The take home here is that moderate penetration is smack down for the
utilities industry. The focus today is on steadily cheapening solar,
but this blog has covered a range of alternative energy solutions
struggling to break into the market.
What I had not understood before though was just how damaging the
battery and solar combination promises to be. It will drive the
utility industry completely out of the housing market as we know it.
It only retainable niche will be night time refueling of electric
cars and that will be easily matched by simple battery depots with an
ounce of personal effort.
The fact is that once we have effective automotive batteries, it is
bone stupid to use a grid. It becomes trivial to recharge a truck
load of batteries at the dam and then haul the load into the market
to be available on demand. We could almost do this now if we wished
and that we soon will is driving the whole industry.
This all means that all utility building plans and particularly
nuclear plans are really whistling in the dark. The truth is that
global demand will climb ten fold at the same time that delivery
loses also collapse providing several times as much deliverable
power. This will happen with a background of exploding solar and
battery delivery.
Once the real roll out begins, investors will face an extremely
volition utilities market.
Solar panels could
destroy U.S. utilities, according to U.S. Utilities
By David Roberts
Solar power and other
distributed renewable energy technologies could lay waste to U.S.
power utilities and burn the utility business model, which has
remained virtually unchanged for a century, to the ground.
That is not wild-eyed
hippie talk. It is the assessment of the utilities themselves.
Back in January, the
Edison Electric Institute — the (typically stodgy and
backward-looking) trade group of U.S. investor-owned utilities —
released a report [PDF] that, as far as I can tell, went
almost entirely without notice in the press. That’s a shame. It is
one of the most prescient and brutally frank things I’ve ever read
about the power sector. It is a rare thing to hear an industry tell
the tale of its own incipient obsolescence.
I’ve been thinking
about how to convey to you, normal people with healthy social lives
and no time to ponder the byzantine nature of the power industry,
just what a big deal the coming changes are. They are nothing short
of revolutionary … but rather difficult to explain without jargon.
So, just a bit of background. You probably know that
electricity is provided by utilities. Some utilities both generate
electricity at power plants and provide it to customers over power
lines. They are “regulated monopolies,” which means they have
sole responsibility for providing power in their service areas. Some
utilities have gone through deregulation; in that case, power
generation is split off into its own business, while the utility’s
job is to purchase power on competitive markets and provide it to
customers over the grid it manages.
This complexity makes
it difficult to generalize about utilities … or to discuss them
without putting people to sleep. But the main thing to know is
that the utility business model relies on selling power. That’s
how they make their money. Here’s how it works: A utility makes a
case to a public utility commission (PUC), saying “we will need to
satisfy this level of demand from consumers, which means we’ll need
to generate (or purchase) this much power, which means
we’ll need to charge these rates.” If the PUC finds the
case persuasive, it approves the rates and guarantees the utility a
reasonable return on its investments in power and grid upkeep.
Thrilling, I know. The
thing to remember is that it is in a utility’s financial interest
to generate (or buy) and deliver as much power as possible. The
higher the demand, the higher the investments, the higher the utility
shareholder profits. In short, all things being equal, utilities want
to sell more power. (All things are occasionally not equal, but we’ll
leave those complications aside for now.)
Now, into this cozy
business model enters cheap distributed solar PV, which eats away at
it like acid.
First, the power
generated by solar panels on residential or commercial roofs is not
utility-owned or utility-purchased. From the utility’s point of
view, every kilowatt-hour of rooftop solar looks like a kilowatt-hour
of reduced demand for the utility’s product. Not something any
business enjoys. (This is the same reason utilities are instinctively
hostile to energy efficiency and demand response programs, and why
they must be compelled by regulations or subsidies to create them.
Utilities don’t like reduced demand!)
It’s worse than
that, though. Solar power peaks at midday, which means it is
strongest close to the point of highest electricity use — “peak
load.” Problem is, providing power to meet peak load is where
utilities make a huge chunk of their money. Peak power is the most
expensive power. So when solar panels provide peak power, they aren’t
just reducing demand, they’re reducing demand for the utilities’
most valuable product.
But wait. Renewables
are limited by the fact they are intermittent, right? “The sun
doesn’t always shine,” etc. Customers will still have to rely on
grid power for the most part. Right?
This is a widely held
article of faith, but EEI (of all places!) puts it to rest. (In this
and all quotes that follow, “DER” means distributed energy
resources, which for the most part means solar PV.)
Due to the variable
nature of renewable DER, there is a perception that customers will
always need to remain on the grid. While we would expect customers to
remain on the grid until a fully viable and economic distributed
non-variable resource is available, one can imagine a day when
battery storage technology or micro turbines could allow customers to
be electric grid independent. To put this into perspective, who
would have believed 10 years ago that traditional wire line telephone
customers could economically “cut the cord?” [Emphasis mine.]
