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Energy Industry Transformations

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The hole in the rooftop solar-panel craze isn’t there

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The hole in the rooftop solar panel craze isn’t there

A recent Wall Street Journal article tried to make the case that while large scale solar energy installations is “good”, distributed scale / rooftop solar is “bad”. In the author’s thesis large scale solar provides more benefits at lower costs, and is thus a better use of capital and tax credits, while  rooftop solar is a poor use of capital, creating the “hole in the rooftop solar panel-craze“. I posted a detailed rebuttal to the article elsewhere, and have updated it here. In short, when all the benefits of distributed generation are considered, it provides significant, and sufficient, value to continue, extend, and expand the use of tax incentives. Or put in the lexicon of the author, the hole in the rooftop solar-panel craze isn’t there.

This issue has taken on new and greater urgency since President Obama’s commencement address at the US Coast Guard Academy where he said “Climate change constitutes a serious threat to global security, an immediate risk to our national security, and make no mistake about it, it will impact how our military defends our country. And so we have to act, and we need to act now.”

Understand that when speaking to the Academy as Commander in Chief of the United States, The President’s words take on a different meaning. They are broad guidance and direction to the military on their mission. The military does not decide the mission, they create the plan to implement the broad mission set out by the CoC. Distributed solar energy one of the fastest and least expensive ways to combat the security risks created by climate change. More on this in another post.

Point by point, here is my rebuttal to the article.

  • First, understand the bias. The Edison Electric Institute (EEI) the largest lobby group for utilities, and a behemoth in DC, is waging a war against DG (Distributed generation) solar, because we’re taking revenue from them under their current business model. They could change their business model (like Green Mountain Power), but generally are not.
  • The author is wrong when he says that solar is hugely subsidized. DG Solar in most states has only the federal investment tax credit (residential or commercial flavors) to incentivize it. This is similar to, and perhaps lower cost, than the incentives provide to other forms of electric power generation and other energy forms.
  • Net Metering, the process by which power companies buy solar at higher than “average”wholesale prices, has been extensively examined for “cross subsidization”. That means it has been studied to understand if a ratepayer without solar is unfairly paying higher costs to subsidize the ratepayer who has the benefit of solar. Good studies (and they are not all good) also look at whether the solar owner is subsidizing other non-solar ratepayers. This is actually a very complex study, and the results are legitimately different in different areas of the country.

    But what is true is that some of these studies come out with subsidy going in one direction, and other studies come out with it going in the other direction. This is because solar power provides more than just raw electricity (kWh) to the utility grid. It provides distributed kWh, taking the load off of (potentially) over loaded transmission and distribution systems. Solar can provide “grid services” meaning it can assist in controlling the frequency and voltage along the lines. This has real and significant value on today’s grid, and utilities often pay for this service from other providers, but it is included “for free” as part of net metering. Another large component of value is the time of day that solar make electricity. It costs a utility different amounts to purchase power at different times of the day, on different days, and in different months. Power costs (to the utility) can vary from well below what a home owner pays, to many times what a home owner pays, due to the effects of weather, fuel prices, peak demand, and other factors. So the price paid from the utility to the solar owner can actually be far below the cost of other power purchased by the utility.

  • The price paid for rooftop solar in a given location is usually NOT 3x higher (as stated in the article) than the price paid in that same location for power from large solar arrays. While there is a differential, it is usually in the 2x range. (And of course, the same tax incentives decried for use by residential solar still pertain to large scale solar. Different tax code section, same percent of cost). As noted above, there are also reasons why rooftop solar is more valuable to the utility. The article is correct that large solar power plants built in the southwest can generate electricity very inexpensively (as low as $0.05/kWh). However, the last I knew, North Carolina and Vermont did not wish to move to the southwest US, no reasonable proposal has been put forth for the mega-transmission required to move all our power cross country, and of course, that would add significant cost, decrease reliability, and change the economic balance of the states.
  • Overall cost of installation on a residential rooftop is typically less than 3x, and as low as 2x, cost of large scale solar. (Just the facts from inside the industry.
  • In the CA example of $0.17 vs $0.05, that does not include the cost of transmission, or the power losses in transmission. Transmission cost in CA is >$0.02 during peak. Losses can amount to >10%. Suddenly that $0.05 (from solar, or a gas plant, or any other form of generation) is now about $0.08, without providing the many very real and valuable local benefits.
  • In short, Mr Potts appears to be carrying the water for EEI in their attack against the freedom for homeowners to install solar and generate their own power. He also ignores any and every benefit of DG solar.

We need a new energy generation infrastructure in the US. It is going to take every kind and type of generation to have us achieve our low carbon goals. The article portends that we could achieve this faster without DG. That would be trusting the utilities to implement something they have long opposed. DG solar, along with the many other benefits, also is working to force the utilities to move forward in energy, despite their centralized power dreams and desires. For our economy, and our national security, we need solar at every possible scale, across the country.

