Navigant Research Blog

Facing Solar Waves, Utilities Should Learn to Surf

— March 5, 2014

In my last blog, I described the relatively rapid fall that many incumbent telephone companies have suffered as wireless technology has replaced landlines as the dominant service providers for not only our voices, but also our data communications needs.

Why, as a participant in the electric utility industry, should you care?

Because the very same thing could happen to incumbent electric utilities, and maybe sooner than you think.  Solar panels and plug-in electric vehicles (PEVs) are spreading rapidly, allowing consumers to generate and even store their own power.  Prices are falling, and with or without government incentives, the penetration of renewable, distributed generation will continue to accelerate.  Storage will get better and commercial customers like Walmart will put panels across thousands of acres of rooftops.

All of this creates challenges for grid operations and (especially) electric utility business models.  (See my blogs on net metering and feed-in tariffs.)  As the fight over net metering has made abundantly clear, the century-old utility business model wasn’t designed for distributed generation – and this transformation is still in its early days.

Ride the Wave

But, couldn’t it also provide an opportunity?  In the first 10 years of wireless telecom service (according to surveys by CTIA), subscribership grew to just under 34 million.  In the second 10, it added 174 million, and since 2005, that figure has nearly doubled again.  That hockey stick phenomenon will happen in the solar and PEV industries, too.

NRG Energy, a retail energy marketer based in Princeton, New Jersey, has taken a proactive stance to solar.  Its NRG Solar division creates large-scale solar facilities and performs installations on commercial rooftops.  The NRG Residential Solar Solutions (RSS) division leases solar systems to homeowners, providing the panels, system design, monitoring, and performance guarantees, as well as several termination options (system removal, lease extension, or purchase).  RSS operates in 10 states, plus the District of Columbia, and has expansion plans in more states.  What’s more, NRG’s eVgo network is a privately funded electric vehicle infrastructure network of home charging stations and public fast charging stations.

NRG’s Alternative Energy division (which encompasses its solar activities) grew revenue to $83 million in 3Q 2013, up from $49 million the year before.  And while it still bleeds red ink, I can assure you that telcos lost money on their wireless divisions for many years before those units became the cash machines they are today.

Sizing the Competition

Vivant, SunRun, SolarCity, and SunPower are the big names among standalone solar financing and installation companies today; $1 billion was raised in 4Q 2013 alone for solar system financing.

SolarCity intends to grow its customer base to 1 million by 2018, while SunPower is reportedly about to announce a deal with Meritage Homes.  SolarCity earns about half of its revenue from solar system sales, with a low 5% operating margin, but it earns an attention-getting 66% margin on its lease business.

The level of competition and the public valuations of many of these solar companies demonstrate the market’s belief that solar (panels, financing, installation) will be a growth market for some time to come.

In order to enter the fray, regulated utilities will have to run their alternative energy ventures as unregulated subsidiaries (that’s how the telcos got into cellular), but the consolidated bottom line is what matters to investors.  And, as a consumer, I’m more likely to trust my solar installation and management to my longtime local power provider than an unknown, independent installer.  Ride the wave!

 

In 2014, Utilities Must Adapt or Retreat

— January 8, 2014

In 2013, the majority of utilities could still afford to keep their head in the sand, ignoring the crisis presented by distributed renewable generation to their bottom line now and in the future.  In 2014, this will not be the case.  Electricity sales of centralized utilities will continue to decline because of continued investment in energy efficiency and onsite distributed renewable energy generation from both residential and commercial and industrial customers.  This erosion of electricity sales will cause utilities to recover their costs by adding fees and/or increasing rates, which will increase the cost of utility-delivered power.  As a result, the economics of distributed generation will potentially be even more attractive to end users, further accelerating the deployment of renewables.  This is the utility death spiral.

As covered in Navigant Research’s report, Distributed Solar Energy Generation, distributed solar PV deployments in particular will continue to accelerate, including in nontraditional markets such as the southeastern United States.  The low cost of electricity in the Southeast has hampered wider adoption compared to the West Coast and Northeast, where high-cost retail electricity rates have made renewables more attractive.  In conjunction with falling renewable technology costs and incentives reduction on the horizon, many customers are making their moves, presenting a great opportunity for forward-thinking utilities in both the residential and commercial markets.

Adaptive Action

Meanwhile, financing has made solar PV available for little to no money down.  Advanced module-level power electronics – as covered in Navigant Research’s report, Microinverters and DC Optimizers – are bringing more rooftops into the fold and increasing the overall energy harvest.

Those utilities that have grasped this threat are taking action to adapt to the changing market environment in the following ways:

  • Taking their case to the public utility commission and requesting fees on those customers with onsite renewables
  • Limiting net energy metering (the ability to send power back to the grid and be compensated at retail rates)
  • Getting into the distributed generation business themselves

Some utilities are doing these things in conjunction.  Utilities have many of the most important components that are required to make the latter option feasible, including a captive customer base, generally high trust among their customers, access to low-cost capital, and solid expertise in operations and maintenance and customer service.  Taking this plunge is no easy decision for companies that are traditionally slow-moving.  But there are few other options.  Utilities may have noticed the writing on the wall during the past few years, but 2014 is the year they will have to do something about it – or it will be too late.

 

In Arizona, A Net Metering Truce

— November 27, 2013

The Arizona Corporation Commission (ACC) voted 3-2 on November 14 to approve a change to the state’s net metering policy, requiring that new solar panel owners (after December 13) be required to pay a surcharge of $0.70 per kWh of capacity, beginning January 1, 2014.  The average Arizona solar panel owner is expected to pay about $4.90 per month under the new rule, which came in response to a petition by Arizona Public Service (APS) filed last July to modify net metering policies in order to stop what the utility terms cost shift to non-solar customers.

