Calvert  News & Commentary

How Electric and Water Utilities Can Succeed in an Era of Change

Electric and water utilities must rethink their business models in order to succeed in a time of greater supply, demand, and climate uncertainty.

10/11/2013

U.S. businesses increasingly understand how natural resource limitations and climate change are affecting their bottom lines. This is the time of a new normal – an overall period of innovation, change and “creative destruction” that can and should be economically and environmentally positive.

Two industries in particular have good reason to update their business models to reflect these new realities – U.S. electric and water utilities. Although globally and in the U.S. we face water scarcity – particularly from changing rainfall patterns, depletion of aquifers, and population increases – ironically many water districts see declining demand. Many electric utilities face a similar conundrum. Conservation and efficiency programs are working well and customers are using less electricity and water, while at the same time, innovations like solar panels are becoming more affordable and widespread. This is great news for the environment, but less so for utilities that continue to do business as usual – basing their profits on selling as much water or electricity as possible. Electric utilities are at a real risk of losing commercial and residential customers to distributed generation options, with which these customers can produce their own electricity and remove themselves partially or fully from the grid.

Electric and water utilities have a great opportunity to be leaders in this time of change. These utilities face significant challenges in the difficult balance between keeping rates affordable while having appropriate price signals to encourage conservation, and ensuring they have enough monetary reserves to update their infrastructure and provide profits to their shareholders. Supply and demand uncertainties also pose business risks to utilities. For instance climate change may have resulted in less snow in the winter in some locations, reducing the normal water supply after the spring melt, and more effective conservation efforts result in less demand for water or electricity.

So how are utilities dealing with these changing times? Most have dug their feet in and continue to do business as usual. While this model may work for now, with changing regulations, supply limitations and continuing lessening of demand, this model cannot be said to be a good plan for the future. Utilities must figure out ways to continue to provide their product in a more environmentally friendly way, such as renewable energy sources, to keep their customers and deal with the reality that fossil fuels cannot be relied on forever. The nexus of water and electric utilities is also often overlooked – water utilities use a great deal of electricity and will need to rethink their electric sourcing, either pushing their electric utilities to invest in renewable energy sources or doing so themselves.

While utilities work to catch up to this new situation, many commercial customers are realizing that they need to take matters into their own hands. Corporations are beginning to create or purchase their own renewable energy if it is not available from electric utilities. The “Power Forward”, report authored by Ceres, Calvert Investments, and World Wildlife Fund , gives many examples of this change; for example, AT&T has installed 5 MW of fuel cell and solar production and Johnson & Johnson will have 50 MW of renewable energy by 2015.1 The boom in solar leasing businesses has enabled residential customers to install solar panels on their homes, reducing revenue for their local electric utility.

What can utilities do to be a part of the solution? The first step is to acknowledge that the business environment is changing and to use this realization to rethink their business plans. In addition, utilities can push for policy and regulatory changes that will level the playing field, including incentives for adding renewable sources to their portfolios, decoupling (separating a utility’s profits from its sales, removing the disincentive for conservation) and shared savings plans (where the utility receives a portion of the benefit from reduced consumption of their commodity). In addition, electric utilities can promote renewable power generation and conservation to keep more of their environmentally minded customers on the grid, instead of driving them to look for alternatives that remove them from the grid. Some electric utilities have taken a lead in renewable energy production and sales, particularly Oregon’s Portland General Electric (which is held by Calvert Investments). To that end, electric utilities can also create partnerships with residential and business customers, where the utility finances, owns and operates renewable energy sources on the customer sites, increasing their renewable portfolio while maintaining their customers.

Calvert Investments is working to help utilities prepare for this new reality and demonstrate leadership in shifting their businesses. We are engaging with electric and water utilities that we invest in to drive them to look at these business risks, update their business models, and disclose these changes to investors. In addition, we have created two sector funds to help provide solutions to this transition. The Calvert Global Water Fund invests in companies that will deal with the challenges of water in the 21st century by helping to build the technology needed for infrastructure upgrades, clean-up for increasingly severe natural disasters, and innovations in water efficiency. The Calvert Global Alternative Energy Fund encourages companies to continue to do research and development on renewable technologies and helps them grow their businesses to bring prices of alternative energy technologies closer to traditional technologies each year.

This is a time of great challenge, but also of great opportunity through changing ideas and technology. Utilities must decide if they want to lead this change or be left behind as competitors with revised business models surge ahead.

As of September 30, 2013, Portland General Electric was held by Calvert VP Russell 2000 Small Cap Portfolio (0.14% of the portfolio), Calvert Social Index Fund (0.02% of the portfolio), and Calvert Small Cap Fund (1.87% of the portfolio).  Calvert may or may not still invest in, and is not recommending any action on, any companies listed. For the most recently available information on holdings in each Calvert fund, visit www.calvert.com. Current and future portfolio holdings are subject to market risk.

The Calvert Global Water Fund is subject to the risk that stocks that comprise the water – related resource sector may fall in value. A downturn in the water – related resource sector would impact the Fund more than a fund that does not concentrate in this industry, and the Fund therefore may be more volatile than a typical mutual fund.  Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations. The Fund is non–diversified and may invest more of its assets in a smaller number of issuers than a diversified fund; therefore, gains or losses on a single investment may have greater impact on the Fund.

The Calvert Global Alternative Energy Fund is subject to the risk that stocks that comprise the energy sector may fall in value, and the risk that prices of energy (including traditional sources such as oil, gas or electricity) or alternative energy may fall. A downturn in the alternative energy industry would impact the Fund more than a fund that does not concentrate in this industry, and the Fund therefore may be more volatile than a typical mutual fund. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations. The Fund is non-diversified and may invest more of its assets in a smaller number of issuers than a diversified fund; therefore, gains or losses on a single investment may have greater impact on the Fund.

1 www.ceres.org/resources/reports/power-forward-why-the-worlds-largest-companies-are-in-renewable-energy/view



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