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RP Siegel

Does the Sun Threaten Our Utility Industry?

What if, given the right device, with the appropriate connection, you could suddenly download all of your favorite music, perfectly legally, and totally for free? Surely people would do it, and in droves. Look no further than what happened when compressed music files (MP3s) first appeared. Millions dived into illegal file sharing, and the recording industry still has not recovered.

There are some interesting parallels between this phenomenon and what utilities are beginning to see with the increasing adaption of rooftop solar power. David Roberts at Grist pointed out a very interesting report from the Edison Electric Institute, a utility industry trade association.

The report, titled “Disruptive Challenges,” raises questions about the financial impact of changes coming to the retail electricity market via new technologies such as renewables, referred to as “distributed energy resources (DER)” and efficiency measures, dubbed “demand side management (DSM).”

At issue is what happens to utility revenues when more people are downloading their power, if you will, from the sun.

Investors Still Not Reacting

Investors have not yet taken notice, the report says, given that solar today provides only a little over 1 percent of total supply. But given the long-term nature of utility investments, which often have a time horizons of 20-30 years, there is real concern that there could be “stranded cost risks” down the road, especially with solar equipment costs dropping like a rock and the market expected to hit grid parity next year.

For most of its century-long existence, the utility industry has been cyclical in nature, generally responding to fluctuations in the economy, but steadily growing over the long term. But what, asks the report, “happens when electricity sales growth declines and that decline is not cyclical but driven by disruptive forces, including new technology and/or the further implementation of public policy focused on DSM and DER initiatives?”

What we’re talking about is the difference between cyclical and secular trends. The first is temporary and usually within a narrow range. The other is powerful and long-term – or permanent.

It’s certainly not an idle fear. It has happened before to many other industries – hello, newspapers! – and it’s happening right now to the U.S. Postal Service and companies like Kodak.

Secular change already is happening in the utility industry in Germany, where solar is well ahead of the United States, thanks to aggressive government incentives. Solar installations, virtually all privately owned, delivered a full 22 percent of Germany’s power last year. But with so much power coming from the sun, especially at peak midday periods, utilities are suddenly selling less power during the day and more at night, when rates are lower.

‘Irreparable Damages to Revenues’

But big power plants were not designed to turn on and off frequently, and they don’t run efficiently that way. The EEI report warns of “irreparable damages to revenues and growth prospects” under these conditions.

You might be thinking, “Well, so it’s bye-bye then, that’s too bad. I wasn’t that crazy about the power company, anyway.” But like them or not, we will still continue to need utilities and the infrastructure they maintain for the foreseeable future. After all, there’s no solar at night.

Under the current model, there seems be little choice but for prices to go up, perhaps, dramatically, which in turn, could persuade even more people to go off the grid.

Here in the United States, we don’t have the same kind of feed-in tariffs that Germany has, although 43 states have net metering, which provides a mechanism by which the utilities must buy excess power from subscribers at rates that vary by state.

These are the kinds of issues that Rocky Mountain Institute’s eLab, a consortium of industry people, regulators, renewable energy providers and environmental groups that is trying and come up with new business models for today’s environment.

How to Maintain the System?

The conversation really needs to focus on where the value is being created, and how those providing value can be fairly compensated to maintain the whole system – affordably.

Lena Hansen, of eLab told us, “If you put solar PV on your roof, you are providing excess electricity to the grid, but the grid is also providing a service to you (i.e., an uninterruptible backup system). So, right now there are conflicts over things like net metering. And it’s all rooted in the lack of clear understanding of the value drivers and the cost drivers around the table. It sounds like a trivial thing, but if we can’t work out the pricing, then we can’t move forward.”

EEI is asking that all users pay a flat fee for infrastructure (which many already do), plus a charge for solar users to cover “off-peak service, back-up interruptible service, and the pathway to sell [distributed energy resources] to the utility or other energy supply providers.” Users also don’t want to pay more than wholesale prices for the power under net metering.

So here is the dilemma in a nutshell. Some fees will most likely be needed since we can’t afford to let utilities go belly-up. But if surcharges for going solar (and, in some cases adapting efficiency measures as well) become prohibitive to the point where they drive people away, then we’ve just shot ourselves in the foot. After all, clean air and a livable climate are in everyone’s best interest. People are willing to make those investments, and not only for themselves. But we need to find a balance point where the most urgent needs of the many are served.

 

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