Cheap rooftop solar freaks out utilities: slowing the roll-out to avoid a “utility death spiral”

A recent article in the NYTimes looked at tensions in Hawaii’s utility market over the rapid expansion of residential rooftop solar.  Ratepayers are increasingly recognizing that the financial equation has shifted so that buying or leasing rooftop solar panels can be cheaper than their current electric bill.  For utilities, this leads to financial pressures of a different kind: they still need to maintain their distribution lines and assure they can deliver power at night when the panels are not generating energy.  This has led many utilities to resist solar expansion by slowing the grid-connection process and reducing the price they pay for excess customer-generated solar power, which has frustrated solar advocates and homeowners looking to add solar.

“Hawaii’s case is not isolated,” said Massoud Amin, a professor of electrical and computer engineering at the University of Minnesota and chairman of the smart grid program at the Institute of Electrical and Electronics Engineers, a technical association. “When we push year-on-year 30 to 40 percent growth in this market, with the number of installations doubling, quickly — every two years or so — there’s going to be problems.”

This is a topic that has been on our radar for quite some time.  Last year, the Rocky Mountain Institute took a look at the longer-term pressures in this sector, and its report, The Economics of Grid Defection, predicted that Hawaii and California will be at the forefront of the next shift as well, when battery technology advances to the point where unplugging completely from the grid will become financially beneficial, leaving utilities even more adrift.  Click through to read “Utility death spirals and the future of energy,” our recent Natural Investments newsletter article on this creatively-disruptive possibility.

Utility death spirals and the future of energy
by Christopher Peck

“Utility Death Spiral?” This provocative title jumped off the agenda page at the recent SRI Conference. What could that mean? Well, with a title like that, I knew I had to attend, though the session description’s litany of tech terms—gigawatts, levelized cost of energy, photovoltaic grid parity, net metering time of use—had my eyes going a little blurry. Spending an hour with a bunch of energy nerds turned out to be the standout presentation of the year for me.

A year ago, Amory Lovins and the team at Rocky Mountain Institute (RMI) released a report called “The Economics of Grid Defection” that highlighted the forces and timing that will drive commercial and residential electricity users to unplug from the grid. Lo and behold, the time is almost here that solar photovoltaic (PV) in combination with new battery technology is/will be cheaper than staying plugged in to the grid. Wow, that changes things! Ever since the initial boom in the 1970’s, PV systems with batteries have been only appropriate for far-off-grid folks, people who lived a mile or more from an electric line. But now, with the cost of PV panels dropping dramatically, coupled with the slow but accelerating reduction in the price of batteries, even someone living in a city house that’s already connected to the grid might choose to unplug. In some parts of Hawaii, the time has already passed—folks there are unplugging, not just to “go green” but to “save green.” In California and New York the report’s most optimistic scenarios suggest it could make economic sense to “defect from the grid” in as little as two years! In places with lower electric rates, including Kentucky and Texas, the time frame is much longer, though well within the thirty-year planning scope of electric utility infrastructure development.

A key factor that will drive “grid defection” is the ongoing monthly cost to stay connected to the utility and the grid. In our current net-metering model, once businesses and homeowners are generating sufficient electricity to cover their own use, then they are using the grid as a giant battery. When the sun is shining the PV system is pumping energy into the grid, and when it’s dark the user is pulling energy out. As the cost of using the grid as a battery increases and the prices for an actual, at-home battery system decreases, users start to look at using their own batteries to perform the same function. If it costs $10 a month to have the convenience of the grid, for example, but it only costs $5 a month to finance a battery pack at your house, well, you can see the appeal—especially if utility fees rise as their customer base shrinks.

What does all this mean for investors? Well, it’s clearly time to think carefully about being too heavily invested in electrical utilities. On the same panel, a representative of Barclays Bank summarized their recent report about what grid defection might mean for investors. The fear is that as more people pull the plug from the grid the fixed costs of electricity generation (e.g., transmission lines and long-term power contracts) will need to be spread out over fewer customers. This will make the cost of electricity for people still on the grid even more expensive, while PV and battery systems continue to drop in price, leading to even more people jumping ship from the utility. This positive feedback loop could bankrupt a utility, and hence the question: “utility death spiral?” In their report, Barclays actually downgraded several electric utility companies that they see as being particularly at risk for just this.

Still skeptical? Me too. Even RMI’s report acknowledges that the timeline for the cost-crossover point is uncertain and will likely require some faster-than-incremental drops in battery prices. But the dynamic being described is surely one worth keeping a close eye on, especially given the large role played by utilities in many portfolios and mutual funds.

Then there’s the impact of all this on our investments in our own tangible assets, around our homes. It’s always a complex task to weight the many interlaced costs and benefits of a big capital improvement, and these new questions up that ante. It’s especially relevant to me since we’re planning to install a fairly sizable PV system at our house in 2015, before the current 30% tax credit expires in 2016. We’re also designing and building a workshop-barn where we’ll mount the PV panels, so we need to get the details right! I was originally going to design the building so it had a large south-facing roof to maximize the amount of sun and electricity I could generate from roof-mounted PV panels. But after looking through the numbers for time-of-use billing I realized that mounting the panels to the west to maximize the afternoon sun would be more financially profitable. Many businesses and homeowners with renewable energy systems use Time of Use (TOU) billing. The utility charges and pays a LOT more for each increment of energy used during certain periods. For example here in Northern California with PG&E, a kilowatt-hour of energy, based on TOU billing, is $0.35 during summertime afternoons during the workweek, but only $0.06 at nighttime. That’s huge—and worth redesigning a barn around!

After attending this session, I began to wonder whether the dynamics it described suggest I need to rethink my plan, and jettison the grid-as-battery framework. Well, I ran the numbers (far too detailed to flesh out here), and it turns out that even if just filling my own batteries, the western orientation is easier and cheaper—plus, the building works better on my property in that orientation, a win-win.

Apart from these design factors that are up for me right now, I came away from the session and my reading of the RMI and Barclay’s reports with a feeling of excitement. While I’d known that PV and battery costs were falling, it had seemed that interconnection with the grid was firmly established as the default framework for the future; dreams of decentralized power appeared as far away as ever. Yet once again, we find that unexpected and unintended consequences can ripple through the complex systems of our economy, making a mockery of our predictions and offering opportunities for transformative change to be lurking around any corner.

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