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Rise of the Sun: Utilities Companies In The Face Of Growth In Solar

October 20, 2015
Prices for solar panels have decreased substantially in recent years, and though solar still represents a relatively small share amongst energy sources for electricity in the US, American households are increasingly considering the advantages of solar panels in the home.  The growth of residential solar usage has direct implications for traditional monopolistic utilities companies, which are threatened financially by the competition introduced by solar.  Here, we explore the ways that utilities companies have reacted to the advance of solar and examine benefits to companies and customers.

Where is Solar today?

The promise of solar power as an alternative to traditional fossil fuels has long been discussed. While fossil fuel supplies threaten to be drawn down, solar offers a sustainable alternative without the same constraints.  Using the sun is also an inherently more democratic energy approach because the raw materials of solar power can be harvested by anyone with an appropriate solar panel.  In the developing world where electric grids are not fully established, solar often offers easier access to electricity. 

However, the promise of solar has not been fully realized to date in the US.  In fact, solar power is still not major player.  In 2014, renewable energy as a whole accounted for just over 13% of electric power.[1]  In 2014, Solar accounted for just over 3% of the renewable energy share, placing solar’s energy contribution at less than 1% of all the electricity generated across the country.[2] 

Net Generation From Renewable Energy Sources 

Source: Energy Information Administration

Nevertheless, solar power is growing across states. This growth is seen at the level of utility-scale investment and residential investment. California has traditionally had the most developed solar sector in the country, both residential and utility-scale.  In terms of Photovoltaic (PV) Installed Capacity, California has nearly 10 times greater capacity than the next well-developed state.[3]


2014 Solar PV Installed Capacity Source: Solar Energy Industries Association

Solar prices have dramatically decreased in California as the market has developed and volumes of solar units have grown.  The growth of solar in California has been fueled by strong support from the California government, which has actively promoted the development of the solar industry.  The California Solar Initiative, which originated as part of legislation passed in 2006, initiated a massive push to install one million solar system roofs across the state. [4] Within the past few weeks, the state passed the Clean Energy and Pollution Reduction Act of 2015, which aims to double the use of renewable energy in the state by 2030 and increase energy efficiency. [5] As part of the bill, there are $8.6 billion that can be unleashed for utility-scale solar projects.  The result of California’s aggressive legislative push for solar has been substantial reductions in solar prices.

Utilities Companies in the Advance of Solar

Utilities companies play an interesting role in the evolution of solar across states.  The utilities industry is tightly regulated, and it has traditionally been run by large companies with regional monopolies. The industry has generally been perceived as stable with few disruptive shocks aside from market-wide effects.  The emergence of residential solar panels clearly has direct implications for utility companies; homeowners with panels have the potential to draw less energy from the grid.  Consequently, the emergence of solar offers a direct threat to traditional utility industry structures and has provoked responses from utilities companies.  

Many utilities companies have argued that those with residential solar panels benefit from the electric grid fueled predominately by nonrenewable sources through their constant access to reliable electricity, while at the same time failing to fully buy into the system.  Underlying these arguments is a broader fear of a “death spiral” for utilities companies driven by increased competition from solar. [6]The basics of the death spiral are relatively simple.  As customers install solar panels and use less electricity from utilities companies, fixed costs from the infrastructure required to maintain the grid are spread over a reduced volume of users, driving average costs up for traditional utilities companies.  Because prices for utilities companies are typically established with oversight by public utility commissions, utilities companies have little ability to raise prices to compensate for increased average costs.  When they successfully do manage to implement a price increase with approval from the commission, they threaten to push more customers towards solar, feeding back into the same loop and progressively eroding the customer base. As a result, many companies have pushed back against the advances of solar and other forms of renewable energy.  However, some have taken the opposite approach, assisting and promoting the installation of solar panels and renewable approaches.

