Rooftop Solar’s Threat to Utilities by the Numbers

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The rise of rooftop solar has resulted in a catchy phrase—the “utility death spiral”. It's the idea that utilities will be put out of business by distributed energy. A Lawrence Berkeley National Laboratory study confirms utilities in the United States do have reason to worry but finds that changes to regulations could make solar and utilities friends, rather than foes.

Right now, it's hard to imagine why utility executives worry at all about distributed solar. Even with a rapid spread over the past five years, distributed photovoltaic generation is only about 0.2 percent of U.S. electricity supply and is only one or two percent in states with solar-friendly policies.

Yet the rise of distributed solar has kicked off fierce debates and utility-backed efforts to dismantle net energy metering, which allows consumers to gain credit for excess solar power they generate. One often-quoted utility industry white paper called distributed energy “disruptive” to the industry’s business models.

Intuitively, that makes sense: if consumers offset their electricity bills with rooftop solar, they pay less to utilities, particularly during peak hours when power can be more expensive. Taken to its extreme, it's conceivable for people to rely on solar energy and, perhaps with the aid of batteries or natural gas generators, to cut their ties from electric utilities altogether.

Yet even a modest penetration of distributed solar bites into the earnings of utilities, the Berkeley Lab study found. If distributed solar photovoltaic adoption rose to the equivalent of 2.5 percent of utilities’ retail sales, it would cut shareholder earnings by 4 percent. Meanwhile, the impact on electricity rates for consumers was minimal—only 0.1 or 0.2 percent increase. As solar penetration goes higher, the economic impact rises along with it. In a scenario in which 10 percent of generation came from rooftop solar, the reduction in shareholder earnings ranged from five to more than 40 percent.

How much solar affects earnings depends on the type of utility, according to the Berkeley Lab study. In its analysis, it created two models for utilities. One is a vertically integrated utility in the Southwest United States that owns power generation and the physical network. The other is a "wires-only" utility in a deregulated market in the Northeast United States.

Solar reduces the amount of money utilities need to pay for fuel to generate power, but those savings are offset by “revenue erosion” from lower sales and from deferring investment in poles, wires, and other infrastructure. Wires-only utilities, many of which are in solar-friendly states in the Northeast, are more financially vulnerable because they have fewer opportunities to invest in power generation and transmission to earn revenue, the study's author's said.

The Berkeley Labs authors concluded that incremental changes to the regulations that govern utilities could address the economic dislocation caused by distributed energy. For example, utilities could charge higher fixed monthly fees and rely less on kilowatt-hour sales. Utilities could also own distributed PV systems or have customer solar count toward state renewable portfolio standards, which mandate that a portion of their energy come from renewables.

“One important contribution of this work is to highlight the degree to which the impacts of distributed PV on utility shareholders and ratepayers can depend on particular details of the utility’s operating and regulatory environment,” co-author Andrew Satchwell said in a statement.

The Berkeley Lab study is important because it tries to find solutions to how utilities can earn money in a world with more distributed solar. Some people may want to completely disconnect from the grid but it’s worth noting that utilities provide a good deal of benefit to solar owners. Grid-connected solar PV systems effectively use the grid as a big battery, absorbing excess power without having to purchase actual batteries or back-up generation. At the same time, it seems fair to recognize the value of solar to the grid as a whole, such as reducing peak demand and lower fuel costs.

It's unlikely that this debate will cool off anytime soon. Another Berkeley Labs study published this month found the price of residential solar continues to drop and, as installation costs come down, solar is poised to continue growing in the years ahead.


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