Utility leader or follower?

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The second step on the road to utility transformation is to determine if you are going to be a utility leader or a utility follower. Leading or following have some obvious advantages and disadvantages. The utility industry has historically been extremely risk averse, which the industry has shown by being very slow/cautious about adopting new ideas and methods. Paraphrasing one utility executive, ‘our R&D is watching what other utilities do, and adopting the stuff that works five years later.’ This risk aversion has served a slow-moving industry very well, resulting in generally low electric rates and reasonably (though not world-leading) high grid reliability.

But two things have happened. First is that the historically slow-moving utility industry is beset with a quick-changing environment. Distributed electrical generation, enhanced demand response, efficiency, and control technology, as well as demand profiles, are changing on single year time scales instead of decadal time scales. Secondly, there is almost no one to follow right now, as the entire industry is racing to understand and determine direction.

While a couple hand full of companies might be said to be “progressive” utilities, there are probably only three who could be described as real “leaders” in the field. NRG Energy is the best known, and only operates in unregulated markets. (With a strong desire to not enter regulated markets.) In regulated markets, two small utilities, Hawaiian Electric Industries (HEI, the holding company for three Hawaiian regulated utilities, just purchased by NextEra) and Green Mountain Power (GMP, Vermont) are leading. While HEI has been forced into a leadership position by the regulators, both GMP and NRG have adopted their positions based on internal business reasoning. Interestingly, all three utilities have broadly accepted renewable energy as an important part of their power mix, and have encouraged more solar penetration instead of fighting solar and other renewables.

In terms of deciding to follow one of these three companies, scant is known about their internal plans. Other than vague commits to certain levels of renewables or carbon reductions, their roads are not yet visible to outsiders. However, given that the planning process is a year plus for significant decisions, perhaps this is enough to at least help determine direction for those who have a strong desire to follow.

Conversely, for companies that would rather lead, the paucity of current leaders, and the lack of information on their plans, gives ample room for additional leaders to move forward. A utility still has the ability to go to their regulators with an untested plan and find approval, since both business practice and regulatory case law are weak in the new areas. A utility which is able to envision a different future for itself is more likely able to get that future enshrined in regulation without precedent now than it will be in three or five years.

Of course, the central question for utilities, thinking from within existing utility culture, is ‘what is the lower risk path? Lead or follow?’ I suggest that the lower risk path is to lead, based on the following items:

  • Once regulatory precedence is set in other states, it will become increasingly difficult to justify and obtain different regulatory structures in new states.
  • Working within new structures determined by others will be more difficult. Each utility and service territory in fact has unique characteristics and needs best served by a unique solution. Driving forward as a leader will allow a utility to set these parameters to maximum benefit instead of fighting the parameters set in other states.
  • Policies more beneficial to utilities may be set first, and then eroded by additional consumer power or choice. Gaining regulatory certainty earlier may result in a much more favorable regulatory environment than what may be achieved later. Especially if more than one transition is required along the road to the future, gaining the best regulatory advantage at each stage may well be the difference between winning and losing.

However, one thing good leaders do is keep an eye on other leaders, and change their plans when they see a better plan. So while I suggest you don’t follow another utility, I do suggest that you gather the best current knowledge and modify plans as appropriate based on the latest information.

Next we will look at where we are going, and what are the key obstacles in our path.

Utility Transformation – Step 1 – Baseline Survey

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Now that we have a planning method, let’s use it! Referring back to the last post, the first step in planning utility transformation is to figure out where you are right now by performing a baseline survey. We need to do this well, because as we noted in the analogy, you need to know exactly where you are before you start a trip, otherwise getting onto the main road can be a lot harder. (I certainly have driven around in circles trying to get onto an Interstate from the city streets.)

Baseline Survey

The establishment of the existing conditions baseline survey needs to go far beyond a physical inventory of assets and liabilities, cash and cash equivalents. Any well run utility has the physical assets and liabilities well documented already. And the survey is much more than understanding the regulatory environment of the company, however complex that might be.

The intangible items are the most difficult to catalog as well as the most difficult to change. I have often said that climate change presents no insurmountable technological problems, but does present very complicated cultural challenges. Compiling the intangible assets is actually more important, and certainly harder, than listing the physical ones.

The key realization is that utility transformation is more about cultural change than physical change. Just as the technological solutions to climate change are not the biggest problem, similarly so for the technological changes necessary for utility transformation. For a successful transformation, the transformed culture must emanate out from the utility to encompass regulators, customers, legislators and shareholders.

