# The energy transition and the utility death spiral
A homeowner in Phoenix installs rooftop solar, adds a battery, and buys an electric vehicle. Over the next year, her electricity bill drops by more than half. She still relies on the grid at night and during heat waves, but she pays her utility far less for the privilege. Now multiply her by a few million households.
That is the setup for one of the most important business problems in the sector: the "utility death spiral."
For roughly a century, most regulated utilities made money in a simple way.
They sold you kilowatt-hours (kWh, the standard unit of electricity you buy). The more you used, the more you paid. This is called volumetric pricing: revenue scales with volume sold.
Utilities spend heavily on fixed assets: power plants, transmission lines, substations, poles, and wires. A regulator (in the US, a state Public Utility Commission, or PUC) approves the rates a utility can charge so it can recover those costs plus an allowed rate of returnrate of returnReturn on Investment: the ratio of net profit to the cost of an investment. A 300% ROI means each dollar invested returns $3.View full definition →.
Here is the key tension. Most of a utility's costs are fixed (the grid exists whether you use it or not), but most of its revenue is volumetric (it only earns when you consume). That mismatch was fine when demand only grew.
A prosumer is a customer who both produces and consumes electricity. Rooftop solar plus a home battery plus an EV turns a passive ratepayer into an active player.
Three technologies drive the shift:
The net effect on many prosumer bills: less energy bought from the utility, and sometimes energy sold back.
Net metering is a billing arrangement where a customer with solar gets credited for electricity they send back to the grid, often at the full retail rate.
That full retail rate includes the cost of the poles, wires, and grid services, not just the raw energy. So when a prosumer is credited at retail for exported solar, they effectively avoid paying for grid infrastructure they still depend on at night.
California's long-running debate over this, culminating in its NEM 3.0 rules (which sharply cut export credit values), is the clearest real-world example of a regulator trying to rebalance these incentives. You can read California's overview of the transition on the CPUC net billing page.
The death spiral is a feedback loop. Walk through it step by step.
1. Prosumers buy less electricity, so utility revenue falls.
2. But the grid's fixed costs do not fall. The wires still need maintenance.
3. To recover those fixed costs, the utility raises the per-kWh rate.
4. Higher rates make solar and batteries even more attractive.
5. More customers go solar, buying even less.
6. Revenue falls further, so rates rise again.
Each turn of the loop pushes more customers off volumetric consumption and loads the remaining costs onto a shrinking base of customers, often those who cannot afford solar (renters, lower-income households). That last point is the equity concern regulators care about most.
"Death spiral" is a useful model, not a prophecy. Several forces slow or reverse it:
So the real story is less "utilities collapse" and more "the pricing model must be rebuilt."
If you cannot rely on volume, you charge for what actually drives cost. Several tools are in play.
A fixed charge is a flat monthly fee for grid access, independent of usage. A demand charge bills based on your highest spike of usage (your peak kW), not total energy. Both shift revenue away from pure volume, which reduces the spiral risk. The catch: high fixed charges hit low-usage customers hardest, so regulators resist large ones.
Time-of-use (TOU) pricing charges more when the grid is stressed (hot summer evenings) and less when it is not (midday, overnight). This encourages EV owners to charge at 2am and encourages batteries to discharge at 6pm.
Done well, this turns prosumer devices into grid assets instead of grid threats.
Instead of paying prosumers the full retail rate for exports, regulators increasingly try to pay the actual value their power provides at that time and location. Solar exported at midday (when supply is abundant) is worth less than power available at the evening peak. This is the logic behind moving from net metering to net billing.
The deeper strategic shift: utilities are trying to move from selling a commodity (kWh) to operating a platform.
A distribution system operator (DSO) model treats the local grid like a marketplace. The utility coordinates thousands of small resources: home batteries, EV chargers, smart thermostats, and rooftop solar.
A virtual power plant (VPP) aggregates many of these small devices so they act like a single power plant. When the grid needs power at 6pm, the utility (or a third party) pulls a little from thousands of home batteries at once. Customers get paid; the utility avoids firing up an expensive peaker plant.
This flips the script. The prosumer's battery, once a threat to volumetric revenue, becomes a resource the utility pays for and profits from managing.
Knowledge check
1. What is the fundamental structural mismatch that makes utilities vulnerable to the 'death spiral'?
2. A customer installs rooftop solar and a home battery. Which best explains why this is more threatening to the traditional utility model than solar alone?
3. Why does volumetric pricing become problematic specifically when demand stops growing or declines?
4. Select ALL correct answers about what defines a 'prosumer' in the electricity sector.
Select all the correct answers.
5. Select ALL correct answers describing how the three prosumer technologies affect a customer's relationship with the grid.
Select all the correct answers.
Utilities must stop treating rooftop solar as pure revenue loss and start monetizing flexibility. The winners will run the grid as a coordination platform.
Grid operators face a harder engineering job. Power now flows in two directions, and thousands of small resources must be forecast and balanced. That requires far more data and automation than the old one-way grid.
Regulators carry the hardest trade-off: keep utilities financially healthy, keep rates fair (especially for non-solar customers), and hit decarbonization goals, all at once. Rate design is where these fights play out.
Prosumers and businesses gain leverage. A company with on-site solar, storage, and flexible load can negotiate, arbitrage TOU rates, and earn from VPP programs. Energy becomes a managed asset, not just a bill.
The core problem in one line of logic:
Utility revenue ≈ (price per kWh) × (kWh sold)
Utility cost ≈ (mostly fixed grid costs) + (some fuel/energy costs)
Prosumers cut kWh sold → revenue falls
Fixed costs stay → utility raises price per kWh
Higher price → more prosumers → repeatBreaking the loop means changing the first line so revenue no longer depends mainly on kWh sold.