Solar photovoltaic (PV) is rapidly upsetting how we operate the distribution system and will soon affect the way we finance and build out the system. Consider what a Fitch Ratings analyst recently predicted. Glen Grabelsky, Fitch’s managing director of utilities, power and gas, stated on July 18, 2013, in www.businessweek.com that “rooftop solar power and energy-efficiency programs will eat into utility revenue and profit margins, and discourage investment in new transmission projects within five years.” And Grabelsky is not alone. Pundits are encouraging utilities and their regulators to reconsider present power-delivery business models to account for disruptive technologies on both the generation and the customer side.

The precipitous fall in solar PV costs has advanced the topic. Consider an EEI report released earlier this year that noted that solar PV panel prices plummeted from US$3.80/W in 2008 to $0.86/W in mid-2012. The same report added that solar PV is already “in the market” in approximately 16% of the U.S. retail electricity markets where retail rates are at or above $0.15/kWh. The report further suggests that the size of contestable revenue may double by 2017, growing to an estimated $170 billion.

If anywhere near accurate, this market size is significant and will catch the attention of new market participants, kick off hyper-competition, increase scale and potentially lower the installed cost of PV, ultimately creating an even larger pool of contestable revenue. On the other hand, as utilities lose energy sales, the remaining revenue requirements must be spread across fewer billing units, thereby increasing rates and further increasing the amount of revenue that is up for grabs. Unaddressed, this compounding effect might quickly create a financial crisis for utilities.

Of course, state and federal energy policies can be credited in large part in creating this situation. We would never have seen the rapid adoption of solar PV without federal tax incentives, policy-driven tariff structures, renewable energy credits and net metering. These policies are a real concern, and some net metering tariffs are simply financially unsustainable. That said, it would be a mistake to pursue a strategy whose only focus is the overturn of these and similar shortsighted policies. Even if these energy policies were to disappear overnight, I believe we would only see the delay the deployment of solar PV and postpone the challenges PV will place on the centralized electric utility business model.

The demand for solar PV is global and growing. The global market potential is too huge and the worldwide energy need too acute for solar PV not to play a key role in meeting that demand. And as the solar industry grows globally, it is likely that PV technologies will continue to improve in performance and decline in cost. Improvements and innovations realized globally will find a home in the U.S. market. It is certain that shortsighted and unsustainable policies must be addressed. But it is equally clear that failure to address customer self-generation and other distributed energy resources in the utility’s future business model is sheer folly.

So, What Are the Opportunities?

The operating characteristics of weather-dependent renewable generation have more in common with weather-driven load than they do with conventional generation. As such, they behave more as an energy resource and less of a capacity resource. As the percentage of these resources increases, the role of responsive capacity will grow in importance, whether this capacity comes from generation, demand response or energy storage. How we integrate this responsive capacity into the grid will, in large part, determine the health of our energy future.

The modern grid is a portfolio of generation and load resources, and when properly managed, can provide fuel and operational diversity, and backup capability with a smaller percentage of generation resources dedicated to that role. The future utility opportunity lies in the deployment of a grid, augmented by sound smart grid technologies, which will allow a utility to apply its real-time energy management savvy to an increasing variety of energy resources, regardless of technology type or ownership.

Utilities must wisely engage customers, regulators and stakeholders as they pursue business models that will add value to the energy choices that utility customers are making and will make in the future.

In the first part of the last century, utility leaders created an electric energy system that transformed a nation. In the first part of this century, utility leaders have the opportunity to transform the electric energy system to create a new energy future.


John H. Baker Jr. (jbaker.inceptionenergy@gmail.com) is an independent utility consultant with expertise in strategic business models, emerging energy technologies and smart grid. He previously he served as chief strategy officer at Austin Energy and director of utility systems research at Pecan Street Inc.