Electric companies may want to look at telecoms for a glimpse of their future. Just as telecom companies faced a challenging transition with landlines over the last twenty years, it appears that utility companies may soon have their own challenges to face.
As residential solar power becomes increasingly popular around the world, utility companies are going to face a stiff challenge. The utility grid is built upon providing consistent reliable electricity in large quantities to every household around the country. This is true not just in the U.S., but all around the world.
Yet more than any other renewable technology, solar power changes the dynamics of this business model. With solar power, consumers generate their own power and hence have only a partial need for energy from the electrical grid. That’s very bad for utility companies. Making matters worse, Tesla’s Powerwall product reduces the need for even partial grid connectivity by allowing consumers to overproduce electricity at peak periods of solar generation and then store the energy for subsequent use. Related: The Next Fracking Boom May Be Closer Than You Think
All of this presents a major challenge to utilities in some areas.
Now of course this won’t be a problem everywhere. In areas with less sun exposure, solar is never going to be a reliable alternative to grid power any more than greenhouses are a reliable producer of oranges in Canada. But in other geographies, this is a very real problem and one that investors need to understand.
Spain provides an example of exactly this situation. Spain has tremendous sun exposure and is a nearly ideal candidate for solar power given its economic development and cultural predilections.
In light of that, Spanish consumers had embraced solar power in droves and solar energy in the country hit grid parity last year. That presents a major challenge for utilities. Once there is no economic benefit to using the electrical grid rather than self-generated energy, the economic rationale for the existence of utility companies becomes questionable. That’s especially true since solar power costs continue to come down around the world, suggesting solar costs below grid costs in Spain within the next five years. Related: OPEC Still Holds All The Cards In Oil Price Game
In light of that, the Spanish government is considering a stiff tax on solar power systems. This tax will artificially boost the cost of solar and keep the electrical utilities profitable. Predictably, Spanish consumers are not too happy about this proposal, but the political reality is that the current government can force the measure through if they choose too.
The larger point for investors is that widespread solar power usage is an existential threat to utility companies in some regions. In these areas, utilities will see their profits severely pressured and they will need to turn to using political clout to maintain their local monopolies. In Spain, the utilities were able to do this because politicians leaving government frequently take up lucrative posts in the utility industry.
But utility companies everywhere are political heavyweights as a result of the taxes they pay and the employment they provide. In the U.S., utilities in several states, including Arizona and Wisconsin, among others, have pushed through fees or taxes on solar. Related: Nuclear Is Not Dead, Uranium Supply Deficit Could Be On The Horizon
Overall, the effect of any such tax on solar will be to make the technology less economical compared with traditional grid electricity. And that is exactly the point. The other alternative which has been widely used in the U.S is for utility companies to charge consumers a connection fee regardless of whether they consume any power from the grid.
If energy storage solutions like Powerwall start to take-off though, some consumers may begin looking to cut themselves off from the grid altogether. At that point, utilities will have to find another way to extract revenues from the local population in order to continue supporting the local grid. Solar and utility executives alike should be looking at telecom and cell phone companies as an example of how to successfully navigate such a transition.
By Michael McDonald Of Oilprice.com
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