Navigant Research Blog

Tug of War Over Utility Customers Intensifies

— November 5, 2014

In the last few years residential demand response (DR) has become a thriving market.  Recently, Constellation and Honeywell rolled out a service for all customers in areas that the companies serve designed to encourage consumers to purchase Honeywell thermostats and network them into Constellation’s platform.  Initially introduced only to Startex customers (a Texas subsidiary of Constellation) earlier this year, this service highlights the rising competition for energy customers.

Constellation claims that the program has the potential to shave upwards of $128 annually from customers’ electric bills.  Such services could help utilities reach energy efficiency targets as well as assemble an effective pool for residential DR programs.

There’s only one problem here, and it’s exacerbating tensions between utilities, energy service companies, and regulators.  The problem is that this type of program, also referred to as a hybrid DR model, blurs the lines around who exactly “owns” the customer, as well as who is providing the resource.

The New Disruptors

It seems natural for utilities to be receptive to the continued expansion in resources used to target electric customers for energy efficiency and DR programs.  But many utilities, particularly those in regulated markets, see this as encroaching on an established model in which the utility acts as the face of the service in all cases (regardless of who’s actually providing the service).  As utilities shift from vertical producers and deliverers of kilowatt-hours to being providers of electric services (the Utility 2.0 model), the general consensus is that they want to maintain their statutory ownership of their customer base.  Having already given up so much, it’s likely that utilities will put up a fight in holding onto at least this little bit of status quo and margin.

But that’s not how the many disruptive participants, which have evolved within the energy and utility industry or entered from the broadband and IT spheres, want to play.  They want the customer too, either to expand their business and gain more margin, or because they already own the customer through their primary business (think broadband providers).

Not Letting Go

Looking at it from an economic perspective, some argue that allowing non-regulated service vendors to compete will eventually favor the customer.  Others point out that, while an electric services model does have the characteristics of a highly competitive market, the fact remains that delivering electricity requires substantial and expensive infrastructure, therefore limiting the number of competitors, which could disfavor the end user.  Regulators have been understandably reluctant to institute any sort of rapid overhaul.

I’d argue that regulators and utilities are highly aware that they must change the way they do business in order to facilitate the transition of the energy industry to a lower-carbon state.  But it’s not surprising that they still want to defend their end-user relationships.  Customers like having a single point of contact for their energy services – not separate contacts and bills for delivery and energy efficiency.  Furthermore, as utilities lose revenue associated with dismantled vertical business models, energy efficiency and DR are among the few areas where they have the ability to supplement losses.  As hybrid DR models spread, it’s unlikely that incumbents will let their customer relationships go easily.

 

Residential Solar Market Roiled by Proposed Rate-Basing Scheme

— November 3, 2014

There is a growing debate about the financing and subsidies of residential solar PV systems.  How this turns out could have a significant impact on the market’s future.  At the center of the discussion are Arizona Public Service (APS) and Tucson Electric Power (TEP), two regulated utilities that have proposed new rate-based solar programs for residential customers.  Such a move threatens private solar installation-financing companies such as SolarCity and Sunrun, which currently lead the growing market by offering no-money-down leasing schemes that have attracted thousands of new customers.

The private solar companies argue that allowing the utilities to sell rate-based solar systems would create an uneven playing field.  They believe the regulated utilities should set up their own separate, unregulated companies and compete for rooftop solar business with the independent installer-financing companies.  That’s precisely what electricity providers operating in other states have done.  For instance, NRG and Edison International have entered the rooftop solar market by establishing unregulated business units that operate in the Northeast and California, thus avoiding the controversy.

Keeping the Playing Field Level

This is a thorny question for Arizona, and both sides have convincing arguments, as my colleague Taylor Embury pointed in a recent blog post.   The solar installers argue that permitting the Arizona utilities to go ahead with their rate-basing plans would set up unfair competition because of their monopoly status.  The utilities say they just want to expand into solar because of customer demand for distributed generation (DG), and because it helps the utilities meet mandated goals for DG.  But the solar installers and their financiers have advantages they can leverage as well, in the form of the 30% income tax credit and a depreciation method called Modified Accelerated Cost Recovery System (MACRS) that can make the investments quite attractive.  A decision on whether to allow the utilities to move forward with their solar programs is pending before Arizona’s utility regulator, and a ruling is expected before the end of the year.

