State of Green Business

How close are we to peak electricity prices?

Rocky Mountain Institute

How close are we to peak electricity prices?

electricty meter, power grid economics, utilities solar batteries
ShutterstockJanaka Dharmasena
The economics of the electricity grid are evolving rapidly.

Residential rooftop solar enjoyed 50-percent annual growth in 2012, 2013 and 2014, according to the Solar Energy Industries Association. That rise of solar PV has eroded the energy sales of certain utilities.

In response, some are fighting back, proposing new charges to preserve revenue. One recently succeeded.

Salt River Project, one of Arizona’s largest utilities, finally succeeded Feb. 27 where nearly two dozen others failed in the past three years: It won the right to impose new demand charges  —  an average of $50 per month  —  on grid-tied customers who produce their own solar power. (Although a recent anti-trust lawsuit brought by SolarCity suggests forthcoming chapters in this ongoing story.)

Why the persistent push from certain utilities for such new charges? Because some see solar and other customer-sited technologies as a threat to their traditional business model  —  and they’re right to worry.

According to a new analysis from RMI with HOMER Energy and other partners, customer “load defection”  — customers’ shift from getting electricity from their utility to getting electricity from solar panels on their roofs  —  could become much bigger in the near future, especially when solar is paired with battery energy storage.

“The increasing adoption of solar-plus-battery systems along with other customer-centric distributed energy resources is going to present a huge challenge to regulatory constructs and utility business models,” said Leia Guccione, a manager with RMI’s electricity practice and coauthor of the new report “The Economics of Load Defection.” “The future looks a lot different than the way utilities have served their customers for the past 100 years.”

Coming soon: Solar-plus-battery systems

At the core of this new analysis are two basic trends: retail electricity from the grid is getting more expensive; and costs for solar and battery technologies rapidly are declining.

But when and where in the U.S. might those two curves cross? And how many customers and how much in electricity sales is at stake? The answer: a lot.

RMI’s analysis shows that in the Northeast U.S. alone, up to 50 percent of residential and 60 percent of commercial electricity customers could be “in the money” with grid-connected, solar-plus-battery systems by 2030, just 15 years away. This would represent defection of 140 million kilowatt-hours (kWh) and $35 billion in utility energy sales per year if customer adoption followed optimal economics.

“The amount of load that’s at stake, the amount of kWh sales, it’s a lot of money,” said James Mandel, a principal in RMI’s electricity practice and another coauthor of the report.

“It can be scary to think about how significant that difference is,” added Guccione.

This new analysis follows on 2014’s “The Economics of Grid Defection,” which examined when and where it would be cost-effective for customers to cut the cord with their utility entirely through off-grid, solar-plus-battery systems. However, true grid defection is unlikely for many customers.

It’ll take more than pure economics to persuade them to make such a big shift in their electric service. That wouldn’t be an ideal outcome anyway for a whole host of reasons, including, for one, the extra cost of oversizing the system to offer standalone assurance and the inability to provide value and services back to the grid, as they’re no longer connected to it.

Beyond secondary values such as backup power, batteries have important benefits for rooftop solar grid integration, especially in places where customer adoption is high, such as California and Hawaii. And so “The Economics of Load Defection” explored a far more probable scenario: Customers will keep their utility, but they’ll also invest in grid-connected solar-plus-battery systems.

That grid connection is crucial to the equation. With the grid as a confident backup for customers, they can more optimally size the solar-plus-battery system, making it smaller, cheaper and thus cost-effective for more customers in more places sooner.

“That’s much more attractive to customers,” said Guccione. “It’s a lot more likely that they’re going to invest in that kind of system.”

Peak prices

But what does all this mean for an individual customer such as you or me? Simple: peak price (not to be confused with on- and off-peak rates for customers on a time-of-use rate structure with their utility).

If you’re like the overwhelming majority of electricity customers in the U.S. today, you pay a monthly electricity bill to your utility.

On average nationwide, that bill  —  as measured by the per-kWh charge we pay for electricity  —  has been rising. And it probably will continue to climb, as factors such as an aging power grid requiring new investment and the volatility of fossil fuel prices affect providers’ bottom line.

Meanwhile, because solar-plus-battery systems have rapidly falling costs and essentially zero operating costs over their 20-plus-year lifetime (the sun’s rays arrive on your rooftop for free), customers who invest in these systems can insulate themselves from rising retail prices, effectively locking in a peak electricity price.

For example, in Westchester County, New York, just outside New York City, by 2030 the average residential customer’s monthly electric bill could reach about $357. With a grid-connected solar-plus-battery system, that could instead be $268, a savings of more than $1,000 per year.

And that’s under some fairly conservative assumptions. For instance, it doesn’t account for utilities’ purchases of customers’ distributed generation, something common today that greatly would improve the economics for customers.

