Net metering and DG solar. Just the words are enough to irk antagonists and protagonists into a heated, and all too often, devolving conversation. On one hand are the owners of DG solar systems who contend that they are not only providing electricity to the grid but also many peripheral benefits. Such benefits, they argue, are based on the avoidance of various inputs like fuel costs, added distribution lines and upgrades to transmission systems. Even pollution costs of NOx and VOC’s are avoided. Some argue that these are net benefits to society as a whole and yet under current accounting methods are not quantified but should be.
Then there are the utilities themselves who argue that net metering causes them to buy electricity at retail prices often at times when they don’t need it. Further, customers on DG solar are not paying their fair share of the costs for lines and transmission. This causes a cost shift to the other customers of the utility who are now subsidizing their neighbor’s use of electricity when their solar systems don’t provide enough power. An unnecessary luxury.
So which side is right? In fact, they are both correct.
Unfortunately like many current issues regarding energy, emotion can derail the process and cause each side to begin to make absolutist statements as their voices reach a higher and higher pitch.
So here’s the deal.
The grid has not changed that much in decades and the need for more renewable generating capacity is a given. At least among reasonable adults. So we have to design a new system that either wholly accommodates a two way transfer of energy and/or embraces distributed generation. It also must allow a fair return on investment for those willing to put up capital to ensure that we all have access to electricity 24/7. So how do we do this?
Lawrence Berkeley National Lab issued a report in September 2014 which looked at the economic implications of 2.5%-10% DG solar penetration in two very different utility models. What they found was rather interesting. According to Lawrence Berkeley:
“Utility executives are often concerned about revenue erosion and reduced shareholder returns when customers with net-metered PV are able to avoid charges for fixed infrastructure costs, as well as potential cost-shifting between solar and non- solar customers.”
So they ran the numbers:
“Customer-sited PV reduces both utility revenues and costs (i.e., revenue requirements). In the case of the SW Utility, the impacts on revenues and costs are roughly equivalent under the 2.5% PV penetration scenario. At higher PV penetration levels, however, revenue reductions exceed cost reductions, in part because of a declining marginal value of PV.
They concluded:
“The magnitude of shareholder impacts varies considerably…Specifically, achieved earnings were reduced by 5% to 13% for the SW utility and by 6% to 41% for the NE utility, with similar ranges in the impacts on achieved ROE, illustrating the degree to which these impacts potentially depend on utility- specific conditions. By comparison, the ratepayer impacts were relatively stable across sensitivity cases, with increases in average rates ranging from 0% to 4% for the SW utility and from 1% to 4% for the NE utility.”
So the argument that ratepayers are going to see their costs rise significantly thanks to all these solar “freeloaders” doesn’t seem to hold much credence. Worst case scenario, rates increase 4% but will probably fall someplace in between. It’s the capital cost and revenue drop issue which is truly problematic. Earnings reductions of up to 41% is not going to work. And here’s what happens. Utilities begin seeing revenue drops and then raise rates. Customers can’t keep up with the rate increases and begin to recognize that DG solar costs are cheaper so they decide to switch to distributed generation. Then the utility loses more revenues. It’s a downward spiral that is hard to stop.
So how can utilities increase revenues, provide reasonable shareholder returns and still allow DG solar?
The answer is to rethink the grid and the business model. For instance, why not buy up solar companies?
Worldwide revenue for solar installation systems is expected to reach $112B by 2018. That constitutes a 44% growth rate and a significant opportunity for wealth creation for shareholders. NRG, the largest US utility, thinks this opportunity is one to grasp. The utility has adopted a different approach from many of its peers and has entered the DG solar market. The company has boasted that they will overtake Vivint Solar by the end of 2015 as the second largest residential solar company in the US. In speaking with investors earlier this year, NRG CEO David Crane spoke of the paradigm shift occurring in the utility market and reaffirmed that NRG’s investment in renewables would pay off big over time. He stated:
“Our industry is in the early but unmistakable stage of a technology-driven disruption of historic proportion. This disruption ultimately is going to end in a radically transformed energy industry where the winners are going to be those who offer their customers, whether they be commercial, industrial or individual customers, a seamless energy solution that is safer, cleaner, more reliable, more convenient and increasingly wireless.”
Other utilities are no doubt watching NRG to see what success they have over the next 12-18 months. Moving into DG solar accomplishes one highly attractive goal. It counters some of the high risk and pricing volatility of the traditional utility business by providing a cushion of long term contracted cash flows which can be used to offset razor thin margins in retail. And NRG looks to be succeeding in its calculated risk. While the company has bought back $1.4 billion of stock since 2009, $200 million of this occurred in the first quarter of 2015. Clearly, this is increasing shareholder value. If this model appears to be working, other utilities will probably start scouting existing DG solar companies and absorb them into their own power generation portfolios.
But one thing appears certain: the grid will never be the same.
