That's a Thirsty Walnut

I loved this Mother Jones article by Alex Park and Julia Lurie. They include a terrific graphic which I re-posted below.

Water Should Have a Price

The California drought has been taking over the news recently, and it seems to be a topic of conversation everywhere I go.  People already love to talk about the weather.  Now they get to include novel terms like mega-drought, water seizure, and ridiculously resilient ridge. (The water seizure appears to be a false alarm).  It is clear that collectively we want more water than we have, and that many trade-offs will have to be made.

In my view, it would be easier to evaluate the various trade-offs being discussed in water policy if water was priced more transparently.  For example, this article mentions that Westlands Water District recently offered to buy water from Oakdale Irrigation District for $400/acre-ft of water.  Last spring, Westlands offered $100/acre-ft.  For comparison, water from ocean desalination plants currently costs roughly $2,000/acre-ft.  Westlands is the largest agricultural water district in the US, and produces iconic California produce like almonds and pistachios.  The price numbers help illustrate the challenges Westlands faces.  Apparently farmers in Westlands can afford to buy water at a price four times what they paid a year ago.  Would they still be able to produce if prices quadruple again?  I'm not sure, but I personally would be willing to pay a bit more for tasty almonds if the price of water increases.  Under that logic, the drought seems to be painful but not catastrophic for the long-term future of California agriculture.

The need for water prices is also apparent when looking at water conservation and recycling.  While some consumers are facing increasing costs for water, others don't even know their own usage.  In Sacramento, only about 25% of homes have a water meter.  Residents without meters pay a flat rate, and increased water consumption is essentially free.  The reason for the limited metering?  The city doesn't want to pay for meters.  As a result, governments have ask people to conserve based on the honor system.

Prices are not a panacea.  Prices miss all kinds of market externalities.  They also can fluctuate widely in markets, like water, which are relatively illiquid.  Still, when attempting to make trade-offs and conserve water, prices are a good place to start.

Hiatus

I am writing to announce my indefinite hiatus from blogging about topics related to the electricity industry.  In the introduction of this blog, I described that blog will include topics related to energy and the environment, specifically due to their relevance in the context of climate change.  While I have focused most posts on the electricity industry thus far, there have been a couple exceptions, such as a post on biofuels and one on ocean acidification.  Going forward, I will explore new topics related to climate change.  I have been wanting to write about issues surrounding water, agriculture, land use, weather insurance, and biochar.  I will miss commenting on developments in renewable power, but I am excited about this new chapter in the development of Green Jouleus.

Utility Investments in Solar

I saw this slide, available here, from the 2013 U.S. Solar Market Insight Conference produced by GTM Research and the Solar Energy Industries Association.  The slide categorizes various utility investments in solar projects.  Previously, I have recommended approaches utilities should take to succeed in an era of distributed solar power, and these utilities are likely to be those at the forefront of new solar business models.

I apologize for the poor image resolution of some of the logos.

Microgrids Have Arrived

First, a definition of microgrids from Wikipedia:

A microgrid is a localized grouping of electricity generation, energy storage, and loads that normally operates connected to a traditional centralized grid. This single point of common coupling with the macrogrid can be disconnected. The microgrid can then function autonomously. Generation and loads in a microgrid are usually interconnected at low voltage. From the point of view of the grid operator, a connected microgrid can be controlled as if it were one entity.

Microgrids are often considered the grid of the future for a number of reasons.  The first is that cost of microgrids are decreasing.  Currently, a university campus or an industrial facility may want to reduce energy costs by using demand side resources such as microturbines, fuel cells, solar panels, batteries or demand response.  In particular, as solar panels decrease in cost, they provide many customers with a source of local power that is less than the cost of grid power, as I have described before.  Solar panels, however, do not match the load profile of a customer, so  microturbines and/or batteries are needed in addition to the panels to create a self-sufficient microgrid.