This topic is certain to be part of the upcoming discussion during Navigant Research’s “The Home as Micro Power Plant” webinar, which takes place on November 11.  Besides the rooftop solar issue, panel members will examine the potential for residential energy storage, how plug-in electric vehicles could be used as grid assets, and whether residential combined heat and power can gain market traction.  To register for the webinar, click here.

 

Finally, Germany Makes Progress on Coal

— November 2, 2014

For critics who scoff that Europe’s carbon emission reduction goals are unachievable, Germany has become Exhibit No. 1.  Since Chancellor Angela Merkel decreed in the wake of the Fukushima Daiichi nuclear accident that Germany would phase out its nuclear power industry, coal use in Germany has been on the rise, and the country’s carbon emissions have remained stubbornly high.

Now it appears that tide may be turning.  According to AG Energiebilanzen (“Working Group on Energy Balances”), an energy research firm, total energy consumption in Germany is projected to fall by 5% in 2014, compared to 2013, to the lowest level since the fall of the Berlin Wall.  Coal consumption for the year is expected to be down more than 9%.

Those declines are due mostly to the mild winter in 2013-2014, but clean energy is expanding as well: Renewable energy use grew by 1.6% over the first 9 months of 2014, compared to the previous year.

The Brown Stuff

Germany’s coal use carries particular importance not only because it is Europe’s biggest economy, but also because Germany burns mostly lignite or “brown coal,” the dirtiest form of coal, and because Germany’s green energy program, known as the Energiewende, is among the most ambitious in the world.  While renewable energy production has expanded rapidly in Germany – accounting, at times, for 100% of the country’s power demand and forcing utilities to pay customers to consume electricity from conventional power plants – the nuclear phase-out has led to a rise in the burning of coal for baseload power supply.

Now, the government is at least considering shutting down coal plants.  German minister Rainer Baake of the Green Party told reporters in late October that the government could come up with a plan as early as December to eliminate coal-fired capacity and boost energy efficiency programs.  Earlier Der Spiegel reported that the government wants to eliminate as much as 10 GW of coal capacity.  A decision will likely not come until next year.

Please Exit

Getting rid of coal is critical if Germany is to reach its target of cutting greenhouse gas emissions 40% compared to 1990 levels by 2020.  The environment ministry has said that if current trends continue, the country will fall short of that goal by 5 to 8 percentage points.

Meanwhile Swedish energy giant Vattenfall, one of Europe’s largest operators of power plants, said it will seek to sell off its coal-fired plants in Germany.  Vattenfall’s coal operations in Germany produce some 60 million tons of carbon dioxide (CO2) a year – more than Sweden’s total CO2 emissions.

Like a drunk uncle at a wedding, Germany’s coal industry is an embarrassing and unwelcome guest that everyone would like to usher to the exit.  Getting it out the door, though, remains a tough task.

 

Tesla Direct Sales Banned in Another State

— October 28, 2014

In mid-October, Michigan governor Rick Snyder signed legislation that effectively bans Tesla’s direct-to-consumer sales business model in the state.  Direct sales of cars are also currently banned in Texas, Maryland, Virginia, and Arizona, and limitations are in place in Georgia and Colorado.  Despite these setbacks, Tesla has overcome battles in Minnesota, Massachusetts, North Carolina, and recently New Jersey.

The reason Tesla’s sales model has been banned has been explained many times, including past Navigant Research blogs, found here and here.  The most critical factor is that Tesla’s direct model leaves established car dealerships out of the business transaction.  This supposedly gives Tesla an advantage over other automakers (like General Motors, which supports the Tesla bans) that must sell their vehicles through dealerships.

As Tesla sales continue to grow, state laws protecting dealerships will come into sharper focus.  Automakers and dealers will have to adapt to legislative reforms accordingly.  Given that, it’s harder to imagine a future where Tesla is forced to sell through dealers than to envision one in which all automakers are able to set up similar direct-to-consumer sales models as they see fit.  Some automakers are already adding more direct pathways for consumers to communicate directly with the automaker on vehicle specifications and deliveries.

Time to Evolve

Under these changing conditions, automotive retail must adapt to the new, information-based, time-efficient market or become structurally obsolete.  Consumers now have more knowledge, power, and control over their vehicle purchases than ever before, and future car buyers will be far more autonomous.  Greater transparency around vehicle costs, automaker inventories, and financing mechanisms enabled by the Internet shifts the bargaining chips heavily in the consumer’s favor.

The disconnect between established dealers and automakers and the new tech-savvy, well-informed consumers will only become more pronounced if state dealer associations focus on campaigning against Tesla rather than pushing industry adaptation.

 

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