Indeed! Just the other
day, Duke Energy CEO Jim Rogers said, “If the cost of solar
panels keeps coming down, installation costs come down and if they
combine solar with battery technology and a power management system,
then we have someone just using [the grid] for backup.” What
happens if a whole bunch of customers start generating their own
power and using the grid merely as backup? The EEI report warns of
“irreparable damages to revenues and growth prospects” of
utilities.
Utility investors are
accustomed to large, long-term, reliable investments with a 30-year
cost recovery — fossil fuel plants, basically. The cost of those
investments, along with investments in grid maintenance and
reliability, are spread by utilities across all ratepayers in a
service area. What happens if a bunch of those ratepayers start
reducing their demand or opting out of the grid entirely? Well, the
same investments must now be spread over a smaller group of
ratepayers. In other words: higher rates for those who haven’t
switched to solar.
That’s how it
starts. These two paragraphs from the EEI report are a remarkable
description of the path to obsolescence faced by the industry:
The financial
implications of these threats are fairly evident. Start with the
increased cost of supporting a network capable of managing and
integrating distributed generation sources. Next, under most rate
structures, add the decline in revenues attributed to revenues lost
from sales foregone. These forces lead to increased revenues required
from remaining customers … and sought through rate increases. The
result of higher electricity prices and competitive threats will
encourage a higher rate of DER additions, or will promote greater use
of efficiency or demand-side solutions.
Increased uncertainty
and risk will not be welcomed by investors, who will seek a higher
return on investment and force defensive-minded investors to reduce
exposure to the sector. These competitive and financial risks would
likely erode credit quality. The decline in credit quality will lead
to a higher cost of capital, putting further pressure on customer
rates. Ultimately, capital availability will be reduced, and this
will affect future investment plans. The cycle of decline has been
previously witnessed in technology-disrupted sectors (such as
telecommunications) and other deregulated industries (airlines).
Did you follow that?
As ratepayers opt for solar panels (and other distributed energy
resources like micro-turbines, batteries, smart appliances,
etc.), it raises costs on other ratepayers and hurts the utility’s
credit rating. As rates rise on other ratepayers, the attractiveness
of solar increases, so more opt for it. Thus costs on remaining
ratepayers are even further increased, the utility’s credit even
further damaged. It’s a vicious, self-reinforcing cycle:
One implication of all
this — a poorly understood implication — is that rooftop solar
fucks up the utility model even at relatively low penetrations,
because it goes straight at utilities’ main profit centers. (It’s
already happening in Germany.) Right now, distributed solar PV is a
relatively tiny slice of U.S. electricity, less than 1 percent. For
that reason, utility investors aren’t paying much attention.
“Despite the risks that a rapidly growing level of DER penetration
and other disruptive challenges may impose,” EEI writes, “they
are not currently being discussed by the investment community and
factored into the valuation calculus reflected in the capital
markets.” But that 1 percent is concentrated in a small handful of
utility districts, so trouble, at least for that first set of
utilities, is just over the horizon. Utility investors are
sleepwalking into a maelstrom.
(“Despite all the
talk about investors assessing the future in their investment
evaluations,” the report notes dryly, “it is often not until
revenue declines are reported that investors realize that the
viability of the business is in question.” In other words,
investors aren’t that smart and rational financial markets are
a myth.)
Bloomberg Energy
Finance forecasts 22 percent compound annual growth in all solar PV,
which means that by 2020 distributed solar (which will account for
about 15 percent of total PV) could reach up to 10 percent of load in
certain areas. If that happens, well:
Assuming a decline in
load, and possibly customers served, of 10 percent due to DER with
full subsidization of DER participants, the average impact on base
electricity prices for non-DER participants will be a 20 percent or
more increase in rates, and the ongoing rate of growth in electricity
prices will double for non-DER participants (before accounting for
the impact of the increased cost of serving distributed resources).
So rates would rise by
20 percent for those without solar panels. Can you imagine the
political shitstorm that would create? (There are reasons to think
EEI is exaggerating this effect, but we’ll get into that in the
next post.)
If nothing is done to
check these trends, the U.S. electric utility as we know it could be
utterly upended. The report compares utilities’ possible future to
the experience of the airlines during deregulation or to the big
monopoly phone companies when faced with upstart cellular
technologies. In case the point wasn’t made, the report also
analogizes utilities to the U.S. Postal Service, Kodak, and RIM, the
maker of Blackberry devices. These are not meant to be flattering
comparisons.
Remember, too, that
these utilities are not Google or Facebook. They are not accustomed
to a state of constant market turmoil and reinvention. This is a
venerable old boys network, working very comfortably within a
business model that has been around, virtually unchanged, for a
century. A friggin’ century, more or less without innovation, and
now they’re supposed to scramble and be all hip and new-age?
Unlikely.
So what’s to be
done? You won’t be surprised to hear that EEI’s prescription is
mainly focused on preserving utilities and their familiar business
model. But is that the best thing for electricity consumers? Is that
the best thing for the climate?
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