It has been predicted that solar power may be a significant hindrance on the electric utility industry… by an electric utility company. In January, a report that went fairly unnoticed by the media was published by the Edison Electric Institute (EEI). The EEI is an association of American share-holder owned electric power companies. The report predicts that as more customers opt for distributed energy resources (DER), specifically photovoltaics (PV), the US electric utility industry could be destroyed. A similar situation has already occurred in Germany and now the US is predicting the same downfall.
American Utility Background
The electrical utility industry is an old system that has been mostly unchanged since its establishment. There are two main types of utilities:
1. Regulated monopolies that generate electricity in a power plant and then sell and provide it to consumers through the power lines within their service area.
2. Deregulated utilities manage a grid that consumers are connected to. However, it is separate from power generation plants so they must buy energy from the market and then provide it to consumers through their grid.
PV energy is causing the slow destruction of American utilities. iStockphoto.com©Richard Schmidt-Zuper
A utility first has to present its case to the public utility commission (PUC) by stating how much electricity they have to produce (or purchase) based on consumer demand for electricity as well as the rates they want to charge for the power. When the PUC accepts their rates, they also guarantee the utility a reasonable return on power investments and grid upkeep.
The electricity utility business model is quite an old and accustomed one. It relies on high demand for electricity and selling this electricity to make a profit. With higher demand for electricity, investments also increase and thus, lead to greater profits for utility shareholders.
Essentially, utilities thrive as they sell more power which could lead them to oppose energy efficiency and demand response programs such as incentives to lower electricity use during peak hours. The ability for solar power to be at its strongest close to peak times also affects utilities’ profit-making mechanisms. PV systems on residential and commercially-owned rooftops are not owned by the utilities so power produced by the PV (or any other DER) is not being returned to the utility as profit. Rather, each kilowatt produced by PV energy is reducing demand for utility produced energy. Power during peak hours are the most expensive and utilities can generate the most profit during this time. Yet, as solar also reaches its maximum near this time, it takes away much of the profit utilities could be making during the peak hours.
Vicious cycle downwards
Normally, the cost of investment and maintaining the grid are placed on ratepayers within the service areas. However, as consumers start to opt out of the grid and produce energy independently, the costs will be placed on a smaller group of ratepayers. When this occurs, the rate for the remaining ratepayers increases and damages the utility’s credit rating. As the rate increases, consumers will switch to DERs such as PV energy. The EEI forecasted up to 20% increase of rates for people without solar energy. This is a vicious positive feed-back cycle that could change how utilities function in America. Solar energy is directly interfering their profit mechanisms, however, utility investors seem to be paying little attention to this issue.
The inevitable changes in a fairly old business model were also compared to the changes experienced by some companies like Kodak and the US Post. However, unlike most companies, electricity utilities are unaccustomed to constant changes in the market and have benefited from a fairly untouched market until now. The EEI report discusses ways to avoid these issues mostly by revising their own tariff structures and by planning for “disruptive challenges” like PV. EEI presents measures to maintain the old business model and the utilities. However, is that what consumers also want or will we soon see the downfall of a possibly outdated industry?
Sources: Grist, Edison Electric Institute