Will solar power disrupt regulated utilities?

Applications_ResidentialOne of the business megatrends of my lifetime has been decentralization. Mainframe computers gave way to laptops and PCs. The AT&T monopoly exploded, and landlines led to a proliferation of cell phones. Airlines were deregulated, creating space for startups like Southwest  and JetBlue. Newspapers have been rattled by the Internet, where anyone and everyone has a voice.

Could distributed power–specifically, rooftop solar–nowbe poised to disrupt regulated utilities?

That’s the topic of my latest contribution to the YaleEnvironment360 website. Some utilities evidently feel threatened, so they are pushing back against subsidies for solar.

Here’s how the story begins:

Issues of electricity regulation typically play out in drab government hearing rooms. That has not been the case this summer in Arizona, where a noisy argument – featuring TV attack ads and dueling websites – has broken out between regulated utilities and the rooftop solar industry.

An Internet web video attacks the California startup companies that sell rooftop solar systems as the “new Solyndras,” which are spending “hard-earned tax dollars to subsidize their wealthy customers.” Meantime, solar companies accuse Arizona Public Service, the state’s biggest utility, of wanting to “extinguish the independent rooftop solar market in Arizona to protect its monopoly.”

Similar battles about how rooftop solar should be regulated have flared in California, Colorado, Idaho, and Louisana. And the outcome of these power struggles could have a major impact on the future of solar in the U.S.

The politics of this debate are unusual, as the story goes on to explain. Please read the rest here.

A couple of thoughts. First, it’s important to keep some perspective here. Solar is growing fast but off a very, very small base. It generates less than 1 percent of the electricity in the US. Some coverage of this issue–notably a long story in Business Week with the absurd headline, Why the U.S. Power Grid’s Days are Numbered — conveniently overlooks that context. Regulated utilities are not going away anytime soon and if the grid’s days are, in fact, numbered, it’s a really really big number.

Having said that, a regulatory system that tilts heavily towards solar–by allowing solar customers to sell their excess power back into the grid at inflated rates, for example–will create problems for the utilities, as well as inequities for other customers. While the regulatory debate has become politicized in places like Arizona–the Koch brothers make a cameo appearance at the end of my story–what’s needed is fair treatment for solar customers and the utilities.

What’s fair, you ask? That’s why we have regulators.

Comments

  1. The resolution of this issue is technically and economically simple; and, also, as you suggest, politically difficult.

    Utility rates typically have two basic components: a monthly service charge, or fixed component; and, a commodity charge, or variable component. However, typically the fixed component of the rate does not recover all of the utility’s fixed costs, leaving the balance of the fixed costs to be recovered through the variable portion of the rate. This is the reason utilities under-earn their allowable rate of return when the weather is mild, or the economy is slow, and electricity sales fall below the levels used to establish the commodity rates; and, over-earn when the weather is very warm or very cold, or the economy is booming, and electricity sales exceed the levels used to establish the commodity rates.

    This is also the reason that net metering adversely affects the utility and its non-generating customers. Electricity sales which do not occur because of on-site generation do not recover the portion of the utility’s fixed costs intended to be recovered through commodity sales. Likewise, electricity sent to the grid by a generating customer, through a net meter, transfers the portion of the utility’s fixed costs intended to be recovered through the commodity portion of the rate to the generating customer. The combination of these two effects causes the utility to under-recover its fixed costs. A rate case then effectively transfers these costs, under-recovered from generating customers, to non-generating customers, increasing their rates.

    Simply revising utility rate structures to allow utilities to recover all of their fixed costs through the monthly service charge, the fixed portion of the rate, allocates all of the fixed costs to all customers connected to the grid, regardless of their level of commodity consumption. Generating customers retain the option to become self sufficient and disconnect from the grid, this avoiding the utility monthly service charge. This step is politically difficult because, in many cases, the current monthly service charge would double or triple, even though the commodity charge would be reduced as a result.

    • Great point, Ed – thanks for that insight.

      I’m just glad, as always, to be living off the grid.

    • Well said, Ed. I’m sure it varies not only from state to state, but utility to utility when it comes to pricing structures and various charging mechanisms.

      I know that a colleague of mine installed a solar array at his Hudson Valley home that pushes the property towards a net supply of energy to the grid. He does have the benefit of net metering, but the utility also has a connection charge which he ends up paying regardless of whether or not he is a net-generating or net-consuming customer. This makes sense to me for all of the reasons you stated. As long as infrastructure is coming to your home for those “in case” times, then there should be a charge for that to help maintain it. Otherwise, buy battery storage and/or a diesel generator and jump off the grid completely.

  2. Community-owned solar—a compromise between utility-scale and roof-top residential solar—is proving to be an all-access solution because it broadens the market for solar participation to any ratepayer in a utility territory (including renters, multi-unit dwellers, those with shady roofs, businesses, non-profits, and municipalities). Importantly, it is predicated on mutually beneficial contracts between the utility and its participating customers. Colo.-based Clean Energy Collective has 11 community-owned solar facilities with Xcel Energy, proving it is a viable, long-term solution that benefits consumers and utilities.

  3. Marc,

    The rate structures which are causing this problem were “brought to you by” regulators, though in a different time and for different reasons. Times have changed, so must regulations.

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