Navigant Research Blog

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.”


For Utilities, a Dark and Darwinian Outlook

— October 11, 2013

The participants in a panel this week put on by the California Public Utilities Commission and En Banc, “The Business Model for the Electric Utility of the Future,” might have been mistaken for a bunch of aristocrats at a tribunal during the French Revolution.

The panelists included the top executives from California’s leading investor-owned utilities, including Southern California Edison, Pacific Gas and Electric Company, San Diego Gas & Electric, and Southern California Gas Company, and while the guillotine is unlikely to be in their immediate future, they are faced with an uncertain strategic future and a market landscape that is transforming far more rapidly than they, or most of their regulators and customers, grasped even a year ago.

That uncomfortable truth was underlined by this week’s release of a report entitled Energy Darwinism, produced by a star chamber of analysts and managing directors from the energy practice at investment bank Citi.  Its conclusions are stark: “A combination of energy efficiency and competition from new technologies … collectively could impact [utilities’] addressable markets by 50% over the next two decades.”  That’s right, one of the world’s major investment banks believe that the business of conventional power utilities could be cut in half by 2033.

Panic Attack

“Consumers face economically viable choices and alternatives in the coming years which were not foreseen 5 years ago,” according to the report, and the pace of change is likely to accelerate.  “Investors, companies and governments must consider the sea change that we believe is only just beginning.”

To be sure, today’s utilities have established customer bases and billions in infrastructure that could enable them to weather the coming storm: “There are opportunities for new avenues for investment and growth in terms of smart grid, storage, and downstream services,” the Citi authors maintain.  “The question is whether utilities grasp that opportunity and evolve themselves.”

Unfortunately, the evidence to date is discouraging.  As you might expect from an industry with a business model that has changed little in a century, utilities are mostly fighting a rearguard action to delay change, not adapting to capitalize on it.  A July feature in The New York Times described how “in almost panicked tones, [utilities] are fighting hard to slow the spread” of distributed renewable generation and the market mechanisms, in particular net metering, that are enabling it.  Standing athwart history and shouting “Halt!” is seldom a winning strategy in today’s globalized, technology-driven economy.

“We did not get in front of this disruption,” Clark Gellings, a fellow at the Electric Power Research Institute, told the audience at a panel discussion at the annual meeting of the Edison Electric Institute in June.  “It may be too late.”

Surf or Drown

Actually, it’s not.  Utility revenue streams are likely to decline gradually, not suddenly, and the big utilities’ unique capabilities (well-described in a recent blog by my colleague Bob Lockhart) give them the opportunity to become the service providers, architects, and delivery mechanisms for all of the new forms of energy transmission and generation, from rooftop solar panels to microgrids to virtual power plants.  Some utilities are trying to surf the waves of innovation and disruption rather than be swamped by them.

The municipal utilities in Los Angeles and Glendale, California have adopted decoupling mechanisms that should allow them to make money even as customers adopt energy efficiency measures and rooftop solar.  A group of utilities that includes Duke Energy and Edison International have backed Clean Power Finance, a San Francisco-based startup that offers financial services and software to providers of rooftop solar.  San Diego Gas & Electric has become a pioneer in the establishment and support of microgrids in its service area.

“But those are exceptions,” notes New York Times energy reporter Diane Cardwell.  And they are not nearly enough.


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