The EPA has released it Clean Power Plan. The Clean Power Plan is designed to dramatically reduce global warming emissions by electric utilities. Massively increasing the deployment of zero-site emissions solar power is a key implementation path of the Clean Power Plan. Under the Clean Power Plan each state is empowered to design their plan for achieving their emission reducing goals.
The adoption of the Clean Power Plan begs this question:
Why shouldn’t an electric utility customer be able to put all the solar equipment possible on their roof, net out their electric bill plus sell any surplus to the grid for a profit? But what state allows this today? The answer is none.
Did California take another step toward freeing customer owned solar
California just inched a little closer to this vision of customer empowerment. The state’s electric gird operator has just issued an order that allows a residential or commercial utility customer to sell electricity from their solar system into the grid for a profit. The only catch is that building and home owners are prohibited from doing so if they also use some of the electricity from their solar system to net out their electric bill under California’s net metering program. Is this just one more example of how utilities and their regulators are limiting customer owned solar power? Or is this a progressive step toward realizing the potential that customer owned solar holds for achieving lower electric bills plus reduced emissions.
Solar too cheap to meter
The disruptive threat confronting the electric utility industry (and their regulators) is that the incremental cost of producing electricity from a roof top solar system is zero! The cost of solar power is almost all in its capital investment (there are incremental costs like washing off the panels to ensure maximum output, any repairs plus insurance). The cost competitive advantage of solar is that the sun shines and electricity flows into the grid at zero incremental cost. The question is then whether it is customer owned solar or utility owned solar that is the least cost path to building solar.
Why utilities should be the developer of solar power
Utilities and their regulators have compelling documentation that the monopoly utility system can develop solar power at the lowest cost per kWh. The utility serving the City of Austin just received solar power plant bids delivering electricity at an average price of 4 cents per kWh with some bids coming in at less than 4 cents per kWh. This low price is enabled by the current tax law that allows a 30% investment tax credit. Even without this tax credit the cost of solar is approximately 6 cents per kWh. And even better, there is no fuel price or supply risk to the utilities as there is for power plants running on fossil fuels.
It would appear that utility owned solar is the least cost option. On the other hand, when was the last time a utility lowered its rates because they installed a least cost power plant? Utilities continuously file least cost of service plans that their regulators approve. But the price of electricity is not falling. This has not always been the case. The founding premise for regulated electric utility monopolies was to enable power plant economies of scale to lower electric bills. It was also based on economies of scale to enable the expansion of universal service. This golden age where regulated integrated electric monopolies delivered expanding service plus lower prices ended in the 1970s. What remains are rules that too often constrict customer choices. What remains is the opportunity for the monopoly to earn a guaranteed return on invested capital.
Why customers should develop solar power
In California a customer owned roof top solar system enabled by the 30% investment tax credit can generate solar power for approximately 7 cents per kWh. On the surface this appears to be almost twice the cost per kWh for a utility solar power plant like that being developed by the City of Austin’s electric utility.
However, there are real cost and environmental distinctions that increase the attractiveness of customer owned solar power. The first is that the customer can realize actual cost savings in the form of a lower electric utility bill. In states that enable net metering, customers have the potential to reduce their annual electric bill to a level equal to, or less than, what they used to pay on a monthly basis. This is customer-owned solar power’s greatest appeal. Unlike utility owned solar, customer owned solar has a clear path to a reduced electric bill.
There is also substantial environmental impact benefits. Unlike many or most solar power plants, placing a solar system on a customer’s roof generates almost no incremental environmental impacts. In comparison, utility scale solar is built on land that has to be graded and then controlled for weeds. This can generate air borne and soil environmental impacts. Typically, the utility solar power plant requires the construction of a substation and transmission lines to connect to the grid. In California one noted new transmission line to connect renewable power plants required construction of a high voltage power line through national forrest land. Customer owned solar is typically housed on an existing roof with marginal or zero environmental impacts. The system is connected to the existing utility grid.
How to value the grid
How to value grid service is a huge area of contention when regulators evaluate customer owned solar. The utilities assign significant value to the grid and this value is often substantially confirmed by regulators. What utility customer can dispute the value of the grid? Customers view the electric grid and internet access as two of their most valued interconnections.
The disruptive reality for utilities and their regulators is that the value of the grid is diminishing. The traditional monopoly grid of electrons flowing to the customer and money flowing to the utility is loosing its value for two reasons. The first is that the traditional grid is increasingly dropping service due to an increase in storm violence created by global warming. Whether it is a hurricane hitting New Jersey, a snow storm burying Boston or tornadoes cutting across the heartlands, the utility grid is under assault. Growing numbers of customers are buying onsite generators and batteries because the grid is increasingly becoming valueless during storms.
Declining costs for customer owned technologies are the second driving force devaluing the grid. Much of the technology excitement tied to electricity service is on the customer’s side of the meter. Solar will soon be at grid price parity across the U.S. Mass customer adoption of customer owned solar systems is now being limited by state regulations and not price competitiveness. Batteries are on the cusp of major price declines. Customer owned batteries on a declining cost curve toward being competitive on price and reliability with grid service. Customer investments in energy efficient technologies, like LED lighting, now deliver four year, or less, financial return on investment. Combined, a perfect technology storm is on the horizon that will open the door to a significant percentage of customers leaving the grid to save money, increase their service reliability and reduce their environmental footprint.
The ultimate devaluation of monopoly service is the emergence of Zero Net Energy buildings (ZNE). ZNE buildings annually generate onsite renewable energy equal to the building’s annual consumption. These buildings are enabled by smart technologies that integrate solar, batteries and energy efficiency to achieve least cost operations plus a reduced environmental footprint. California has now adopted Zero Net Energy as a foundation of their building codes. The Zero Net Energy building has the potential of achieving mass market acceptance by delivering “cost less, mean more” customer results. Such an event will massively revalue the grid as a hub that must supply competitively priced energy, reliability and lower emissions if it is to win customers.
Utility regulation in crisis
Utility regulations is grounded on over a hundred years of legal precedent. It is system struggling with the disruption being created by cleaner technologies like solar, batteries and ZNE buildings. It is struggling with how to maintain system reliability while enabling innovation, conflicting definitions of least cost, competing claims around customer fairness and utility expectations for earning on their invested capital.
We have been here before. Up until the mid-1980’s the telephone industry was a regulated monopoly just like today’s electric utility industry. At one time no phone could be connect to the phone grid that was not manufactured by the monopoly. In fact, customers were prohibited from owning a phone. They had to rent one from the phone company. Regulation approved this based on maintaining grid reliability, customer fairness and least cost.
We now face similar regulatory constraints to the mass adoption of a customer-centric electric grid. Regulation is struggling with the rapidity of change. The issue is how to maintain grid reliability, customer fairness and costs when customer-owned technologies threaten to make coal fired power plants, that still generate about 40% of U.S. power generation, obsolete on the basis of cost, regulatory compliance and environmental impacts? The issue is how to sustain the grid’s operation, and revenue streams, when customers are increasingly seeking the freedom to buy technologies that offer lower electric bills and protection against grid disruptions?
The ultimate regulatory challenge is how to reengineer the grid into a hub where electrons and money flow bilaterally between the customer and the utility? The ultimate monetization of the Zero Net Energy buildings is to arbitrage prices and reliability between onsite solar, onsite batteries and grid service. This holds the potential of generating superior economic incentives, across the widest segment of our economy, to reduce the greenhouse gas emissions that are driving global warming. It holds real potential for delivery lower electric bills. It is a regulatory challenge that will require regulators (and legislators) to free customers to profit from the Clean Power Act.
About the author
Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017