Utilities vs Solar, Can They Ever be Friends?

When we think of the benefits that come from adopting clean alternative energies we often forget to consider the losers. Perhaps none should feel as threatened as the utility companies.

First, consider the telephone. Not so long ago telephone wires were on track to line every street in the country. At the time supplying and maintaining phone connection was an expensive but ultimately valuable endeavor. There seemed no way the market would ever falter. No one counted on satellites and cell phones to take off, and never did they imagine we could get by so easily without a landline.

Utilities may have a similar story to tell. Populations boomed, residential areas expanded, consumption of electric powered appliances like cell phones and laptops only increased the need for energy. It seemed the business could only go steadily upwards, in good times and bad. But, alas, the green movement has made consumer more conscious of their consumption, and utilities have set a wary eye on the public's willingness to adopt alternative energy sources.

A Consumer’s Switch To Solar

“While we would expect customers to remain on the grid until a fully viable and economic distributed non-variable resource is available, one can imagine a day when battery storage technology or micro turbines could allow customers to be electric grid independent.”  – Financial Implications and Strategic Responses to a Changing Retail Electric Business

Utilities sell power to consumers by generating electricity and pumping it through their grid to satisfy consumer demand. They actively control for spikes and drops in that demand and adjust their rates accordingly. But what happens when demand drops?

As Grist writer David Roberts put it, "the power generated by solar panels on residential or commercial roofs is not utility-owned or utility-purchased. From the utility's point of view, every kilowatt-hour of rooftop solar looks like a kilowatt-hour of reduced demand for the utility's product."

Imagine three percent of a utility's customers install solar panels, relying on the utility services only for backup. The utility company is now losing nearly three percent of its revenue, but they still have the obligation to maintain the grid for the other customers at the same overhead cost. In turn the power companies must, and have, charge higher rates to their remaining consumers in order to cover fixed costs.

This is not a sustainable business plan. Raising prices encourages customers to find alternatives, perhaps joining their neighbors in becoming more energy efficient by erecting solar panels and investing in battery technology. The movement will begin to pick up speed until, suddenly, utilities find themselves in a downward spiral of low revenues and increased costs, eventually sharing the fate of the telephone pole.

Need to Adapt

Candid proof of this threat to the utility business model came from an interesting source: Edison Electric Institute, the association of U.S. shareholder-owned electric companies. It may be prudent to highlight the following points made in their recent Disruptive Challenges report:

- Solar panels are already robing utilities demand for their prime product.  Solar panels provide the most energy in the middle of the day when the sun is highest. These are the same "peak" hours for utility firms, when rates are highest.

- Edison Electric Institute expects a 20% or higher rate increase in the high impact areas.  Solar represents less than 1% of US energy production today, but Bloomberg Energy Finance expects it to reach up to 10% in certain areas by 2020.

- Utilities fear political backlash from passing on costs. Utilities spend a huge amount of their resources updating and improving infrastructure. In order to keep up they must increase customer rates to subsidize the non-users. At some point it may be ruled illegal to pass on the full cost.

- In addition to the telephone wire example the Edison Electric Institute (EEI) made parallels with other failed or failing business models that have succumbed to new innovations including Kodak film and the U.S. Postal Service. 

- Investors are sensing trouble. "Increased uncertainty and risk will not be welcomed by investors, who will seek a higher return on investment and force defensive-minded investors to reduce exposure to the [utilities] sector. These competitive and financial risks would likely erode credit quality. The decline in credit quality will lead to a higher cost of capital, putting further pressure on customer rates. Ultimately, capital availability will be reduced, and this will affect future investment plans."

The Plan

Stopping this destructive self-reinforcing cycle is challenging.  EEI’s proposed immediate and long term actions for change are prompted with the words "analyze," "assess," "consider," "develop," "factor," and finally "apply." Clearly, there's work to be done in recouping and reallocating costs, even shifting consumer behavior in their favor.

But investors should note all emphasis is on keeping the familiar utility business model viable, an odd approach after citing multiple failed businesses that became too comfortable in their position.  The improving economics of the solar industry and encouraging political and social support for alternatives makes this approach unlikely to succeed in the long term.

Eye Candy

Looking to trade the movement? The online brokerage firm Kapitall has created a helpful infographic to summarize the solar industry, its potential, and the key publically traded players that are at the forefront of the trends.

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- Rebecca Lipman, Kapitall Editor

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