Rebuilding Electric Power Business Models: The Cost of Disruptive Technology

The increasing generation of electricity from rooftop solar panels has had an impact on the utility industry, and it’s one they’re not particularly happy about. A recent paper by the Edison Electric Institute, entitled “Disruptive Challenges,” sounds dire warnings about what this could mean for their future. Solar energy burns a hole in the prime time peak power sold during the day, when the air conditioning load is highest. That is when utilities charge the highest rates and when they use the most of their capacity. It’s also when they get best value from their generation assets, when everything is running at full steam.

Not only do they lose sales, but they are also required to buy up any excess power from those self-generators, providing a back-up service for them in the process, swooping in with needed electrons any time the sun goes behind a cloud. That provision is called net metering, which is now mandated in more than 40 states.

There are a lot of people who aren’t too crazy about the power companies, but we can’t afford to see them go away because of the infrastructure that they provide and support. It’s analogous to an issue in the transportation sector where, if you start getting more people into electric vehicles, what happens to the roads? A lot of the road infrastructure, repairs and upgrades, are paid for by gasoline taxes. As more people get into electric cars, how do these things get paid for? Watch for that issue to emerge in the months and years to come.

California has set a great example for a solution for the utility problem, with a compromise that balances the needs of consumers who want to go solar with the needs of the utilities to maintain the infrastructure that delivers electricity. PG&E can bill its solar customers an additional $10 a month to help maintain the grid and backup power, and can apply for a rate hike if more of its customers switch to solar. The solar power companies get an increase in the amount of power that can be sold back to the utility.

The balance is really critical. If the utilities raise their rates too high, that’s going to incent even more people to get off of it and go on to solar—which would be counterproductive. On the other hand, if they add exorbitant fees to the solar customers, that could quash the rapid development of solar. Neither of these are acceptable outcomes. This compromise seems reasonable. Ten dollars a month doesn’t sound like much, but when you add it up from many customers, it’s enough to maintain the grid.

Part of the reason this solution works so well in California is because back in the ‘80s, the state started a policy of decoupling, which means the utility doesn’t get paid based on the amount of electricity or gas they sell, so that the utility’s incentive to conserve energy is not at odds with their profitability. Revenues and profits are regulated by the California Public Utilities Commission. It works out to be independent of how much energy they sell. That’s a very advanced model that a number of other states have followed and it’s worked very well for them.

A similar bill was passed last week in Arizona. It was much more hotly contested because the state does not have a similar decoupling model in place. The Arizona public utility pressed very hard (with significant funding from many groups, including the Edison Electric Institute) to cut back on the amount of net metering allowed.

The compromise preserved net metering but like the California deal, enacted a fee from solar customers: roughly, $5 per month to help pay for infrastructure.

Rocky Mountain Institute has been working on this issue through their eLab project, a consortium that includes utility representatives and environmental activists who are trying to take a rational look at the implications of a changing electricity delivery system. There’s a lot of value being created; the question is coming up with new business models for the electrical system that pays properly where the value is being created. That may involve changing the rules of the current game.  According to Virginia Lacy, a RMI senior consultant, “Deciphering the costs and benefits of distributed energy services is critical to ensure better technical integration and economic optimization.”

So here’s the dilemma in a nutshell. Some fees will most likely be needed because we can’t afford to let utilities go belly-up. But if surcharges for going solar (and, in some cases, adapting efficiency measures as well) become prohibitive to the point where they drive people away, then we’ve just shot ourselves in the foot. After all, clean air and a livable climate are in everyone’s best interest.