Navigant Research Blog

Harder, Better, Faster, and Stronger Communications Networks

— December 17, 2015

A few months back I wrote a blog entitled “The Comms Are the Cloud,” where I suggested that utilities intent upon enjoying the full potential of the coming Energy Cloud need to develop more holistic communications strategies—specifically, they’ll need enterprisewide, low latency, high bandwidth networks in order to get there.

This is a tough nut for utilities because over the years innumerable ad hoc, application-specific networks have been deployed. Even relatively new advanced metering infrastructure (AMI) networks were built largely with meter reading in mind, and many of the underlying technologies used stumble when tasked with broader distribution automation applications—and forget about teleprotection.

That needs to change. Globally, AMI penetration is still relatively low. While many utilities are running fiber or setting up microwave links to their second-tier substations, further out in the grid, connectivity is generally comprised of a hodgepodge of incompatible, location or task-specific networks. Most often, if AMI is present, it’s the only network.

The challenges are many. For one, licensed spectrum is not something that very many utilities own—and many don’t care to. Certainly spectrum prices can be high, although Salt River Project (SRP) and a handful of other utilities have recently made the plunge; SRP is planning to put its distribution automation applications on licensed 700 MHz spectrum that it bought for about $0.75/MHz POP, or an estimated $6.5 million. But unlicensed spectrum brings the risk of interference; as the Internet of Things proliferates, that spectrum could get dangerously clogged.

Crossing the Great Divide

Meanwhile, the major telecommunications service providers and infrastructure vendors are moving ahead with the next generation of wireless technology. 5G hasn’t been clearly defined by standards bodies, but Verizon announced back in September that it will be testing its 5G network in 2016 and intends to begin commercial deployment in 2017. It has partnered with communications heavyweights like Alcatel-Lucent, Cisco, Ericsson, and others to man its innovation centers and bring the technology to market. Verizon says its 5G network will offer throughput that is 50 times greater than its current 4G LTE network.

But while these telecommunications leaders work toward the next big thing, utilities are largely still reliant upon older communications technologies. There have been some announcements related to 4G-based offerings, and a growing number of utilities are looking to leverage 4G’s low latency. But many utilities are still reluctant to use public carrier networks for their critical applications. Instead they build their own—but is there any utility out there as good as a Verizon or AT&T when it comes building communications networks?

Some large utilities are beginning to reevaluate their communications strategies, but the IT/OT silos that segment utility divisions on so many other fronts are also very much alive when it comes to the communications networks. Retail (AMI) teams don’t want to share their network with the distribution operations folks, and the distribution operations folks may not want to let other applications ride on their distribution automation networks.

At the end of the day there are several points I want to make, and I intend to bring them up again and again in 2016. Utilities need to consider their networking strategy in a holistic manner. Utilities should consider spectrum ownership in their long-term planning. And utilities should reconsider their reluctance to rely upon public networks. Without robust, holistic communications, your utility can’t participate in the Energy Cloud.

Perhaps Daft Punk said it best:  Work it, Harder, Make it, Better, Do it, Faster, Makes Us, Stronger.

 

TEP’s Program a Win-Win for Solar Proponents and Utilities

— October 7, 2015

I’ve written extensively about the solar/net metering brouhaha in Arizona over the past 2 years (you can see related blogs here and here). I’ve also previously posited (here, here, and here) that electric utilities worried about solar encroaching on their core business and profitability need to embrace solar, suggesting that if you can’t beat ‘em, join ‘em.

That is exactly what one offering from Tucson Electric Power (TEP) attempts to do. Well, sort of. My analysis indicates that the deal is pretty good for all involved.

In August 2014, TEP proposed a rooftop rental arrangement for customers in its territory whereby TEP would rent its customers rooftops and install solar panels for its own generation needs. In exchange, the utility fixes customers’ monthly bills at their current level for the next 25 years, which TEP considers to be the life of the panels. According to the company website, TEP intends to accept 500 participants in 2015 and was still accepting applicants through September. The plan has been viewed with caution—but not outright hostility—by solar advocates because TEP is subcontracting out the panel installation business rather than creating its own internal, division.

