What are utility death spirals?⚡

Today’s newsletter is about the “utility death spiral” a fascinating theory that will become more important over the coming decades.

Despite its weird name, the “utility death spiral” is a simple idea with major ramifications for the ways that we power homes and businesses around the world.

Let’s break it down.

Solar power is becoming cheaper and more accessible thanks to technological advances and growing Chinese solar panel production capacity.

As a result, a growing number of people around the world are using solar panels to power their homes and businesses.

This puts financial pressure on utility businesses that operate fossil fuel-powered electrical grids, forcing them to raise prices to make up for falling demand.

Price increases will push more consumers to adopt solar energy as a cheaper alternative.

The ‘death spiral’ refers to a situation where these utility companies are forced out of business due to the growing adoption of solar power and decentralized power grids.

So, how does this work in practice?

Last week, the Financial Times published an article about how the utility death spiral has started in Pakistan. (see a picture from the article showing solar panels atop a gas station in the Pakistani capital of Karachi below)

Pakistan is the fifth-most populous country in the world with 235 million people, but it’s only the 46th biggest economy in the world despite its massive population.

One of the things holding Pakistan’s economy back is the fact that it has one of the world’s most expensive and least effective electrical grids.

Pakistani professor and renewable energy expert Abdul Waheed Bhutto explained for The Diplomat magazine:

Because of the dysfunctional power grid, blackouts are a regular occurrence in Pakistan. (Check out this January 2023 news story)

Pakistan’s grid relies primarily on burning fossil fuels like coal and natural gas for power.

Since the Russian invasion of Ukraine in early 2022 sent energy costs to their highest levels in years.

As a result, electricity prices in Pakistan have sky-rocketed.

This had led many Pakistanis to start using solar panels to power their homes and businesses.

Over the past few years, Pakistan has become the third-largest importer of Chinese solar panels in the world.

It makes sense, given that Pakistan is well-suited for solar energy:

This has created a problem for Pakistan’s electricity grid, leading to a 9% decline in power consumption from the grid over the last year.

This is the ‘utility death spiral’ in action.

So far, the solar transition has primarily benefitted businesses and wealthy Pakistanis who can afford the up-front costs of buying & installing solar panels.

Pakistan's energy minister said that the growth in solar energy usage is taking place too fast, leading to rising electricity prices for the ~30 million low-income Pakistanis who don't have access to solar panels.

But: solar panels are getting cheaper and more accessible every year.

According to a solar analyst at Bloomberg, the cost of solar panels in Pakistan fell from 24 cents per watt to 10 cents per watt over the last year. That’s 5% of the cost-per-watt from 2010. (Take a look at how solar panel prices have fallen over the last few decades:)

Individual states in Pakistan are taking action to help protect low-income Pakistanis from rising electricity costs — by giving them solar panels and contributing to the utility death spiral!

The government of Punjab, a Pakistani state that is home to more than half the country's population of 235 million, announced that it would give free or heavily-subsidized solar panels to millions of people struggling with electricity bills.

The Sindh province, which is home to more than 50 million people, said that it would also provide solar panels to the poor. 

Should we be worried about a ‘utility death spiral’ in the U.S.?

As grid expert James Tonrey explained for UPenn's Kleinman Center for Energy Policy, American utility companies have avoided the death spiral by:

• investing in renewable energy sources, and

• incorporating distributed energy resources (DERs) like rooftop solar installations into their business models

To learn more about how this happened, check out Tonrey’s essay entitled: Distributed Energy Resources: How Utilities Have Stared Death in the Face and Emerged Victorious.

ART OF THE DAY

Hunting Otter by Jane Dignum.