Power lines damaged by Hurricane Sandy in 2012
Source: Wikimedia Commons

While microgrids still are typically more expensive than traditional grid service, they offer the additional benefit of added reliability compared to grid power.  The big news in this area is that this past September, a microgrid in Borrego Springs, California enabled a community to quickly restore power after a thunderstorm-induced transmission outage in the area.  The quote from UT San Diego:

1,060 customers had their power restored automatically within hours by the Microgrid, using the on-site power. This included the essential downtown business area that contains several gas stations, stores and the local library, which is the designated “cool zone” for the community. The Microgrid continued to use on-site generation to power these customers while repairs were made to the damaged poles, allowing them to keep air conditioners and other vital appliances running during the intense heat. This is one of the first times in the nation that a Microgrid has been used to power a large portion of a community during an emergency situation.

My hat goes off to all the people behind the Borrego Springs microgrid.  Microgrids are starting to live up to their potential, and hopefully we look back on September, 2013 as a major landmark in their development.

CCA Remains a Bad Deal

Community Choice Aggregation, or CCA, has had a number of wins over the past year.  I have written about CCA before, including a description of how it works.  Recently, Sonoma Clean Power in Northern California announced that it has signed contracts with Constellation Energy for a primary energy supply and with Calpine for a 10-year contract for local carbon-free geothermal power.  CCA advocates celebrate that with the Calpine deal, Sonoma is the first CCA to focus on local energy, a long-term goal for CCA supporters.

I believe that in most cases, CCA is a bad deal for consumers, just like municipal power.  CCA is similar to municipal power in that local government, rather than a private utility, controls energy purchasing decisions.  This is a generally bad deal for consumers because the fallout from bad decisions is much more significant.  Utilities have a challenging job which involves making big investments and signing long-term contracts for power under uncertainty of fuel prices and technology risks.  With a well regulated investor owned utility, when the utility screws up, the investors pay.  For example, in 1988 PG&E made big mistakes with its investment in Diablo Canyon nuclear plant.  Diablo Canyon had seismic and design problems which led to some parts of the plant having to be rebuilt three times.  PG&E's regulator ruled that $2 billion in cost overruns for Diablo Canyon were imprudently incurred, and thus had to be borne by PG&E equity holders rather than consumer ratepayers.  These costs wiped out PG&E's entire 1988 earnings.

In contrast, with municipal power or CCA, the risks of investments and long-term contracts are borne by the local government, and thus by local taxpayers.  For example, when SMUD made an imprudent investment of its own in the Rancho Seco nuclear plant, which was prematurely shut down, the utility nearly went bankrupt.  Sacramento taxpayers paid the cost for this mistake.

Municipal power and CCA enable the use of tax-exempt municipal debt to fund energy investments.  Such low cost debt should lead to lower power prices.  But the lower prices come at a steep cost in terms of risk for the local consumers.  Moreover, there is not clear evidence that municipal power or CCA actually do offer consistently lower power prices than investor owned utilities.  With more risk and comparable prices, municipal power and CCA are a bad deal for consumers.

CCA does have one clear positive aspect: it is a threat that can provoke a utility to listen to customers.  For example, San Francisco's stalled CCA program, CleanPowerSF, planned to offer customers a 100% green power option.  In response, PG&E announced a 100% green power option of its own.  Ultimately, CleanPowerSF has not been able to deliver on its goals of clean, cost-competitive, local power.  The only benefit it has provided is prodding PG&E into offering better services, like the 100% green power option.  It is frustrating that the PG&E monopoly would not offer a service customer wanted until it faced competition from CCA, but now that it does offer the option, it is surely a better deal than what CCA could offer.

A better alternative to both CCA and monopolistic distribution utilities?  The answer lies with Texas' deregulated market for retail power marketers.  When I tried soliciting options for a hypothetical house in Dallas (zip code 75001), I was presented with 344 competitive offers.  75 of them offered 100% renewable power.

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.