For example, sufficient investment in the poles and wires infrastructure in the US has been deferred for decades. One effect of this deferral has been to decrease the pool of knowledgeable and skilled employees who want to go into this field and develop the skills to implement rapid deployment of classic poles and wires technology. Regulators have similarly become adept at working to minimize and defer infrastructure investments. Even in a world where transmission and distribution systems are less central than they have been, they will certainly be needed. A different understanding of investment in poles and wires, and how that investment is returned, is needed, even if the technology of the poles and wires remains little changed. (Though it will likely change as well.)

Intangible Holdings

Beyond employee knowledge and skills, Intangible holdings include the following:

  • Customer relationships, classes, distribution
  • Customer expectations (of reliability, of service, of product selection)
  • Relationships, with regulators, government officials, fuel sources, vendors
  • Brand (possibly the single most important, and currently underutilized asset of most utilities)
  • Geographic presence
  • Natural and renewable resources internal to any defined service area
  • Existing non-utility-focused energy and pollution regulatory framework in every jurisdiction where the utility does business
  • Strength and vision of the Board of Directors and Management
  • If publicly held, profile of the major shareholders
  • This list continues. Add your top items in the Comments.

This is a lot to understand. Gathering, compiling, sorting, and relating this information will provide new insights into the company, highlight unknown strengths and expose hidden weaknesses. And prepare you to start the journey well.

An ancient utility joke, which will fade away during the utility transformation, is that to understand a utility you need to understand two things.

  1. Utilities don’t know what anything costs (due to being in a historically regulated environment, they basically had a framework of documenting approved expenditures, not proving costs)
  2. Utilities don’t know what anyone wants (who actually wants electricity? People want lights, cold beer, and their cell phone charged. Utilities sell electricity, which no one really wants.)

Part of this baseline survey will start to uncover what things cost or are worth (in dollar and human terms), and what people want, further informing the development of roadmap. This preparation allows you to start the journey imparting a strong feeling of control and purpose to your fellow voyagers / stakeholders. You have also begun to learn the route of the journey, as you learn what culture change (in addition to physical change) is needed, and what education and experience will foster that in the desired direction.

Time to head out on our journey of utility transformation pretty soon, but there are a few more important steps before we’re ready. Next up is the question of what it means to follow, lead, or travel in a pack.

Planning for electric utility transformation, or travel, for that matter

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A short diversion today from the mechanics and problems of the actual utility transformation. It is important to think about how we plan utility transformation. We can’t just “let it happen”. There will be far too much disruption in electricity supplies, unacceptable to our economy and our lifestyle. So planning is fundamentally critical, non-trivial, and difficult. Let’s explore a couple of analogues from outside the utility world for planning complex situations with many unknowns.

Google Maps

Right, this has nothing to do with utility planning, but it has everything to do with “charting a course” through an enormous number of variables. It was not long ago that this was considered far too complex a problem to solve, but now, I simply enter my current location and where I want to go. It then calculates a few million routes (depending on distance) and charts the “best” route for me.

A friend recently told me that internally what happens in any mapping software is that the program figures out the “cost” of each route (how many discrete node points are touched along the route, with each point of lesser or greater “value” based on derived factors). Then the least “cost” route is provided. Of course, you need to know where you’re going in order to get a map. But we all have had the experience of navigating to “somewhere close” to where we want to go. We believe that as we get closer, we will gather new information and then be able to refine our end point. Such is true for utilities. As I indicated in the last post, I believe the end point is “100% renewable energy, focus on distributed generation”. But perhaps a utility puts in some “way-points” such as 50% and 80% to help guide them.

Scenario planning

Or, as I put it, looking at the Good, the Bad, the Ugly, and the WTF. Much more traditionally used in business, the goal is to craft a business plan which allows progress on the chosen path while protecting against the less favorable external factors. Again, a utility needs to have an overall direction, a long term goal of what it wants to be. The goal does not need to be a final stage, but needs to be far enough along a path as to create optionality.

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The face of utility transformation

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Recently I was meeting with a small group of senior executives from a regulated electric utility. This particular utility currently generates the significant majority of their electricity from coal. During our discussion I looked at one of them and said “You know that (the utility) will be powered by 100% renewable energy in the future, you just don’t know when that will be.” The look that appeared instantly on his face told me two things:

  • Up to that very moment he did not know that
  • From that moment forward he knew that the statement is true.

This is the literal face of the utility transformation which every utility confronts. And they have two choices, which we also discussed. They can lead the transformation, or they can follow; And if they follow, they will likely not survive as an independent entity.

So how can a utility expect to chart a course through uncharted waters? It’s not simple, but there are methods and examples to draw on. This is not as simple as “follow what the telecoms did”, or “look at the deregulation of the gas industry”. There are unique functions and liabilities of our electric system which are intrinsic to the industry, and cannot change. A few of these are:

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