Distributed Solar is the Real Threat - Trends

This is part 5 of a series on disruption of electric utilities.

Disruption of Electric Utilities
1.  Background on Utilities
2.  Why Utilities have Avoided Disruption Thus Far – Reliability
3.  Why Utilities have Avoided Disruption Thus Far – Financial Metrics
4.  Community Choice Aggregation is a Red Herring Disruptor
5.  Distributed Solar is the Real Threat - Trends
6.  Distributed Solar is the Real Threat - The Difficult Position of Utilities
7.  A Survival Strategy for Utilities

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While CCA is not a true disruptive threat to utilities, I will argue that distributed solar is.  Solar industry skeptics may argue that solar is propped up by government subsidies and therefore not a sustainable threat to utilities in the long-term. In reality, however, unsubsidized distributed solar is already cost effective for many consumers looking to reduce their utility bills.  While utility rate structures can change, regulators are unlikely to give utilities carte blanche to eliminate solar.  For example, one can imagine a utility promoting a new structure in which consumers pay a large fixed charge for utility interconnection, while the price of electricity consumption is near zero.  Such a rate would negate the benefits of solar, but would infuriate consumers who have already invested in solar as well as energy efficiency advocates.  State utility commissions, which must approve utility rates, will not allow this to happen.  Utilities are in a tough spot, and it is useful to see how we have gotten to this place.

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As the cost of PV solar power has decreased, solar power from solar leasing companies has become a low end disruption relative to electric utilities.  Solar leasing companies are firms that do not manufacture solar panels, but rather purchase panels and install and lease the panels to consumers.  In the past 5 years, the price of photovoltaic solar panels has plummeted due to competition of Chinese solar panel manufacturers, and leasing companies are now able to offer solar panels to consumers at rates below the marginal cost of retail electricity.

The chart "Solar vs. Utility Costs in California" shows how consumer costs for solar have changed over time. The unsubsidized installation cost of solar is measured in dollars per watt on the left axis.  However, when customers lease solar, they do not pay this value upfront but rather pay a monthly bill for the electricity they receive.  This equivalent $/kWh paid for monthly electricity is shown on the right axis.  Years 2007-2013 of solar cost data are based on historical data from the state of California.  As solar prices have declined, more and more consumers are able to lease solar panels and pay for solar electricity at a lower rate than the marginal rate for electricity.

Solar vs. Utility Costs in California

Sources and Assumptions:

• Historic residential install cost of solar – Based on California state database (CSV, accessed 4/11/2013) of all completed residential solar installations in California.  Install cost calculated by dividing Total Cost ($) by PTC Rated Capacity (kW).  The cost figure includes parts, labor, permitting fees, overhead, and installer profit, but does not include tax credits.
• Implied solar LCOE – Takes as input the installed solar cost from left axis and converts to a levelized cost of energy (LCOE) using the following assumptions: 20 year system life, 16.6% capacity factor, and 5% discount rate.  16.6% capacity factor comes from NREL PVWatts calculator assuming Fresno, CA solar insolation, fixed tilt panels, and 77% DC-AC derate factor.  Accessed 4/20/2013.
• Residential max marginal retail electricity price – PG&E Electric Schedule E-7, Residential Time-Of-Use Service, summer on-peak, tier 5 rate.  Accessed 4/20/2013.
• Residential average retail electricity price – EIA average residential retail rate, California.  (PDF File, accessed 4/20/2013)

While solar in 2013 remains above the average price paid for residential electricity in California, the marginal price is the relevant metric consumers use to calculate the savings from solar.  Marginal costs vary based on a consumer’s local utility, the consumer’s specific tariff, the consumer’s monthly usage, and the time of day.  For example, many tariffs charge for electricity based on time-of-use rates, where the rate of electricity is higher during the day and lower at night, in order to encourage a reduction in peak time usage.  In addition, many tariffs are inclining block rates in which the marginal rate increases based on higher monthly usage.  Inclining block rates encourage conservation and keep rates low for low income consumers using minimal electricity.  When a residential customer on a time of use rate installs solar power, the avoided cost of electricity is the higher daytime marginal rate.

The "Solar vs. Utility Costs" chart shows that the highest marginal electricity rate faced by consumers is $0.531/kWh by high consuming customers on PG&Es E-7 time of use rate.  In reality, few customers regularly face the $0.531/kWh marginal rate, but many customers regularly pay marginal rates in the $0.25-0.35/kWh range.  Therefore, there are many parallel horizontal lines on the chart which represent the various marginal rates of electricity that different consumers pay.  Even as solar subsidies expire, the unsubsidized cost of solar will continue to remain below marginal electricity rates for numerous consumers.

As customer bills increase and solar panel installation costs decrease, the market size increases for residential customers that can save money by leasing solar panels.  The "Residential Solar..." chart below shows the increase in residential solar panel installations that has occurred in the past decade as more and more consumers find solar power to be cheaper than their marginal electricity rate.  In 2012, approximately 75% of the solar power installed in California was done by third-party companies that leased solar panels as opposed to consumers who bought the panels outright.  Residential solar in growing quickly, and is unlikely to stop anytime soon.

Residential Solar Installed Market Size in the United States

Source: Greentech Media