Navigant Research Blog

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.


Net Metering Fight Gets Strange

— October 10, 2013

The rapid spread of net metering has unleashed plenty of Sturm und Drang during the past year.  Let’s face it, when the Tea Party and the Sierra Club join forces, there’s definitely something strange going on (more on that below).

Here is a small sample of recent headlines that illustrate the sharp feelings involved:

“AB 327: From California Solar Killer to Net Metering Savior?” GreentechMedia, September 4, 2013

“Rooftop solar net metering is being fought across U.S.”The Denver Post, September 1, 2013

“Arizona Mulls Solar ‘Tax'”, August 1, 2013

“Can Germany afford its ‘energy bender’ shift to green power?” BBC News, July 9, 2013

“Dragons’ Den solar power business goes bust” The Guardian, October 4, 2012

For about a century, the electric power industry was guided by a straightforward business model:  utilities build power plants and generate and distribute electricity; regulators approve rates to prevent monopolistic pricing and provide a fair return on investment to the utility and its investors; and consumers pay that rate to the utility for the kilowatt-hours consumed.  The power flowed in one direction and payments for that power flowed back upstream.

Cracks in the Foundation

Today, however, the world of electricity generation and distribution is going through a major transition.  In addition to a growing number of deregulated markets, the accelerating adoption of renewable distributed generation (DG) — primarily solar, but also wind and biofuels — means that the old business foundation upon which utilities rest is cracking.

As solar penetration deepens, there are legitimate concerns, primarily over how utilities can continue to maintain the distribution grid when fewer (and generally lower-income) ratepayers are supporting it.  Major utilities across the United States are now putting forth controversial proposals to either charge a monthly fee to solar customers, or to reduce the amount those customers receive per kilowatt for excess energy.  Solar advocates are up in arms, but without a change to the system, the shrinking base of traditional utility customers will bear the brunt of paying to maintain and upgrade an aging distribution network.  How these issues are resolved will affect electric utilities worldwide for years to come.

Strange Bedfellows

Meanwhile, the solar industry, which was injected with billions in government and utility-sponsored subsidies, is now at risk of the severe after-effects of that artificial growth spurt.  Businesses, jobs, and economic growth are at risk if those subsidies are withdrawn too abruptly.

Finally, consumers who have made the investment in solar panels based largely on net metering’s advantageous payment structure are worried that while they may be grandfathered in their utility’s current program, any new buyer of their home might not be.  Home values will likely decline if net metering reform takes place.  At the same time, the solar-challenged neighbors of these homeowners are seeing electric rates rise steadily as this table from the U.S. Energy Information Administration illustrates.

Average Price of Energy, United States: 1990-2011


(Source: EIA)

Beyond these primary stakeholders, environmental groups, like the Sierra Club, and political groups, like the Tea Party, have joined the fray.  The former is promoting the need for greener energy, and the latter is worried about private property rights.  (In Georgia, consumers are not allowed to lease solar equipment, which has led to the teaming of these strange bedfellows on the solar battleground.)

The problem is complex and a solution that is fair to all may simply not be possible.  None of the stakeholders is likely to get everything they want in a solution, but if the reality-TV drama of today doesn’t give way to balanced compromise, and soon, it is likely that no one will get what they need for long-term survival.  In my next blog, I’ll examine the problems Germany is now facing as a result of the rapid transition to renewables, including the fact that its carbon emissions actually increased in 2012, partly as a consequence of its DG policies.


In California, Net Metering Hits the Wall

— January 25, 2013

Net metering essentially allows homeowners and commercial entities to barter electricity with their host distribution utilities.  At night, when virtually all of us are drawing power from the utility grid, your meter spins forward, adding to your monthly utility bill.  When the sun is shining and the solar panel on your rooftop generates electricity, with net metering, it actually spins backwards, removing demand for power from the grid.

Utilities complain that this policy is unfair to customers who do not generate their own power.  In California, the nation’s most successful solar market, the state’s three investor-owned utilities – Pacific Gas and Electric (PG&E), Southern California Edison (SCE), and San Diego Gas and Electric (SDG&E) – have calculated that the amount of solar photovoltaic (PV) coming online by the end of 2015 will add up to approximately $1.3 billion in increased electricity costs for ratepayers who lack solar.  In the utilities’ view, net metering customers are not being charged a fee to help maintain the grid that serves everyone.

Proponents of solar energy see net metering as a phenomenal success story.  According to a report developed by Crossborder Energy consultants and released earlier this month, net metering actually provides more than $92 million in benefits to ratepayers of PG&E, SCE, and SDG&E.  Interestingly enough, this new report claims that the majority of the benefits of solar PV flow to customers that do not have solar on their rooftops – since they reap the benefits of reduced demand on utility grids, lowering overall system costs.  Only PG&E residents incur greater costs than benefits, according to the Crossborder Energy study.


Net Metering (NEM) Costs (Red) & Benefits (Green) per CA Utility

(Source: Crossborder Energy)

Bringing this issue to a boil is a California state law that places a cap on net metering.  Thanks to a ruling by the California Public Utilities Commission (CPUC), the cap is now higher than originally thought: 5,700 megawatts (MW) of solar PV. But the CPUC ruling would also end the net metering program as of January 1, 2015.  The amount of net-metered solar PV feeding into California’s grid is currently just under 2,000 MW, and PG&E expects that the number of solar PV customers using net metering within its service territory will reach its cap this year ­ mobilizing solar advocates to increase the cap even higher.

To put this issue in context, consider the fact that California’s fiscal incentives for consumers to install solar PV are dwindling to near zero under the so-called California Solar Initiative (CSI) program.  Solar PV costs are declining to near the utilities’ retail price for electricity, but in order for consumers to fully maximize the value of their solar systems, net metering is now more important than ever before.

The solar industry is not fully united on the topic of net metering.  Some, such as Craig Lewis, executive director of the CLEAN coalition, claim there is a better way.  He likes the feed-in tariff (FIT) model that has flourished in some European countries, such as Germany.  The FIT pays consumers for the power they generate as it flows onto the wholesale power grid, just like any other power source.  “I think both the utilities and net metering advocates are right,” Lewis told me recently, acknowledging that calculating the cost shifts and benefits associated with net metering is incredibly complicated.  “If taken to the extreme, net metering could lead to a downward death spiral for utilities,” he warned.

Here’s the kicker: California utilities are allowed to charge ratepayers up to $0.28 per kilowatt-hour (kWh) for solar PV systems they own and build, while new projects developed under the FIT model by non-utilities are charging as low as $0.12/kWh.


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