Guess Who’s in the Crosshairs as a Solar Power War Erupts
As long as solar power remained on the fringes, the big utilities never really had any reason to be concerned.
But now that solar power is beginning to boom, the “old boys” of electric power have a serious fight on their hands.
According to GTM Research, a solar photovoltaic (PV) system is now installed every four minutes in the U.S. And by 2015, the country’s distributed PV market is expected to jump by more than 200%.
In places like Arizona, that means a solar power war has begun to erupt.
For the “old boys” it’s a matter of simple math: Every kilowatt of power that’s generated from a rooftop means that much less demand for power from a utility.
These trends are especially troubling considering solar power is becoming less expensive even while massive government subsidies are being reduced.
The Holy Grail for solar power would be reaching grid parity. That’s the point at which powering your home with solar is on par with what you could purchase from the grid.
For the big utilities, “grid parity” could spell the end of their longtime business models.
Just don’t expect the “old boys” to go down without a fight…
The Seeds of the Solar War
In fact, the solar war has already entered into a new stage. Unfortunately, it is the consumer that is likely to come under the most fire.
Utilities buy power from all sources. While a generating plant dependent upon coal may have a vested interest in discouraging the use of solar, a utility does not. A utility only needs to balance its demand levels with the availability of solar or wind to determine a proper business plan.
The primary problem with “green energy” has always been the variable nature of renewable distributed energy resources (DER). As you know, the wind doesn’t always blow and the sun doesn’t always shine. What’s more, the current state of battery technology is insufficient to use as a remedy.
As a result, solar power production peaks when the sun is at its highest point. That time of day also happens to coincide with the industry’s peak-load pricing programs.
That is, given the largest volume of production taking place during that time of day when demand is highest, utilities have had the double advantage of buying power at a discount from solar providers while being able to charge consumers highest-usage rates.
And that is one of the reasons why utilities don’t like the rising number of people disconnecting from the grid and generating their own power using rooftop solar. It hurts their bottom lines.
In fact, the private solar panels are reducing what has been the industry’s highest margin period – that primary demand period during midday.
Now, right on cue, the Edison Electric Institute (EEI) has published a report discussing the financial implications and strategic response to the changes in the retail electric business brought on by solar power.
The EEI represents all U.S. investor-owned utilities providing power to about 68% of the entire country. Its report highlights the industries’ concerns with renewable residential energy impacting their ability to sustain their current business and financial models.
Meanwhile, both federal and state officials are attempting to reduce fossil fuel electricity generation, for both environmental and infrastructure reasons.
You see, the more people that resort to rooftop panels, the less expensive it is to expand existing power facilities to meet anticipated higher demand.
Consumers in the Crosshairs
That brings us back to the struggle in places like Arizona–and the prospect of higher prices for consumers.
Initially, the state had introduced a targeted energy reduction program. At first, the utilities went along with the move, providing rebates to customers who installed solar panels.
The thinking was straightforward enough. A percentage of end users not requiring additional power from the grid would reduce overall infrastructure capital requirements. The rebates were regarded as a bottom-line consideration.
In 2010 rebates were $3,000 per kilowatt. But as the usage of roof panels increased (and started cutting into utility profits), those rebates began to come down.
Today, these rebates are at $100 per kilowatt. And, you guessed it, it is the consumer that is taking it on the chin despite the fact that the installation cost of panels has come way down. This has now pushed up the cost of electricity by 50% to the homeowner using solar panels.
In response, the utilities claim that solar power has now reached competitive levels (grid parity) and no longer requires the rebates. Of course, these guys never consulted either the solar power producers or their customers to see what they thought.
In addition, Arizona’s electric utilities are still collecting something called an “environmental benefits charge” of some $220 million annually. However, the money is used to build central solar and wind generating projects, not residential distributed solar resources. Consumers end up paying this additional fee without realizing any benefits.
What’s more, energy efficiency or “green building” initiatives also pose threats to Arizona’s utilities. And if energy use declines, rates have to rise to cover the difference.
In fact, a recent price increase was justified after a claim that some rather limited solar adoption had reduced overall energy volume and the revenue was needed to sustain the current infrastructure.
So it seems a greater reliance on private solar power systems will lead to increases in everybody’s electricity prices in Arizona.
Is the Other Shoe About to Fall?
Some utility heads have gone even further.
Duke Energy (NYSE: DUK) CEO Jim Rogers, never reluctant to thrust himself into the middle of such debates, has said that, “If the cost of solar panels keeps coming down, installation costs come down and if they combine solar, battery technology and a power management system, then we have someone just using the grid for backup.”
The observation is a bit hyperbolic (for example, there is no breakthrough on the battery front anywhere on the horizon). Nonetheless, a very similar observation was made in the EEI report.
But there is an underlying and longer-term problem for the utilities in all of this. As homeowners adopt solar, it raises utility costs on other ratepayers.
This increases the attractiveness of solar, so more will adopt it. Costs on those still dependent upon the grid will go up even more.
At some point, the other shoe falls. The utility’s credit rating may be called into question. The increased uncertainty and risk ushered in by this cycle will not be welcomed by utility investors.
Not surprisingly, the EEI’s short-term recommendations mostly amount to making rooftop solar customers pay more.
First, EEI wants all power bills to include a flat charge for fixed costs, which would apply to all grid-connected customers.
Second, it wants solar customers charged for the services the grid provides them: “off-peak service, back-up interruptible service, and the pathway to sell [distributed energy resources] to the utility or other energy supply providers,” is the way the report puts it.
And last, the EEI wants net-metering programs revised to pay solar customers only the going market rate, not a higher subsidized rate. All these measures would have the same effect: reduce the economic incentives for rooftop solar and thus slow its adoption.
State governments may have been instrumental in starting the war but now they have been pushed into a corner as well. After all, they collect tax revenues from the bill homeowners pay to the utility.
In Arizona, for example, that translated into a contribution of at least $450 million a year to the state budget.
It seems the only people left holding the bag are the folks who bought into the solar rooftop idea to begin with.