In February, the millionth solar installation was completed in the United States. That momentous number has taken forty years to arrive. Fortunately for renewable energy advocates everywhere, the next million installations will likely take a lot less than forty years. At the end of 2015, the U.S. solar market had a total capacity of 27 gigawatts.
While that number may sound like a lot, in reality it’s only 1 percent of the overall electrical mix of the country. Given that, solar still has a long way to go before it becomes a major energy production source in the U.S. Conversely, solar power also has a long potential growth runway ahead of it.
Solar power installations are expected to grow 119 percent in 2016, or roughly 16 GW of additional installed base. That compares to 7.3 GW installed in 2015. By 2020, the U.S. could have 100 GW of installed capacity and an annual growth installation rate of 20GW. On the whole then, solar still seems to have years of growth ahead of it.
Solar’s growth is changing the economics of the conventional utility industry. Now that more than a million households have solar panels, grid managers are set to cut the amount of electricity they buy from conventional power plants by 1,400 MW starting in 2019, according to industry consultants ICF. That amount represents the power capacity consumed by roughly 800,000 households.
While it sounds extreme to call conventional electrical generation a business in secular decline or even at risk of being disrupted, there might be more truth in either of those arguments than many investors would like to believe. The cuts to the conventional grid due to solar represent more than $2B in lost revenue. Adding to generation woes, environmental rules are becoming tougher and tougher with no sign of turning back, and wholesale power prices are being driven largely by the price of natural gas. The current minor rebound in natural gas and oil prices notwithstanding, there is still a glut of both commodities, and that is especially true for U.S. natural gas. Against this backdrop then, it’s little wonder that electrical wholesalers seem to be struggling. Revenue from electricity sales fell 1.3 percent to $388 billion in 2015.
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Yet it’s too soon for either environmentalists or solar business owners to begin celebrating. An industry with almost $400 billion in annual revenues is still very much a lion in a cage match with a solar mouse. Utilities can call on political power and the ability to effectively arbitrage prices based on peak usage throughout the day (though storage batteries are increasingly undermining this latter tool). In addition, there is nothing to stop major energy companies from entering the solar business on their own either in the rooftop segment or with a distributed grid model. Finally, and perhaps most importantly, utilities and generation firms still command the lion’s share of capital in the industry. It is well within the capacity of utility firms to buy part or all of various new technology companies thus giving themselves a call option on changes in the industry.
Utility companies have many tools at their disposal to help deal with the changing environment if they accept that the environment is changing and choose to adapt. After all, mammals were a lot smaller than dinosaurs, yet the former survived the changing environment of the Ice Age as the latter died in droves. Utilities could learn a thing or two from that historical analogy.
By Michael McDonald of Oilprice.com
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Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…