What Solar Success Looks Like

The explosive growth of solar over the past few years caught many in the electric utility industry by surprise. The sheer amount of solar is impressive, though the 8 GW of solar installed in the U.S. today is still less than 1 percent of U.S. electricity production. What’s grabbing the attention of utilities is the potentially cascading impact of solar in decentralizing the generation of electric power delivered to the customer. 

The single most significant development in this trend has been the proliferation of solar companies leasing customer rooftop power systems. Leveraging a combination of cheaper solar panels, tax credits, and local incentives, these companies have built a profitable business model while offering the utility customer a “no money down” means to reduce monthly utility bills. The leasing companies now compete directly with utilities for energy sales to retail customers, a relationship that the utility once owned completely. 

The revenue erosion and possible negative impact on the utility industry is addressed in the report Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business released in January 2013 by the Edison Electric Institute. Some observers believe that the logical reaction of utilities to solar is to see it as a threat that will demand amassing their considerable power to stop. 

We at the Solar Electric Power Association (SEPA) see the future playing out differently. There might be some utilities digging in their heels, but we see a growing number who recognize that accommodating more distributed, customer-based generation presents new business opportunities. Solar is the bellwether of a more customer-focused energy business in which electric utilities can be a significant and successful player. 

20 Percent in 20 Years

There is little doubt that solar will grow into a significant resource. Two years ago, at a general session of Solar Power International, I led a discussion on the future of solar with the CEOs of six major U.S. utilities. Each CEO estimated that solar will comprise 15 to 20 percent of the generation portfolios of their companies in 20 years. 

If solar success can be defined as a win-win-win scenario for utilities, solar companies, and consumers, what has to happen to achieve that success? 

First, solar success will depend on resolving the question of how to equitably reward the customer who installs solar for the value of that resource, while allowing the utility to cover the costs of supplying the services necessary to the vitality of a grid that benefits all electricity consumers. 

This is the most visible issue facing solar and utilities today, and one that SEPA is committed to playing a key role in resolving. In July we released Ratemaking, Solar Value and Solar Net Energy Metering – A Primer, a carefully constructed report that we offer as a critical reference for a process of developing solutions to support solar growth. 

At the core of what has become a contentious debate is the future of net energy metering, a policy that exists in a variety of forms across most of the United States, requiring payment from the utility for excess customer solar generation. Virtually everyone agrees that net energy metering has been successful in helping solar grow. Many solar advocates and some solar companies feel that it’s critical for net metering to be maintained to support continued solar growth. Most utilities believe that customers with retail net energy metering don’t fully contribute to paying for the costs of the grid services they use, and they argue a change is required to keep the system whole. 

Utilities aren’t alone in concern over the unintended consequences of technological change. A debate and dilemma with parallels to the net metering problem exists in transportation.

Owners of electric and gas-electric hybrid vehicles, similar to owners of solar systems, can be excused if they feel a bit virtuous. At added personal expense, these vehicle owners are helping lower dependence on imported oil as well as lessening air pollution. But there is a problem. Roads are built and maintained with the taxes collected on the sale of every gallon of gasoline. When electric power replaces gasoline, less money comes in to state and federal road funds. 

Solutions are being sought but with limited success. Virginia and Washington now charge a fee to electric and hybrid cars to make up for the lost tax revenue, and other states expect to follow suit. Is this a fair “true-up” or an unfair penalty on drivers who are “doing the right thing”? Is the proposal in Oregon to charge an annual road usage fee based on vehicle miles driven a better resolution, provided an acceptable means of measuring that use is developed? 

Electric and hybrid vehicles are hardly the only reason roads funds have been depleted. But meeting basic infrastructure costs, whether highways or the electric grid, will require adjustments in how payments are made as technology options evolve. 

The second factor in solar success is a continued decline in the price of installing solar. 

The falling price of equipment and installation has fueled the tremendous growth of solar energy. Today, the cost of utility-scale PV averages close to $2 per watt installed, and output is priced between 7 to 12 cents/kWh. A homeowner is typically able to install PV for an average cost of $3.90-$5.90 per watt. In some regions of the country, this equates to a per-kWh cost that’s not far above the average rate for retail electricity; in Hawaii, solar is now cheaper. 

One of the key financing mechanisms available today is the 30-percent investment tax credit (ITC), which after 2016 will fall to 10 percent. Continuing the trend to greater affordability of solar – which will benefit all participants from the largest utility to the homeowner – will require adapting to this change in the ITC as well as reducing the so-called “soft costs” of solar – the price of customer acquisition, permitting, interconnection, and labor.

A third factor affecting solar growth is the development of software and hardware tools and energy storage to effectively manage solar on the grid. 

A vibrant solar industry depends upon a robust, secure, and reliable electric grid. But that grid needs to evolve to effectively accommodate solar and other distributed generation, the development of microgrids, and a growing emphasis on greater grid resiliency. Utilities are in the natural position to own and manage the tools that can capture additional value from solar while strengthening the grid and ensuring the reliability and safety customers are accustomed to receiving. Active management of solar, and the addition of distributed storage in various forms, can supply valuable services – such as reactive power from inverters, improved outage restoration, and better management of power quality and peak demand. 

Finally, solar success hinges on mainstreaming new revenue models and business partnerships to result in more cost-effective solar delivered to the customer. 

Decentralizing power production and delivery will bring more competition to utilities and at the same time will put utilities in a position to provide new energy services. It will also expand the opportunity for utilities to partner with non-utility companies in a range of solar services. Some U.S. utilities envision business scenarios in which they own and operate smart inverters and communications at the customer site while other providers own the solar generation. The solar franchise model launched by the utility Enel in Italy, with hundreds of local installers, is being proposed as an option for the United States. And partnerships in distributed solar aggregation between utilities and solar companies, combined with forecasting, could turn dispersed solar into a managed and predictable utility-scale resource that can be sold into regional power markets.

There are bumps in every road, and many would say that the growing influx of distributed solar is leading the electric utility sector into a particularly bumpy stretch. But collaboration between utilities, regulators, solar providers, and customers will lead to the development of new regulatory compacts, rate structures, business models, and partnerships that benefit all. Solar success will mean that the electric utility industry is more technologically dynamic and more customer responsive than at any time in history.