Distributed generation threatening utilities? How can they respond?
Solar panel in London, Ontario (Image: chucka NC, Flickr)
Last year, NV Energy, a utility covering the US state of Nevada, found itself embroiled in a confrontation with its solar energy customers over fees distributed energy generation (more simply ‘Distributed Generation’ or DG). In January this year, the company offered them a compromise. The company, which is owned by Warren Buffett’s Berkshire Hathaway Energy, has announced it will submit a proposal to the state regulator that will allow customers who already own solar panels to avoid new fees over the next 20 years. These fees became effective earlier this year and are highly controversial. They would still be levied against new solar energy customers. Nevada Governor Brian Sandoval argued that people who don’t own solar panels are paying more than they should for grid maintenance and interconnections while solar panel owners enjoy the benefits. NV Energy and the PUC take the same view.
This is just one episode in an ongoing struggle in which utilities all over the world have been trying to cope with the growing popularity of distributed generation technologies, often based on renewable energy such as solar power, which is enabling more and more people to generate their own power rather than relying on supplies from utilities. This has become particularly prevalent in the US, where in sunny regions of the US, states such as Nevada, Arizona and California, solar power is immensely popular. Late last year, Nevada’s Public Utility Commission decided to try and solve the problem by adding extra fees for solar panel owners while also lowering the income they receive for producing power and selling it to the grid.
Rooftop solar at Bentley Motors factory in the UK (Image: Department of Energy & Climate Change (DECC) Flickr)
Unfortunately for utilities, the writing is on the wall so to speak. They will have to change the way they do business as more and more renewable, distributed energy comes online. Distributed generation threatens the centralized networks and regulation enjoyed by utilities thus far, reducing competition.
In January 2013, Edison Electric Institute (EEI), a trade group of investor-owned utilities, identified DG as perhaps the largest disruptive threat to the utility business model. In response, EEI has opted to react aggressively to the most popular form of DG – solar power. According to the Energy Policy Institute (EPI) EEI is intending to try and squash the solar market by appealing to lawmakers, regulators and consumers that solar is unfair to ratepayers. Its goal is entrenchment of the existing energy regime, not transition.
The reason why the threat exists is easily explained. In short, utilities want to sell more power. They want demand to rise. Distributed generation threatens that.
There are a number of reasons why this situation is becoming increasingly serious. In fact it’s actually due to a convergence of factors such as falling costs, a strong focus on the development of new DG technologies and an increasing customer, regulatory and political interest in demand-side management technologies (DSM). Government incentives, the declining price of natural gas and sluggish economic growth has assisted this process, as has the cost of providing interconnection and back-up supply for intermittent generation. In turn, utilities are beginning to suffer declining revenues, increasing costs and lower profitability.
Power transmission lines (Image: Chris Hunkeler, Flickr)
This has initiated the beginnings of a 'utility death spiral' which will become more severe as customers turn to DG. In November 2015, Hervé Touati, Managing Director of the Rocky Mountain Institute (RMI) Business Renewables Centre (BRC), speaking to Renewable Energy Magazine (REM), predicted that demand for electricity will fall as more technologies aimed at managing demand come online. Even simple systems such as LEDs are 90 percent more efficient than incandescent lighting, thus reducing demand. The trend is for more efficient use of power, demand reduction and distributed generation and some utilities have seen that as a threat.
There are obvious benefits to increased DG, such as the reduction of carbon emissions, increasing resilience of power systems and the stimulation of the economy with new jobs and growth. However, there are also benefits for utilities also, including reduced energy costs, reduced capacity costs for generation and lower transmission losses. There are also a number of ways in which utilities can protect themselves.
DG customers will have to rely on the grid to some extent in order to collect revenue from net metering or Feed-in Tariffs. They also need the support of a grid for backup power, especially if they don’t have any energy storage. Ironically then, utilities can maintain value by helping to integrate DG, a strategy that German utility RWE is now embracing. For example, utilities can themselves invest in solar, become involved in financing and can offer customers clean-energy options to prevent them straying. They could, for example, opt to own and control solar energy inverters or get involved in running community solar programs, particularly for people living in apartments and high-rises.
In essence, utilities can become proactive, they can opt to lead the energy transition rather than just standing by and watching it happen.
In 2010, NDN released a really interesting report entitled Electricity 2.0: Unlocking the Power of the Open Energy Network. The paper correctly identified the onset of a global revolution in how the world consumes electricity, in essence, tackling climate change, creating wealth and democratizing energy, thus empowering people all over the world. The thing that stands in the way of this is the power network as it exists currently. That has to change.
DG offers a democratized energy system which is decentralized in the sense that energy is generated closest to the point of use. Increasingly, energy will be generated in homes, offices and factories and energy consumption will also become far more efficient, particularly with the introduction of smart grid technology in power transmission and distribution.
The National Clean Energy Project (2009) organised by the Centre for American Progress (Image: Centre for American Progress, Flickr)
Organisations such as the Rocky Mountain Institute (RMI) are helping to play an important part in how the transformation of the energy sector takes effect. For example, RMI’s eLab has drawn together people from all across the US electricity sector to discuss collaborative innovation which will help to address the barriers to deployment of distributed resources in the sector. This includes discussions around the communication of costs and benefits, the harmonization of regulatory frameworks and business models and the acceleration of the pace of deployment.
According to a report by Utility Dive in 2015, some utilities are beginning to respond positively, identifying DG not as a threat at all but actually as a new growth opportunity. In fact, utility executives are increasingly identifying DG as the ‘biggest driver of industry growth’ in the future. Utility Dive’s report found that almost half of utilities are now restructuring their business model around DG with more than three-quarters increasing investment in customer engagement.
As Melissa Whited, an associate with Synapse Energy Economics, said, speaking to Utility Dive, “You really have to be providing value. When you get down to the bottom of it, it's about utilities finding new areas where they can provide value to customers. Utilities want to be competing in this marketplace.”
That’s more like it.