By fighting rooftop solar, utilities are setting themselves up for worse to come

Large incumbent industries threatened by new upstart technologies do not always respond to those threats wisely.

Shocking, I know. While this is usually obvious in retrospect, it can often be difficult to see in real time as the struggle is unfolding.

Take power utilities. (Please.)

Currently, utilities are threatened by distributed rooftop solar panels. They are pushing back against rooftop solar in states across the country.

It turns out, though, that by squashing or rolling back current support mechanisms for rooftop solar, utilities are only accelerating the development of a much more serious and enduring threat to their business model.

That threat is solar plus storage: an integrated combination of solar photovoltaic (PV) panels, batteries to store their energy, and power electronics capable of managing the system and, in some cases, communicating with the larger power grid.

Such a system is, to quote the Rocky Mountain Institute, a "utility in a box." Make it big enough and it can supplant the utility entirely, taking the user entirely off-grid.

In a separate post, I'm going to review the value and current economics of solar plus storage. Today, though, I just want to briefly review the trap utilities find themselves in.

Utilities don't like rooftop solar

The details of utility battles against rooftop solar are complicated, but the basic shape of the story is pretty simple: Rooftop solar reduces utility revenue. Utilities don't like that!

(Shutterstock)

Utilities don't make money on electricity itself — for that, they are only allowed to recover their costs. Instead, they make profit by earning a rate of return on investments in grid infrastructure.

Problem is, charges for infrastructure are typically bundled, on a consumer's power bill, with charges for electricity. It's all lumped together into a single per-kWh "volumetric" charge (i.e., consumers who use more pay more).

So when rooftop solar customers buy less utility power, they are also paying the utility less for those sunk investments in infrastructure. In order to get the same rate of return on those investments, utilities then have to raise rates on other customers, which does not make them popular. It also drives more customers to install solar, accelerating the cycle.

So utilities are going after "net metering," the near-ubiquitous policy (44 states and Washington, DC, have it in some form) that pays solar customers the retail rate for the surplus electricity they produce.

Utilities want to pay solar customers a lower rate for their surplus electricity and charge them separate, extra "fixed charges" to cover grid investments.

There are dozens of these battles ongoing. Utility Dive has a good list of the top 10.

In most cases so far, utilities have lost. But not all. In Nevada, the public utility commission (PUC) just decided in favor of the utility, slashing compensation for, and increasing charges on, rooftop solar customers. Hawaii ended net metering last year.

In California, by contrast, the PUC just decided in favor of rooftop solar customers and installers, preserving the current payment regime.

However these short-term battles play out, conventional wisdom is that net metering can't survive in its current form. One way or another, solar customers are going to have to pay more.

Higher fixed charges are an incentive for solar customers to install storage

What happens when a rooftop solar customer gets paid less for her electricity and pays more in fixed charges?

Enter storage.

Shutterstock

A solar customer who's getting the full retail rate for her surplus power has no financial incentive to store any of her energy. When she sells it, she gets the retail rate; when she buys power, she pays the retail rate. She has no reason to prefer her self-generated electricity to the utility's. It's all worth the same.

But if retail rates rise and incentives for solar decline, the game changes.

Under those circumstances, when generating surplus energy the solar customer faces a new choice. She can sell her power to the utility (for below retail rate) or she can store it and use it later, when she would otherwise be paying retail rate.

In other words, the lower net metering rates get, the more solar rooftop customers have incentive to consume as much of their self-generated power as possible. The way to do that is to store the excess generated during the day and consume it at night.

And a fairly modest-size battery can substantially increase a solar customer's consumption of self-generated energy. A 2015 Australian Climate Council report found that "adding a 4 kWh battery to a 5 kW solar system can increase the amount of self-generated solar electricity a household consumes from 30 to 60%." (By way of comparison, Tesla's Powerwall home battery is 7 kWh.)

What happens when solar customers buy even less power from utilities? Do utilities cut net metering rates even further? Raise fixed charges even higher?

If they do that, they just piss more customers off and create even more incentive for larger solar arrays and bigger batteries, accelerating the cycle.

In short, by going after net metering, utilities are merely delaying, not avoiding, the much-discussed "death spiral." They can delay it for a while, even a decade or two in some places (more on that in the next post), but they cannot forestall it. It's coming.

The only long-term solution, as New York and a few other innovative states have grasped, is to rethink the utility business model.

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