A Survival Strategy for Utilities

This is part 7 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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To recap, the situation facing utilities is that the price of distributed solar power on customer rooftops has dropped significantly.  Many customers now save money by leasing solar panels and reducing their electricity bills, and this would be true even without government subsidies for solar (the investment tax credit).  Utilities do not like this because their traditional business model is to be the energy asset owner, and this role is being usurped by third party solar investors.  Solar is taking away utility market share.

Furthermore, utilities really dislike net metering, where customers sell excess solar back to the grid.  Utilities justifiably argue that under net metering, utilities are obligated to purchase solar at a higher prices than what it is worth to other grid customers, thereby raising average rates.

Unfortunately, the utility response thus far has been no more effective than the music industry’s early response to file sharing:

The Current Utilities Response to Solar

1. Fight net metering
• Utilities have lobbied for limits to net metering and to reduce the payouts for net metering.
2. Fight community solar
• Community solar, also known as virtual net metering, enables a customer to buy a stake of a nearby solar installation to reduce their electricity bill rather than place panels on their own roof. Therefore, larger, cheaper solar can be built in more advantageous locations, and customers without sunny roofs can benefit from solar.  Utilities dislike community solar because the solar panels are not behind a customer meter, and so power flows across utility distribution wires, but the utility does not get paid.  Utilities do need to get paid for the use of their wires, but rather than naming a price, they have thus far refused to support such programs.
3. Limit investment in distributed solar
• The utility business model is to finance energy investment assets, so utilities could be expected to invest in residential solar.  However, other than two defunct programs between PG&E and SunRun and SolarCity, utilities have left the financing of distributed solar to banks and Google.

The current utility response is effective in delaying the adoption of solar power, but shows no coherent long-term strategy.  By fighting solar adoption, utilities lose a significant opportunity to integrate distributed solar into their own business model.  Moreover, utilities foot-dragging will eventually lead frustrated solar advocates to pay for expensive battery backup systems in order to remove themselves from the grid.  While batteries are not close to being cheap enough for residential homeowners, we are could see larger commercial and industrial customers turning to battery backups or microgrid systems featuring solar and other distributed fossil fuel generation in order to reduce electricity bill and increase reliability.  In the long-term, solar-enabled customer flight is a real threat to utility survival.

That said, the percentage of utility customers with solar remains tiny in the United States.  It is not too late for utility companies to formulate a reasonable solar strategy.  Here is my recommended approach for utilities:

Utility “Survival Strategy” Response to Solar

1. Pioneer community solar
• Realistically, utilities cannot suddenly go after the current residential distributed solar market. They have lost too much ground to distributed solar companies SolarCity, SunRun, SunPower, CPF, etc.  However, utilities are uniquely positioned to lead in community solar because utilities can site and interconnect community projects better than anyone, plus utilities alone can come up with fair distribution wheeling charges.  The community solar model would allow utilities to invest in solar while favorably competing with the leaders in distributed solar.  Also, the potential customer set is much bigger, and includes housing renters.
2. Create a distribution-level energy auction with the utility as the market maker
• While ownership of community solar is an easier short-term advance for utilities, a customer-to-customer market for solar power has much great long-term potential.  The analogy is that at the transmission level, independent system operators serve as non-profit market markers between generators and utilities.  At the distribution level, however, utilities have the opportunity to play the role of market maker between solar customers.  They would profit from distribution wheeling charges, increased utilization of utility assets, and a bid-ask spread between solar buyers and seller.  As the price of solar is reduced, more and more people would want to participate, as sellers if they have a big sunny roof, or as buyers if they do not.  When all customers can participate in solar, the utility has more ability to charge all customers for distribution system investments necessary to upgrade the distribution grid for more solar generation.

Under this plan, utilities keep their role as asset owner of distribution assets, add a new source of revenue, and benefit from decreasing costs of solar rather than suffering.  Finally, with a customer-to-customer solar auction, the utility customers benefit from economies of scale.  Thus, the utility would face less threat from municipalization or community choice aggregation.