By - Michael Drost

Don’t fear the reaper: How hybrid solar and battery systems are transforming our electricity grid, and why that’s not a bad thing

By Michael Drost

Solar industry advocates have been clamoring for years that improvements in photovoltaic (PV) generation and storage technology will someday make traditional power generation obsolete. Instead of plugging into the grid, they claim, customers will simply be able to drive to a local Home Depot or Leows, order and install a few solar panels and storage devices for their home or business, and then produce and use all the energy they want without needing a utility. We aren’t there yet, but we are getting close to the point where hybrid distributed solar generation and storage systems reach economic parity with retail electricity, making the option of “defecting” from the grid not only possible, but also economically viable.

According to Leia Guccione, Senior Associate at the Rocky Mountain Institute, research into multiple scenarios for different U.S. electricity markets shows that the levelized cost of electricity for “solar-plus-battery”, or when customers can combine the ability to generate solar power with the ability to store it for their own energy needs, is declining, while the traditional cost of retail electricity is only growing. This has resulted in “grid parity” for at least one U.S. state, Hawaii, while eventual grid parity for two of the largest grids in the U.S., California and New York, is projected by some to occur by the end of this decade. At the very least, the research suggests a sizable chunk of utility customers will be seeing favorable defection conditions within 10 years.

You can view the RMI paper on the economics of grid defection here.

“What that means for customers is an expanded spectrum of choices of how to meet their energy needs, and at the far end they will have the option to economically provide all of their electricity needs with no grid connection, which is pretty unprecedented,” said Guccione in an interview with EUCI.

Though fans of solar might hear such news and cheer, the prospect of thousands, if not millions, of utility customers defecting from the grid would have a devastating impact on the traditional utility business model, and depending on how utilities respond, on customers of the grid itself. Revenues would erode, power plants may have to be shut down, and infrastructure may not get necessary upgrades, affecting reliability, and costs will inevitably be shifted to those still paying to stay connected, convincing those who can defect to do so even more quickly, and saddling those who can’t with the bill.

“That ends up being a bad situation for huge segments of customers who will never be able to afford solar-plus-battery systems, or do not own property so they can install PV systems, and all of those people will be left holding the bag,” said Guccione. “That’s really sub-optimal.”

This dreaded “utility death-spiral” may be coming sooner than people think; especially if larger investor-owned utilities refuse to enact reasonable changes to address it. Some utilities, such as We Energies in Wisconsin, have opted for a draconian approach, proposing a 75 percent jump in its fixed charge on solar customers to integrate PV systems into the grid. The Wisconsin Public Service Corp is going even further, proposing to more than double its fixed charge on residential customers and nearly triple the fixed charged on small businesses.   In addition, both We Energies and Alliant Energy are asking state regulators to reduce the amount they have to pay solar customers each month.

This approach addresses multiple concerns over distributed solar in the short term, including the growing number of solar systems being installed and the amount the utility pays to integrate solar PV into the grid, however it ignores the fact that advances in hybrid PV generation and storage technology are only going to make defecting from the grid easier and cheaper. If utilities want to avoid the death spiral, they will have to fundamentally reshape their business model to account for the fact the traditional utility customer may be on the verge of extinction.

So what can utilities do to meet this challenge head on? A key component of any solution will involve rate design. The traditional business model assumes the existence of a certain number of customers in order to spread costs for the purpose of rate recovery. With the advent of cheaper and more efficient hybrid solar systems, this assumption can no longer exist. As customers get wind of the fact that they can disconnect from the grid at a cost equal to or less than what it would cost to receive power from the power company, more and more customers will take advantage of the opportunity. That means utilities must assume there will be less customers they can count on plugging into the grid to spread the cost of their investments, and must adjust rates accordingly.

One mechanism that has the backing of a wide number of clean energy advocates is rate decoupling, which removes the sale of electricity as the driver for the utility’s revenue stream. Under this policy, utilities would base rates not on how much electricity it wants to sell, but how much money it wants to make based on its assets, how many customers it has and how much electricity they use. A minimum bill would be imposed to guarantee the PUC-approved revenue amount, and would apply to all ratepayers, even solar customers.

Another policy utilities can adopt is to stop thinking of themselves as power producers, and instead as energy service providers. Large investor owned utilities can look no further than their own backyard for examples of this dynamic. Municipal utilities, due to their proximity to customers who either have or will have an opportunity to defect to the grid, as well as their unique relationship with stakeholders, have been at the forefront for pilot programs and tariff restructuring that takes into account the fact many customers want to utilize advances in PV generation and storage technology, effectively making the utilities a service provider for those ends. Fort Collins Utilities, for example, helped launch the FortZED project in 2007, which aimed to make the downtown area of Fort Collins, Colorado into a net-zero energy district, utilizing conservation methods, energy efficiency, and PV storage and integration. The Sacramento Municipal Utility District (SMUD), also launched its own PV and smart grid pilot in Anatolia in 2011, gaining valuable insight into how utilities can integrate PV systems to make solar generation more efficient and reliable.

Larger utilities, especially in the western U.S. where solar energy is plentiful, are also coming up with ways to make distributed solar more accessible. Arizona Public Service, which at one point lobbied against the solar industry in order to enact changes to the state’s net-metering policies, is now offering to install up to 20 megawatts of solar PV on 3,000 rooftops through the end of 2015. Customers would be offered a $30 credit each month on their electricity bill for twenty years. The upside for APS would be the ability to rate base the investment, something solar developers are unable to do. Some solar industry advocates, including the Solar Energy Industries Association, are calling the proposal a “trojan horse”. Other western utilities, including SCE, Xcel, and PGE, are moving with less controversy on projects to determine the viability of smart grids and distributed energy resources, including SCE’s Irvine Smart Grid Demonstration. These projects are still in the testing phase, however it is assumed that after the data is collected, utilities both in the Western U.S. and elsewhere will be able to use the evidence to determine a wide variety of variables related to integrated PV, such as how system performance changes with high levels of PV penetration, how does reliability differ, what kind of tariff structures allow the right type of cost recovery, or what kind of cost sharing needs to happen in order to build and maintain the system.

With the right business plan, utilities can look at the increasing penetration of distributed PV generation as an opportunity, not a curse. Whether it is making the system reliable, adjusting tariffs to make integration easy and affordable, or entering the PV generation business itself; there are an increasing number of ways that utilities can embrace hybrid solar systems while preventing customers from defecting from the grid, and contribute to their bottom line at the same time.

The moral of the story is: if a utility death spiral does occur, it may well be of the utility’s own making.

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