Long-Term Benefits for All

TEP’s proposal could have a substantial positive financial value to customers in its territory. Here’s why: If you run a discounted cash flow analysis, using an 8% cost of capital assumption and a 25-year time horizon, the present value of the savings that TEP customers might enjoy is substantial—assuming that electric prices in Arizona continue to rise at historic rates.

In running my calculations, I assumed a customer would start the program at the beginning of 2015 and that the current $0.12/kW cost rises 3.4% annually through 2040 (this is the average annual increase between 2003 and 2013 in Arizona).

A current $100/month TEP customer is using 852 kWh per month; a $240/month customer is using 2,044 kWh. Keep that usage fixed for 25 years, and the net present value to these customers of the fixed rate versus projected actual monthly bills ranges from more than $6,000 to more than $14,000. The nominal (undiscounted) value of the savings amount to more than $20,000 for the $100/month customer and an eye-popping sum of more than $50,000 for the $240/month customer.

Tucson Electric Power Solar Rooftop Proposal: Potential Net Benefits to Consumers

Richelle Table(Source: Navigant Research)

Even if the rise in electric rates were to fall to half of its historic rate in Arizona (1.7% rather than 3.4%), the savings to TEP rooftop renters would be $2,600 and $6,200 respectively on a present value basis, and the nominal benefits accrue to $9,000 and $21,000 for $100/month and $240/month customers. Considering the heat in Arizona, I’d be willing to bet there are quite a few $300+/month customers for whom this is an even more attractive proposal.

It Takes a Village

Solar installers in Tucson do not view TEP as a competitor because they continue to get the business. Customers do not have to worry about credit scores or qualifying for financing. TEP expands its solar generation capabilities. The deal truly appears to be a win-win-win. In fact, the financial benefits to TEP are probably the lowest on management’s totem pole. The program helps the utility meet renewables requirements and keeps customers happy—and that is worth quite a lot.

 

GreenCo in the Red: NRG Reset Highlights Tenuous Solar Model

— September 21, 2015

On September 18, NRG Energy announced a restructuring designed to firm up the balance sheet of its core business and move the cash-losing solar and electric vehicle charging businesses into a new company, dubbed GreenCo. NRG’s stock has fallen by a third this year, and with interest rates poised to rise, investor pressure forced the move.

NRG CEO David Crane said in a webcast that the company will provide GreenCo with a $150 million revolver through 2016, adding that NRG believes “Now is neither the time to abandon GreenCo nor to transfer its full value to someone else, but it is very much the time to impose a new higher level of financial rigor on GreenCo befitting the type of capital discipline imposed on entrepreneurial startups by venture capitalists.” Crane also noted that formal efforts are underway to find GreenCo a strategic partner.

Selling the Upside or Saving Itself?

Back in early 2014, I wrote a blog suggesting utilities invest in solar and highlighted NRG’s (the non-utility) aggressive moves in the sector. I noted that many telecoms that invested in cellular early and consolidated (rather than divested) today find that business line to be their largest and most profitable.

But 18 months later, the losses at GreenCo have become too much for NRG’s investors to stomach. I looked at other public solar companies and, sadly, analysis of SolarCity’s financials don’t fill me with hope, either. The long-term lease model and aggressive marketing employed by solar firms recently have ballooned losses and reduced working capital, and long-term debt has grown.

Now, like solar, the cellular industry in the 1990s was particularly capital-intensive, and free cash flow losses for many were huge. But once the networks were built, cellular has turned into a nicely profitable business. Will that same dynamic prove true as the solar industry matures?

Who Should Own Solar Panels?

