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.

Distributed Solar is the Real Threat - The Difficult Position of Utilities

This is part 6 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

-------------------------------------

Solar represents a dangerous disruption for electric utilities, particularly because as more consumers install solar, the price of power for utility customers will increase.  When consumers use less utility power in favor of distributed solar power, utilities have to distribute their fixed costs over fewer customers.  Utility electricity prices then increase, and more customers are driven to install solar.  Jim Rogers, CEO of Duke Energy, a utility serving Ohio, Kentucky, Indiana, Florida and the Carolinas, described solar as a threat to utility survival in the long term.  Moreover, the risk of distributed generation including solar is noted in nearly all utility annual reports.

A logical next question, however, is why utilities cannot enter the residential solar business themselves.  After all, solar leasing companies are financing the installation of energy assets, a business model very similar to that of utilities.  The good money, bad money theory explains why this endeavor is challenging to a utility.  In early 2010, PG&E saw the opportunity of residential solar ownership and invested $160 million in funds raised by SunRun and SolarCity, the two leading solar leasing companies.  Unfortunately, in late 2010, PG&E faced a crisis when a gas line it owned exploded in San Bruno, CA, killing 8 people and destroying 38 homes.  The disaster forced PG&E to pay large expenses not recoverable from rate payers and to devote significant resources to ensure the safety of its existing infrastructure.  As a direct result, in 2011 PG&E shutdown its residential solar investing group to focus on its core business.  PG&E offered bad money for solar investment, and leasing companies have found more patient capital from financial institutions.

As descried earlier, utilities should have the correct financial incentives to defend against the solar threat.  In fact, though solar only represents about 1% of California electricity generation currently, utilities have been aggressive in lobbying for changes in rate design of marginal costs that would reduce the incentives to install residential solar.  However, the solar industry and political supporters now have the ability to lobby back.  In addition, as solar continues to decrease in price, it will undercut even the average cost of power provided by utilities, making it more challenging for utilities to stymie solar via rate design reform.  In the short-run, utilities will likely be able to stay in business so long solar customers still need the grid for backup service.  In the long run, though, fully modularized solar power may kill the utility industry.  NRG, a large S&P 500 power generation company, has announced plans to sell micro gas generators as a backup to distributed solar.  Micro generation allows customers to completely disconnect from the electricity grid while staying on the gas grid.  While micro generation or other backup power sources like batteries are unlikely to be cheaper than wholesale utility power, the combination of cheap distributed solar plus backup power may be able to provide reliable electricity at a cost below retail rates offered by utilities.  As customers start to leave utilities, the remaining customers will see higher rates due to utility stranded assets, accelerating the transition to distributed generation.  Even though the utility industry is set up with factors that have encouraged it to fight new entrants, distributed solar power has the potential to be the long-term threat that finally disrupts the electric utility industry.

Distributed Solar is the Real Threat - Trends

This is part 5 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

-------------------------------------

While CCA is not a true disruptive threat to utilities, I will argue that distributed solar is.  Solar industry skeptics may argue that solar is propped up by government subsidies and therefore not a sustainable threat to utilities in the long-term. In reality, however, unsubsidized distributed solar is already cost effective for many consumers looking to reduce their utility bills.  While utility rate structures can change, regulators are unlikely to give utilities carte blanche to eliminate solar.  For example, one can imagine a utility promoting a new structure in which consumers pay a large fixed charge for utility interconnection, while the price of electricity consumption is near zero.  Such a rate would negate the benefits of solar, but would infuriate consumers who have already invested in solar as well as energy efficiency advocates.  State utility commissions, which must approve utility rates, will not allow this to happen.  Utilities are in a tough spot, and it is useful to see how we have gotten to this place.

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As the cost of PV solar power has decreased, solar power from solar leasing companies has become a low end disruption relative to electric utilities.  Solar leasing companies are firms that do not manufacture solar panels, but rather purchase panels and install and lease the panels to consumers.  In the past 5 years, the price of photovoltaic solar panels has plummeted due to competition of Chinese solar panel manufacturers, and leasing companies are now able to offer solar panels to consumers at rates below the marginal cost of retail electricity.

The chart "Solar vs. Utility Costs in California" shows how consumer costs for solar have changed over time. The unsubsidized installation cost of solar is measured in dollars per watt on the left axis.  However, when customers lease solar, they do not pay this value upfront but rather pay a monthly bill for the electricity they receive.  This equivalent $/kWh paid for monthly electricity is shown on the right axis.  Years 2007-2013 of solar cost data are based on historical data from the state of California.  As solar prices have declined, more and more consumers are able to lease solar panels and pay for solar electricity at a lower rate than the marginal rate for electricity.

Solar vs. Utility Costs in California

Sources and Assumptions:

• Historic residential install cost of solar – Based on California state database (CSV, accessed 4/11/2013) of all completed residential solar installations in California.  Install cost calculated by dividing Total Cost ($) by PTC Rated Capacity (kW).  The cost figure includes parts, labor, permitting fees, overhead, and installer profit, but does not include tax credits.
• Implied solar LCOE – Takes as input the installed solar cost from left axis and converts to a levelized cost of energy (LCOE) using the following assumptions: 20 year system life, 16.6% capacity factor, and 5% discount rate.  16.6% capacity factor comes from NREL PVWatts calculator assuming Fresno, CA solar insolation, fixed tilt panels, and 77% DC-AC derate factor.  Accessed 4/20/2013.
• Residential max marginal retail electricity price – PG&E Electric Schedule E-7, Residential Time-Of-Use Service, summer on-peak, tier 5 rate.  Accessed 4/20/2013.
• Residential average retail electricity price – EIA average residential retail rate, California.  (PDF File, accessed 4/20/2013)

While solar in 2013 remains above the average price paid for residential electricity in California, the marginal price is the relevant metric consumers use to calculate the savings from solar.  Marginal costs vary based on a consumer’s local utility, the consumer’s specific tariff, the consumer’s monthly usage, and the time of day.  For example, many tariffs charge for electricity based on time-of-use rates, where the rate of electricity is higher during the day and lower at night, in order to encourage a reduction in peak time usage.  In addition, many tariffs are inclining block rates in which the marginal rate increases based on higher monthly usage.  Inclining block rates encourage conservation and keep rates low for low income consumers using minimal electricity.  When a residential customer on a time of use rate installs solar power, the avoided cost of electricity is the higher daytime marginal rate.

The "Solar vs. Utility Costs" chart shows that the highest marginal electricity rate faced by consumers is $0.531/kWh by high consuming customers on PG&Es E-7 time of use rate.  In reality, few customers regularly face the $0.531/kWh marginal rate, but many customers regularly pay marginal rates in the $0.25-0.35/kWh range.  Therefore, there are many parallel horizontal lines on the chart which represent the various marginal rates of electricity that different consumers pay.  Even as solar subsidies expire, the unsubsidized cost of solar will continue to remain below marginal electricity rates for numerous consumers.

As customer bills increase and solar panel installation costs decrease, the market size increases for residential customers that can save money by leasing solar panels.  The "Residential Solar..." chart below shows the increase in residential solar panel installations that has occurred in the past decade as more and more consumers find solar power to be cheaper than their marginal electricity rate.  In 2012, approximately 75% of the solar power installed in California was done by third-party companies that leased solar panels as opposed to consumers who bought the panels outright.  Residential solar in growing quickly, and is unlikely to stop anytime soon.

Residential Solar Installed Market Size in the United States

Source: Greentech Media