That sum could increase if utilities sold — and bought — electricity at prices based on its actual time-varying cost, as the smart meters now spreading across the country are meant to facilitate.

Indeed, RMI’s e-Lab, the National Renewable Energy Laboratory, Navigant Consulting, and the Electric Power Research Institute, among others, have released studies on the myriad benefits distributed energy resources (DERs) can provide. Most recently, the Maine Public Utility Commission released the contentious numbers from a value-of-solar study that found solar’s true grid value around $0.33 per kWh, greater than customers were currently being compensated.

And distributed storage could provide resilient services even if the grid failed.

A fork in the road for the grid’s evolution

Grid-connected, solar-plus-battery systems will be the lowest-cost system in many markets within 10 to 15 years. This is shorter than the economic lives and cost-recovery periods of many of the major new central-generation assets either still in their cost-recovery period now or planned for construction.

The financial stakes are big. Between 2010 and 2030, the grid will require an estimated $2 trillion in investment, or about $100 billion per year. Even if only a fraction of customers for whom solar-plus-battery systems would make economic sense actually invest in them, that would still represent a sizeable chunk of revenue the grid and utilities were counting on.

“There’s a real danger of central generation investing in increased capacity at the same time customers are making these distributed investments,” said Mandel. “The end result would be way too much capital on both sides of the meter.”

All of these pressures move in the direction of the so-called “utility death spiral,” a scenario where utilities, faced with fixed costs, must raise rates on dwindling numbers of grid-reliant customers, driving more of them away, needing to raise rates still higher to break even, and so on.

The grid is thus at a fork in the road.

Solar PV and batteries will play a central role in the future grid, but exactly what role  —  integrated into an optimized grid of the future or seen as a subversive threat to today’s legacy grid  —  is yet to be decided. That means that decisions made today about rate structures, utility business models and regulatory reform will have important implications, because they set the grid more toward one trajectory or the other.

“While the task may seem overwhelming, we need to start tackling it as soon as possible,” said Guccione. “It’s only going to become more difficult to turn the ship. We really need to start today.”

A few already have, such as New York State’s Reforming the Energy Vision regulatory proceeding.

Embracing solar and batteries for society’s benefit

So, what now?

“Grid-connected solar-plus-battery systems definitely present opportunities,” said Guccione. “They’re disruptive opportunities, but they’re opportunities nonetheless.”

RMI sees this unfolding shift in the technology and economics of electricity as a chance for all stakeholders to evolve a better future together, not as a threat.

“There is potential, with new rate structures and new business models, for customers to provide valuable services back to the system,” said Guccione, “and to help speed the transition to something that’s lower-carbon, more reliable and much more dynamic than what we have today, because those distributed resources remain connected to the grid.”

“Batteries and solar both provide a lot of value to the electricity system,” said Mandel. “They can do things like defer upgrades; they can provide services that normally a utility has to pay a lot of money for: they can decongest areas; they can reduce peaks and make the load flatter, which lowers costs.”

That is, distributed solar generation  —  especially because it’s greatest around peak loads on hot, sunny days when electricity is costliest to supply  —  not only deprives utilities of revenue but also relieves them of commensurate or greater cost. This could benefit both parties so long as they coordinate and plan accordingly.

“Many grid operators don’t see solar and batteries as assets; they see them as hurdles,” said Matt Roberts, executive director of the Energy Storage Association. “That’s only because this is how the system is designed. So they’re not resistant to solar; they’re not resistant to storage. Everyone loves clean energy in the end. It’s just at what benefit vs. at what cost?”

And, he says, are there price signals and is there a marketplace for that value to transact? Right now, the answer is largely no.

“It’s pretty urgent from our perspective for distribution systems to account for the fact that they’re going to have solar and batteries on their network,” RMI’s Mandel said. “They should be looking for opportunities to take advantage of it.”

And some are. For example, progressive California utility San Diego Gas & Electric in March brought a team to RMI’s e-Lab Accelerator event in Utah to explore solutions for customer-sited battery energy storage.

The time to adjust is now

Realizing these transformations will require all stakeholders to work together to design and move towards a radically different future. Happily, RMI’s recently released report seems to be prompting those discussions.

“The fact that we have gotten feedback from diverse corners of the industry  —  utilities, regulators, solar and battery companies  —  has been an encouraging sign that the right people are in the right conversations and that this work is reaching its intended audiences,” said Guccione.

“We’ve had numerous inquiries from utilities wondering how to adjust their business models to account for distributed resources,” said Mandel. “If there are only 10 or 15 years before these systems are economic, it’s not a lot of time.”

But if done right, he said, “these customer-cited technologies will let us have cheaper, cleaner, more reliable power  —  to me that’s a really big thing, and it’s really good news.”

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