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Are falling utility revenues reason enough to slow down renewables?

A recent article in the Economist portrayed a rather gloomy outlook for renewable energy. This was not because of shifting political winds, as some might expect, or the oft-repeated fact that the sun does not shine at night. Instead, the authors pointed to two discrete facts.

First, building out the infrastructure required to reach critical mass for renewables will be enormously expensive. Second, the economics around the receipt and delivery of electricity are changing dramatically, largely due to the impact of renewables. While the two facts themselves are indisputable, the conclusions drawn from them are less so.

The story point outs how utility revenues are falling. Renewables cost much less to operate, which brings prices down. Plus, when people put solar panels on their roofs, they no longer need to buy power from utilities, at least not during the peak sunshine hours. However, they still expect the utility to provide power to them when the sun goes down. That requires a lot of resources on the part of the utility that someone needs to pay for.

In many ways, the issue is analogous to — although slightly ahead of — what will soon be playing out on the highways. Money to maintain the roads is largely collected from state and federal taxes on gasoline. As more people shift to efficient hybrids or fully electric cars, less money is collected for road repairs, while the amount of driving remains roughly the same. This is an issue you can expect to hear more about in the future and it likely will cause some consternation, although I don’t expect to see getting rid of EVs widely supported as the solution.

The whole idea of grid defection keeps utility executives up at night… the future being painted by Elon Musk, where solar panels on the roof, a battery and a Tesla in the garage provide all the power needed.

It’s also important to note where the analogy falls apart. Roads are maintained largely by the government as public infrastructure and paid for through taxes. Most of the electric grid is owned and maintained by private interests that are expected to show a profit each quarter. This difference is the current point of pain.

In some ways, this is looking at the next century’s energy infrastructure through last century’s glasses, but still, as the author says, "long-run solutions do not solve short-term constraints." Utilities have been raising concerns over this issue for several years, as witnessed by this four-year-old Disruptive Challenges (PDF) report from the Edison Electric Institute, which states:

Recent technological and economic changes are expected to challenge and transform the electric utility industry. These changes (or "disruptive challenges") arise due to a convergence of factors, including: falling costs of distributed generation and other distributed energy resources (DER); an enhanced focus on development of new DER technologies; increasing customer, regulatory, and political interest in demand-side management technologies (DSM); government programs to incentivize selected technologies;  the declining price of natural gas;  slowing economic growth trends; and rising electricity prices in certain areas of the country. Taken together, these factors are potential "game changers" to the U.S. electric utility industry, and are likely to dramatically impact customers, employees, investors and the availability of capital to fund future investment. The timing of such transformative changes is unclear, but with the potential for technological innovation (e.g., solar photovoltaic or PV) becoming economically viable due to this confluence of forces, the industry and its stakeholders must proactively assess the impacts and alternatives available to address disruptive challenges in a timely manner.

The report was seen by many as a call for utilities to circle their wagons.

The Economist story uses the German village of Wildpoldsried as its jumping-off point. This is a green energy Mecca where wind, solar and biogas conspire to produce five times the amount of electricity the villagers need, making them all well-paid energy farmers. While this likely represents a worst-case scenario from the perspective of the utilities, it, along with those completely off the grid, is likely one extreme on the future energy spectrum.

Still, the whole idea of grid defection keeps utility executives up at night. This is the future being painted by Elon Musk, where solar panels on the roof, a battery and a Tesla in the garage provide all the power needed all the time, potentially eliminating the need to be tethered to the utility altogether.

Indeed, the Rocky Mountain Institute’s (RMI) seminal study, compiled in their Reinventing Fire book, says that "a considerable number of utility customers will likely see favorable defection economics within 10 years." Considering that the book came out in 2011, that’s practically just around the corner.

These problems are all rooted in the lack of clear understanding of the value drivers and the cost drivers.

How many people ultimately opt to go forth without a net, so to speak, in this connected age when electricity has become such a necessity remains to be seen. After all, a battery system can only store so many days of sunshine, and there will be malfunctions.

In a world where utility customers remained connected for backup services, it is easy enough to see how fees could be used to cover the costs of maintaining the grid. If ratepayers leave in large numbers, that will cause a bigger problem.

RMI has been looking deeply into this question through their eLab project, which convenes interactive sessions with all stakeholders around the question of evolving utility business models. They have been bringing these stakeholders together in multi-day "accelerator boot camps for electricity innovation" for four years. While innovation can take on many facets, these camps are focused on "the electricity system’s distribution edge."

When I spoke with eLab’s founder, Lena Hansen, back in 2013, she told me that these problems are "all rooted in the lack of clear understanding of the value drivers and the cost drivers around the table... It sounds like a trivial thing, but if we can’t work out the pricing, then we can’t move forward."

As this transformation continues to take place, location, scale and ownership will all change, and the old rules simply won’t apply anymore. But if we get all the smart people concerned about this to sit down and share their perspectives, in an open process, they should be able to find a way to work out the pricing, and solutions will be forthcoming. Just recently, a contentious solar rate case was settled in Arizona.

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