One of the main reasons utilities fight distributed generation like rooftop solar is that it erodes demand for their centrally generated electricity. Reduced demand is annoying for any business, but it’s especially bad for traditional monopoly utilities. It’s especially bad because much — even most — of the cost of producing a kWh of electricity doesn’t go away if you don’t produce that kWh of electricity. These so-called “fixed” or “non-production” costs come from multi-decade financial commitments to big pieces of infrastructure — the power plants, transmission lines, and distribution systems.
So when you put solar panels on your roof and reduce the amount of electricity you need to buy from the utility, there’s a little bit of fuel that doesn’t get burned, and a little bit of money saved on the utility side (but as we’ve pointed out before, they don’t actually benefit from that cost savings), but a lot of the money that the utility spent to be able to provide you with electricity if you needed it is already spent. This is problematic because most electricity rates are designed to recover utility costs in proportion to the amount of electricity you buy (this type of rate is known as a “volumetric rate”). So utilities have an incentive (known as the throughput incentive) to ensure that their electricity sales increase, or at the very least don’t decline.
If lots of people start buying much less electricity, this reduces utility spending on things like fuel, but it doesn’t have any effect (in the short term) on the fixed or non-production costs. To stay solvent, the utilities then go back to their regulators and say “Hey, we’re not getting enough revenue to cover our costs. Give us a rate hike!” and if the regulators agree, allowing the utilities to recover the same fixed costs from fewer overall kWh of electricity sold, this just makes it even more financially sensible for people to put solar panels on their roof, to avoid buying the more expensive electricity. (And in our fantasy world, one could also imagine savvy regulators taking measures to decrease fixed costs, by forcing early retirement of risky, uneconomic fossil generation…)
This is the essence of the Utility Death Spiral that’s gotten so much attention over the last year or two (including a speakeasy we hosted), and which Dave Roberts did a great job of exploring in his Utilities for Dummies series over at Grist. From the Utility’s point of view the Death Spiral can be short-circuited with revenue decoupling… up to a point. With decoupling, they don’t have to go to regulators and ask for a rate hike — they can recover the fixed costs in a formulaic way, and so decoupled utilities are able to invest in energy efficiency without worrying about lost revenues. They’re also likely to be less opposed to modest amounts of distributed generation.
In fact, it’s hard to imagine a climate-aware utility of the future that isn’t decoupled. We need to get away from utilities treating electricity (and energy more generally) as a commodity, with profits tied to the quantity of product they sell. Instead, we need to move toward treating energy as a service — Amory Lovins’ famous hot showers and cold beer — with an incentive to provide high quality service using the least possible amount of underlying energy.
Decoupling is a Good Thing™
However, if you care about climate, then you always have to ask not just Is this a good thing? but Is this good enough? It’s an old cliché that “better is the enemy of good enough,” — i.e. spending time and money and effort on improvement beyond what’s good enough can be wasteful. But in the context of climate, we have the opposite problem. Moving things in the right direction can still mean abject failure. Plenty of things that are better than the status quo — like decoupling utility revenues, or burning natural gas instead of coal — come nowhere close to being good enough to keep us from seeing more than 2°C of warming.
To have a chance of stabilizing the climate, the utility business model can’t just be tinkered with. It needs to be radically transformed. The good news is that radical transformation is probably on the table whether the utilities want to talk about it or not. Our task is to make it happen as quickly and smoothly as possible.
Utility Death Spiral: Not Just for the Paranoid
Until very recently anybody afraid of the death spiral dynamic might have seemed a little paranoid. DG was still pretty expensive, and often dependent on utility rebate programs, tax credits, and other incentives that were often controlled by regulators and utilities. As the price of distributed solar has fallen, rebates have dwindled to nothing, and new financing mechanisms and business models have emerged. Utilities and regulators have lost some of their ability to moderate deployment, and they’re poised to lose much more.
A few examples of new DG financing and business arrangements compiled by Green Tech Media and others:
- Mosaic has created a peer-to-peer lending platform that lets individuals invest in diversified portfolios of smaller distributed solar projects, earning around a 5% return on their investments. They’ve done about $10M worth of financing this way. Now they’re getting into solar loans with backing from a large international re-insurer, adding another $100M in capital.
- Sungage just raised $100M in funding from a large northeastern US credit union to use as a revolving solar loan fund.
- SolarCity has started issuing solar bonds with a similar yield directly to the public on a much larger scale. They’ve raised more than $100M so far, without going through the traditional finance industry.
- Big time sprawling suburban home builder Lennar is now installing rooftop PV systems by default in some markets, including around Denver. They’re offering home buyers a power purchase agreement (PPA) in which they get a 20% discount off of retail electricity rates for 20 years.
From the consumer’s point of view what this means is that in an increasing number of markets, rooftop solar can now be had at a discount to utility power, with no up front costs. This is new and different and scary for utilities, because it means rooftop solar can go big. Fast. Additionally, Elon Musk (who heads both electric car maker Tesla Motors and SolarCity…) is investing $5 billion (with a B) in a massive lithium ion battery factory in Nevada, hoping to drive costs down through economies of scale.
Suddenly, a good chunk of the traditional utility customer base starts to look a little sketchy.
