Last year, a report from The Rocky Mountain Institute (RMI), The Economics of Grid Defection, put fear into the hearts of many utility operators and some significant investors. Talk of a ‘death spiral’ for the utility business entered the mainstream. Many of the biggest names in the investment banking world took note.
From Barclays one report stated: “We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade.” Morgan Stanley drew a similar conclusion: “Over time, many U.S. customers could partially or completely eliminate their usage of the power grid.” Even the mighty Goldman Sachs agreed: “Grid independence is soon to be a reality.”
RMI has refined its thinking and issued a new report this April, The Economics of Load Defection, which offers a startling conclusion: “We think large scale power plants are the structural losers from this trend...The customers don’t leave, but their load does, ‘defecting’ from grid supply to behind-the-meter, grid-connected solar PV and batteries.”
How many home and business owners will become net suppliers to the grid over the next ten or fifteen years? Who will own and manage the assets? The answer to these questions is the measure of the risk to generating and transmission utilities and central power plant owners. Related: Four Stocks To Watch In The Driverless Vehicle Industry
Even without cheap storage, observe how the massive PV build out in Germany has led to a substantial drop in wholesale electricity prices and a collateral drop in the share value of leading utilities throughout Europe (or as The Economist put it: “How to lose half a trillion euros”). According to Greentech Media, in 2013 alone, Europe mothballed 20 gigawatts of natural gas plants and wrote down $23 billion in generating assets, "a financial pain they have never felt before." The news is getting worse for conventional power plants. A recent Bloomberg headline identified more salt heading for the wound: Solar Costing a Third of Retail Power Emerges in Germany.
This problem is not limited to utility companies in Europe. The California Independent System Operator (CAISO) Strategic Vision report for 2015 highlights the “increased risk of over-generation,” which means the supply of electricity exceeds demand. “Current studies show that this risk will grow quickly after 2020 with higher levels of renewable generation in the mix — even after fossil fuel power plants have reduced output as much as possible.” The remedies include exporting power to neighboring states, developing storage systems, and electrifying transport. Related: Renewable Energy Could Dominate Electricity Market In 15 Years
Detractors assert that due to the intermittency of renewable sources it will be a very difficult challenge for the grid to integrate them. However, Michael Picker, the president of the California Public Utilities Commission, told attendees at the Bloomberg New Energy Finance summit in New York City, April 14: “We could get to 100 percent renewables. Getting to 50 percent is not really a challenge . . . the grid already is comfortably managing solar and wind energy that reached as much as 40 percent of the total a few days last year. In the years ahead, authorities can add the flexibility needed to manage power that flows only when the wind blows or the sun shines.”
That is good news because the forecast for electric supplies calls for a lot more sun and a lot more wind. NREL predicts that the U.S. will reach 80 percent renewables by 2050. Finally, it is worth noting that Germany already has a very high renewable penetration rate and their grid is far more reliable than the U.S. grid, i.e. the lights go out there one-tenth as much.
David Crane is the CEO of NRG Energy, the leading independent power producer in the U.S. Mr. Crane was the first in the industry to beat the drum heralding the coming of cost-effective PV. He told Bloomberg earlier this year that: “Everyone is beginning to believe that residential solar is this trillion-dollar market that currently has about 1 percent market penetration.” The Lawrence Berkeley National Lab reckons that rooftop solar adds a $15,000 premium to a home’s value. So, it may not be a question of how smart the grid is, rather how smart homeowners, solar installers, regulators and utility operators are.
The big dog in the race to put the sun to work on your home is SolarCity, with roughly a third of the U.S. market share. According to Utility Dive, “[r]esidential solar companies like SolarCity have been one of the utility industry’s biggest headaches over the last few years. But while utilities are worried about the impact of rooftop solar on the grid and to their bottom line, these players have their eyes set on the ultimate prize: The customer relationship. Today, utilities have one big advantage over solar companies: They already own the customer relationship. But utilities have an arguably proportionate disadvantage: They are typically not allowed behind the meter and in the customer’s home.”
Small solar in US 13%// All solar 31%// Wind & solar 58% of all new US capacity in 2014 (All solar worldwide 34%)
The CEO of Tendril (a privately held company, backed by SunPower, providing energy management software) says: “The [solar] leasing companies have ambitions to become a new kind of utility.” SolarCity recently announced a partnership with Nest Labs, Google’s smart thermostat company. “[They] can bypass the utility and set up shop inside the customer’s home.” SolarCity has over 200,000 customers and expects to reach a million by 2018. Their director of grid engineering solutions says, “We want to understand…load control, what that thermostat does, and how could it cooperate and integrate with solar."
The senior grid analyst at GTM Research is on board: “We’re really seeing a fundamental shift right now in the way solar players and service providers are addressing the residential consumer market…In the not-so-distant future we could see a very capable bundled solution from SolarCity, possibly including Tesla residential battery storage, Nest energy management, and solar generation — all under some sort of financing agreement." Related: Oil Demand Weaker Than Many Expect
What goes on in the garage may become the most important development of all. According to the CAISO study referenced above: “Fleets of electric vehicles can similarly balance the grid, with operators sending signals to increase or decrease electricity flow to or from the vehicle. With the right technology, electric vehicles could coordinate with the grid for the roughly 90 percent of the time they are parked and still be fully charged when the consumer needs them.” Greentech Media sounds a similar note with a recent headline: “Turning driver behavior and multiple grid markets into predictable revenue.” The article goes on to say that “EVs could help ease congestion on distribution grid circuits, absorb excess solar and wind power, or provide sub-second response for high-priced ancillary services markets.”
In the final analysis, RMI is sanguine about the coming distributed renewable tidal wave, calling it a great opportunity. “Compared to the off-grid systems analyzed in The Economics of Grid Defection, optimally sized, grid-connected solar-plus-battery systems can reach economic parity sooner, and across more geographies, with faster customer adoption, and greater system benefits. This will herald a marked shift in the relationship between customers and utilities, and between customers and the grid. But since such systems will remain grid connected, they can offer value to that grid, rather than be seen solely as load defection from it.”
The big banks do not disagree. Citigroup sees storage as ‘a pillar of growth,’ and thinks utilities will boost their asset base by getting involved in it. Morgan Stanley sees the utilities’ future as an integrator, offering energy services that include finance, design and installation of solar and storage systems. Their advice to central generators is blunt: “Invest in renewables since fossil plants will lose out due to fuel costs.” In other words, the time has come to trade out of fossil fuel assets and reinvest the capital in New Energy assets, assets that use the sun, wind, and water to generate energy.
By Henry Hewitt for Oilprice.com
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