The spin-meisters were out in force following the ruling, with solar advocates suggesting that APS is putting nails in its own coffin.  Meanwhile, APS executives suggested that the compromise is merely a step in the right direction.  In a statement, APS Chairman, President, and CEO Don Brandt said, “Having determined that a problem exists, we would have preferred for the ACC to fix it.  The proposal … falls well short of protecting the interests of the 1 million residential customers who do not have solar panels.”

Hastening the Change

But NRG CEO David Crane, in an article in the New York Times, said “The more they charge people who are generating most of their own electricity for backing up that self-generation, they’re going to encourage those people to find a solution that doesn’t involve the grid at all.”

Despite the still polarized views amongst the stakeholders in the net metering controversy, Arizona’s ruling will be watched closely as public utility commissions nationwide grapple with the problem of determining how to fairly treat solar and non-solar customers.

In my last blog I highlighted the recommendations made to commissioners by the ACC staff, which effectively acknowledged that net metering policy in the state is in need of reform, but which suggested the commission wait until APS’ regular rate hearing next year before making a determination.  In that filing, the staff supported a per-kWh rate of roughly $3, whereas APS’ original proposal suggested closer to $8 per kWh in surcharges.

Commissioners this month elected to put a toe in the water, choosing a compromise that institutes the surcharge immediately, but at much lower levels than APS, and even the commission’s own staff, had recommended.  Considering the ire that this controversy has raised, even a small step toward compromise is a step in the right direction.

Hold the Rhetoric

There are a multitude of reasons why the proliferation of renewables like solar (and wind) should be encouraged, but at the same time, technology is a long way from giving homeowners an alternative to the grid as a critical backup.  The electric grid represents public infrastructure that’s needed by consumers, businesses, government agencies and … well … everyone.

Finding a compromise solution, one that provides a roadmap to resolution for stakeholders all 50 states (not to mention in other countries) is paramount.  But one thing’s sure.  Inflammatory statements like this gem in the NYT article referenced above don’t help:  Bryan Miller, head of the lobbying group Alliance for Solar Choice, said, “Those fees are real and they’ll have a real impact on the industry, but they do not accomplish APS’s goal of destroying the rooftop solar industry.”  Sheesh.

 

Utilities, Regulators Seek Truce in Net Metering Fight

— November 11, 2013

In three recent blogs, I’ve discussed the emotional spin attached to the net metering issue in the United States, the unintended consequences that have resulted in Germany due to aggressive renewables policies, and the boom and subsequent slowdown in solar deployment in the United Kingdom as a result of volatile feed-in tariff policies.  The system is broken, and most stakeholders recognize that.  But the question remains, how do we fix it?  Many proposals have been put forth.  Few have been approved.

In a filing by the Arizona Corporation Commission (ACC) in September, ACC staff recommended that the commission reject two proposals made this summer by Arizona Public Service (APS) to address cross-subsidization of solar customers by non-solar customers, and suggested that the debate should be addressed in APS’ rate case deliberations next year.  The staff also put forth two interim solutions.

APS had proposed two modifications to the net metering program in Arizona, which it says is shifting $18 million (growing by $6-$10 million annually) in fees to non-solar customers.  APS’ first proposal suggested that new solar customers would only be eligible for APS’ ECT-2 rate, which is a demand-based rate with time-of-use features.  Alternatively, APS’ Bill Credit Option would allow customers to remain on any APS plan, but instead of net metering, APS would compensate customers through a bill credit based on the forward market at the Palo Verde hub.  According to APS, “This price would send a more accurate price signal for the true cost of the electrical service provided.”

A Little Further

ACC staff calculated that, under the various APS proposals, utility customers would see their savings cut in half, from an average of 68% annually to 34%.  In addition to suggesting that the issue wait until APS’ rate case next year, the commission staff also suggested two bridge solutions.  Both proposals make adjustments to the lost fixed cost recovery (LFCR) mechanism by charging new solar customers a monthly fee ($2.76 per month, which may or may not increase over time).  The ACC staff argued that this will prevent non-solar customers from covering ever more of the LFCR fees, while remaining revenue neutral to APS.

The impact on new solar customers would be a modest reduction in savings (between 59% and 66.5% annually vs. 68% currently).  ACC also suggested that grandfathering should be tied to systems rather than homeowners, which would alleviate concern over the effect that net metering reform could have on home values.  In its response to these proposals, APS said, “The staff report makes it clear that the current net metering structure is not fair for all customers and must be changed,” adding that the staff’s alternatives “don’t go far enough.”

End the War

The ACC staff report  includes detailed discussion of five net metering policy actions proposed around the country; in particular it highlights the Austin Energy solution, which has been adopted and which many in the renewable energy industry like because it includes environmental benefits in its value of solar (VOS) equation.  The Austin Energy formula values on-site generation at $0.128 per kWh, and is adjusted annually based on a factors including the marginal cost of displaced energy, avoided capital costs, line loss savings and environmental benefits.  VOS calculations are gaining traction as a net metering solution, although inputs to the calculation vary widely by region.  It’s a start.

By midyear, the United States had crossed the 10 GW of installed solar capacity threshold, the fourth country to do so.  As solar installations grow, the net metering brouhaha will further escalate; industry stakeholders would be wise to come together on a plan sooner rather than later.  One thing is sure: Utility proposals for dramatic reductions in consumer savings from distributed solar will only perpetuate their “bad guy” image and headlines containing phrases like “War on Solar” and “Tax on Solar.”

 

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