Net Metering Required (For Now)
Many of these disruptive businesses depend on net metering policies and so utilities, including Xcel, have coordinated with the climate-denying corporate octopus that is the American Legislative Exchange Council to try and repeal it. So far net metering has been pretty durable. The policy is easy to understand and seems fair to most of the public, so it’s popular. Net metering also now has its own relatively well funded corporate advocates in the form of Big Solar — the very same companies raising hundreds of millions of dollars, listed above, being represented by The Alliance for Solar Choice (TASC) — one of the intervenors in 14AL-0660E (which is the PUC’s catchy name for this whole rate case thing we’ve been involved in).
In Colorado (and elsewhere) these dynamics have brought us to a regulatory stalemate. For once the status quo — net metering — favors distributed renewable electricity. It’s the policy that Big Solar has bet the farm on. But if we try and use it to scale up cheap rooftop PV dramatically, it may destabilize the utilities.
Straight net metering also won’t result in a particularly optimal deployment of distributed energy resources, because all it accounts for is energy production, and there are many more subtle qualities that are important to a well functioning electricity grid. If we can integrate those other qualities — temporal, geographic, environmental, price stabilization, etc. — into our electricity pricing we’ll get a much better overall outcome. As the Rocky Mountain Institute has put it: the debate over net metering misses the point.
Be that as it may, right now there are two 800lb gorillas (or maybe, an 800lb gorilla and a 300lb gorilla) locked in mortal combat — the utilities on one side and Big Solar on the other. One side is trying to get rid of net metering altogether, and the other is willing to fight to the death to preserve it. When people bring up other ways of valuing distributed renewable energy like Minnesota’s proposed Value of Solar or Feed in Tariffs they tend to either be ignored or attacked, sometimes by both sides of the fight! For example, The Alliance for Solar Choice wasted no time in setting up a campaign to stop what they glibly re-termed Feed in Taxes and Value of Solar Taxes as soon as Minnesota made it clear they were considering Value of Solar seriously.
Headed for Strange Country
As with so many aspects of climate and energy policy, change here is inevitable. Regardless of which side prevails in the fight over net metering, as the cost of distributed solar and energy storage continue to decline, we are headed for strange territory.
If the utilities prevail and repeal net metering, they’ll probably slow the spread of distributed generation, since customers would only be able to benefit economically from satisfying their electricity demand on-site in real time, rather than banking electricity production annually. But in the longer term, given ongoing PV system cost declines and the potential for cost-effective electricity storage, the utilities will still face a decline in electricity demand regardless of whether a policy like NEM remains in place. At one extreme we could end up in a situation (well described by RMI), where defection from the grid is economically sensible for a significant number of people.
On the other hand if Big Solar prevails then we get to the same place, maybe a little quicker, since they’re already operating with a net metering based business model at significant scale. If the Feds don’t renew the Investment Tax Credit in 2016 that will push the economics out a little, but there’s little reason to think the overall price trend is going to reverse. Ever.
Does that sound ridiculous? Then note that PV in 2014 is already 59% cheaper than NREL predicted it would be back in 2010, and Deutsche Bank is forecasting that solar will reach grid parity nationwide by the end of 2016. On the wholesale side the New York Times reports that without subsidies wind on the high plains has come in as low as ¢3.7/kWh (the same as just the production costs of Xcel’s Colorado fossil fleet in 2013).
Some folks think widespread grid defection sounds like utopian energy independence. In practice it would be far less equitable, more expensive, and operationally much less robust than a well designed network that integrates a lot of distributed energy. It’s also physically impossible in cities, which consume most of our electricity, because no matter how cheap solar and storage become, cities use more energy within their boundaries than is available from renewable sources in those same boundaries. This is despite the fact that cities have much lower per capita energy use than rural and suburban places of comparable wealth. Cities are great for the climate, but they will always need to import energy, and that means we will still need transmission and distribution systems.
Um, okay. But, decoupling?
In the near term, revenue decoupling would insulate Xcel against the sales they’re going to lose to rooftop solar and other distributed energy. Rather than seeing revenues decline as more electricity sales are displaced, they’d be empowered to adjust rates in a formulaic way to compensate for the losses, and ensure that the fixed costs of the grid continue to be paid for (along with their profits). In theory, this ought to remove or at least reduce their opposition to net metering.
In the long term, if grid defection becomes attractive, additional fixed-cost recovery mechanisms like revenue decoupling aren’t going to be much help to the utility.
Our task is to open up the discussion about creating an intelligent grid with electricity prices that reflect the more subtle attributes of distributed generation. Revenue decoupling is one potential avenue into that discussion — at least the early part of it. How so?
In the short term, the utilities are fighting for the status quo, minus net metering, and they seem to be losing. If the only two positions available are the status quo with vs. without net metering, the choice for renewable energy and climate advocates is clear — we have to side with Big Solar. But if utilities were actually up for creating a different — and much more scalable — renewable energy policy, then the decision of who to work with becomes more challenging.
With revenue decoupling in place, utilities like Xcel could have more room to consider policies that support distributed generation, without seeing them as an axiomatic threat to their revenues. But to do so, they’d have to be willing to talk about unwinding their existing investments in fossil generation — otherwise, no renewable or distributed generation policy can scale up far enough to be “good enough” for the climate. That vital discussion about unwinding fossil plants is not yet happening out in the open. At least, not in the US. We’ll take a much closer look at it in a post very soon!