The difference between the telecom/cellular dynamic 20 years ago and the uneasy utility/solar relationship today is at least partially due to the fact that individuals—or even the Walmarts of the world—weren’t out buying their own cellular towers and building their own networks in the nineties in order to save money with AT&T or Verizon. It wasn’t an either-or proposition; for a long time, most people had both cellular phones (which were great when they worked) and landline phones.  Of course, cellular phones dominate today, and many people no longer find a need for a home phone.

But if I put solar panels on my home today, that creates an immediate, permanent reduction in the amount of power I buy from the utility. Other critical differences include the fact that the cellular network grew exponentially in value as it became truly nationwide; solar will remain a much more local/regional business. And cellular is regulated at the national level by the Federal Communications Commission, while electric utilities all have to contend with their state-level regulatory bodies.

That doesn’t change the fact that solar will inevitably have a measurable impact on demand for the local utility’s product. Many large regulated utilities are weighing the risks of building community solar projects within their regulated business units; others, like Exelon’s Constellation, are aggressively going for the NRG GreenCo/SolarCity model.

At the end of the day, the differences between utility/solar and telecom/cellular may be greater than the similarities. But if I were a traditional utility watching more and more solar panels take up position on rooftops across my territory, I’d certainly be seeking a way to capitalize upon the trend.

 

Solar vs. Utilities: Can’t We All Just Get Along?

— September 4, 2015

To say that the battle over net metering payment schemes is getting heated is an understatement. But nearly 2 years after I wrote about how the net metering debate was playing out globally (see those blogs here, here, here, and here), what troubles me most is that little progress appears to have been made in terms of finding an equitable, transitional solution that promotes solar adoption without unfairly affecting the business models of regulated power utilities.

In the United States, the state-level regulation of utilities means that 50 different public utilities commissions (PUCs) are considering proposals from numerous utilities, and no two proposals are exactly alike. But nationwide, solar supporters are still doing their best to make utilities look like the bad guy—and inflammatory solar tax headlines still dominate in the media.

War in the Great Lakes State

This summer, a bill before the Michigan State Senate has created more sturm und drang because, as written, the bill would not grandfather in existing solar customers. I found article after article where homeowners who’ve invested tens of thousands say that rather than a 10-year payback, it will now take 20, 30, or more years for their solar system to pay for itself. Why? Because the proposal would make solar customers sell their power to their utility at wholesale rates, then buy back what they need at retail.

As in most net metering battles, solar advocates argue that the incentive for consumers to install solar will be eliminated under such rules. Combine that with that the expiration of the federal solar tax credits at the end of 2016, and solar supporters imply the end of their industry (and jobs) is nigh.

On the other side of the table are utilities that typically rely upon the cross-subsidization argument to defend their efforts to implement higher fixed fees or reduced net metering payments for solar customers. Their argument is that, in order to pay for the grid that everyone—even solar customers—still needs, those customers should pay a connection fee so that fixed grid maintenance costs aren’t unfairly shouldered by non-solar (often lower income) customers.

Coopetition?

Both sides of the argument have merit. Increased fees or reduced net metering payments to solar customers will make a potential customer think twice before committing to a $20,000 (or much more) investment. But utilities do have to maintain and operate their power plants, distribution grids, billing systems, etc. whether a customer buys $200 worth of power in a month or $20. Today, solar penetration in the United States is still low, but it’s growing rapidly. There’s no reason to think that growth will slow—especially if the federal tax incentives are extended, as has been proposed by New York Senator Charles Schumer.

What’s harder to understand is why more utilities and solar companies aren’t working together to create a plan that allows solar investment to continue growing—creating jobs, reducing carbon footprints, and taking stress off of the grid—without creating abrupt, unfair financial stresses for these utilities that have been bringing power to Americans for more than a century.

Yes, the business is changing. Yes, regulatory action often comes too slowly while business forces can shift rapidly—just ask the old school telcos that still had more customers than mobile carriers less than 10 years ago. But there ought to be enough creative juice among advocates on both sides to imagine a transition plan that works for all. Industry-driven compromise would be embraced and emulated by regulators nationwide. Let the mudslinging end and productive dialogue begin, I say.

 

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