Fighting back against Solar

In Arizona and Florida, battles between utilities companies and the nascent solar industry have been well chronicled. [7] [8] In Nevada, NV Energy, the leading utility company in the state, has fought against the advance of solar. [9] In particular, they have pushed back against “net metering.”  Net metering policies, which now exist in well over 40 states, allow customers with solar panels to sell the energy produced by their panels back to the grid.  The precise mechanics of this sale vary on a state-to-state basis (in some states, all energy produced from the panels is sold back, in others only residual electricity after owner usage is sold back), but net metering allows for solar users to compete directly with utilities companies.  The challenge from NV Energy has relied upon the argument mentioned above, which suggests that solar users do not fully pay for the fixed costs of the grid and effectively drive-up prices for customers without solar panels.  However, the difficulty is that there is little concrete evidence to support claims that net metering (and solar panel use more generally) has driven up prices for non-solar electricity customers.  Studies of a number of other states with net metering have failed to produce evidence of cost-shifting to non-solar customers, and even in Nevada, research by the public utilities commission of Nevada a number of years ago suggested no concerns about increased prices for non-solar users.[10]The reason for this is that solar usage actually reduced costs for utilities companies in other ways.  For instance, during the hottest times of the year when energy usage is highest, solar generates its highest levels of energy and reduces the amount that is drawn from the grid during the most expensive peak hours for utilities companies.  The challenges ahead for utilities companies opposing the advances of solar appear to be largely legal.  The viability of traditional utilities companies are threatened by the competition introduced by solar as solar panel prices continue to decline, and so the primary response is through legislative action that creates direct barriers to entry for solar companies.

An Alternative Vision for Solar in Utilities Companies

Some utilities companies have taken an alternative approach to the advance of solar.  Major utilities companies in California have come to embrace recent aggressive pro-solar legislation.[11] The potential to develop utilities-scale solar facilities appears to be facilitating this support for solar growth in the state (though even in California, there have been recent challenges by utilities companies to the state’s net metering policies).[12]  Some companies are pushing limits even further by actively facilitating the installation of personal solar panels and energy efficiency upgrades.  Green Mountain Power in Vermont actually offers to install products such as the Tesla Powerwall, which is a home battery that stores energy generated from residential solar panels.  The company claims to benefit financially through reduced provision of energy at peak hours and through installation fees, often paid through leasing structures that involve customer paying through their utilities bills. [13]

The financial implications for utility companies like Green Mountain Power are difficult to perfectly predict.  Mass personal solar usage fundamentally threatens the existence of even the most environmentally-friendly utilities companies because it reduces the need for large scale energy provision through the grid.  Nevertheless, a solar-friendly approach may prove more viable than anti-solar approaches.   

References:

  [1]  “Renewable shares of energy consumption highest since 1930s,” US Energy Information Administration, last modified May 28, 2015. 

  [2] “Electric Power Monthly,” US Energy Information Administration, US Department of Energy, September, 2015. 

  [3] “Solar Industry Data,” Solar Energy Industries Association, accessed October 15, 2015. 

  [4]“About the California Solar Initiative,” California Public Utilities Commission, last modified August 26, 2015.  

  [5]“Climate Change Legislation,” California Government Climate Change Portal, accessed October 15, 2015, .

  [6]David Roberts, “Nevada’s big utility is about to strangle the state’s rooftop solar program,” Vox, May 20, 2015.

  [7]Jim Turner, “Utilities in Florida continue to fuel solar amendment,”Orlando Sentinel, October 15, 2015.

  [8]Bill Mckibben, “Power to the People,”New Yorker, June 29, 2015.

  [9]David Roberts, “Nevada’s big utility is about to strangle the state’s rooftop solar program,” Vox, May 20, 2015.

  [10]Ibid.

  [11]James Nash, “California Climate Law an $8.6 Billion Coup for Solar Utilities,” Bloomberg Politics, September 14, 2015.

  [12]Reem Nasr, “Utilities Newest Battleground: California”, CNBC, October 5, 2015.

  [13]“Tesla Powerwall,” Green Mountain Power, accessed October 15, 2015.

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  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

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