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Electric Utilities Warm to Solar

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November 13, 2014
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Investing Daily Article of the Week

by David Dittman, Australian Edge

The question of whether distributed generation, including the installation by households and businesses of rooftop photovoltaic solar power systems, represents a threat or an opportunity for traditional power providers was addressed by the Edison Electric Institute, the association that represents all US investor-owned electric utilities, in January 2013 white paper.

That study, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, described rooftop solar as a “disruptive challenge” that could squeeze revenue and profits as households and businesses defected, leaving companies forced to maintain grids that serve all customers.

The potential threat is growing.

According to recent research out of Deutsche Bank AG (Germany: DBK, NYSE: DB), declining system costs, customer acquisition costs, financing costs and rising volumes will drive scale benefits sufficient to pull rooftop photovoltaic (PV) solar power to “grid parity” in 50 US states by 2016, up from 10 states right now.

This significant milestone-the term “grid parity” describes the point in time at which an alternative energy source generates electricity for the same cost as the electricity available on a traditional utility’s transmission and distribution system-would set the stage for a dramatic increase in the uptake of rooftop solar in the world’s biggest economy.

Deutsche Bank offered this forecast as part of its first report on Vivint Solar Inc (NYSE: VSLR), which debuted on the New York Stock Exchange on Oct. 1, 2014. Vivint, the No. 2 rooftop solar PV installer in the US, is on track to at least double its sales during each of the next two years.

During 2013 approximately 1 gigawatt (GW) of rooftop solar PV capacity was installed in the US. And residential solar grew by 45 percent in the second quarter of 2014 compared to the second quarter of 2013.

But 1 GW is a little more than was installed in Australia, a country with about 7.5 percent of the population of the US.

But the US installation rate could grow six-fold by 2016, a function of government subsidies and declining costs that have allowed startups to underprice utilities.

Some perspective is warranted. Although the amount of capacity has increased rapidly in recent years, according to the US Energy Information Administration (EIA) solar will account for just 0.6 percent of net utility-scale electricity generation in the US in 2015.

And solar powers only half a million US homes and businesses, according to GTM Research.  Solar growth has historically been concentrated in customer-sited distributed generation installations, though utility-scale solar capacity slightly more than doubled in 2013.

The EIA expects that utility-scale solar capacity will approximately double again between the end of 2013 and the end of 2015; about two-thirds of this new capacity is being built in California.

But customer-sited PV capacity growth is expected to exceed utility-scale solar growth between 2013 and 2015.

At the same time, however, utilities are now taking steps down a path that will turn this emerging crisis into an opportunity.

This past summer Arizona emerged as a battleground between electric utilities and solar installation companies, as Pinnacle West Capital Corp (NYSE: PNW) unit Arizona Public Service (APS) announced a plan to spend up to $70 million on systems for about 3,000 homes and Fortis Inc (TSX: FTS, OTC: FRTSF) subsidiary Tucson Electric Power proposed a fixed power rate in exchange for customers putting panels on their rooftops.

These plans first must be approved by the utilities division of the Arizona Corporation Commission.

Edison International (NYSE: EIX) and NRG Energy Inc (NYSE: NRG) have entered the rooftop solar market through unregulated divisions, and many utilities have bought huge solar arrays.
Ownership by regulated utilities of rooftop solar systems isn’t a new idea. But its adoption and implementation is on the verge of accelerating. And solar installation companies are trying to put the brake to it.

If utilities embrace home solar on a large scale, their deep pockets and access to customers could transform what has been a fast-growing but remains a niche industry.

Dominant solar installation companies such as SolarCity Corp (NSDQ: SCTY), the dominant US residential installer with about a third of the market, Sunrun Inc and Verengo Solar are threatened by the possibility regulators will set rates that guarantee profits for utilities, giving them a financial advantage on top of their access to customers.

They also question regulated utilities’ motivation: Is their interest in the broad deployment of rooftop solar or in quashing what could become stiff competition?

Again, some context is key: Solar companies benefit from significant government subsidies. For instance, the state of New York recently agreed to invest $750 million in infrastructure and equipment purchases for a SolarCity solar panel factory.

The Empire State is also considering legislation that would permit regulated utilities to own residential rooftop systems.

Regulated units of National Grid Plc (London: NG/, NYSE: NGG), Fortis, Iberdrola SA (Spain: IBE, OTC: IBDRF, ADR: IBDRY) and Consolidated Edison Inc (NYSE: ED) operating in the state support the idea.

An early draft of the plan released in September 2014 included a provision that utilities must demonstrate why their rooftop solar would be better than the alternatives.

In August 2014 South Carolina passed legislation that allows utilities to offer solar leases but won’t let them recover costs from ratepayers. Companies such as SCANA Corp (NYSE: SCG) and Duke Energy Corp (NYSE: DUK) will have to run such programs through an unregulated division, a condition insisted on by solar installers.

In the state of Washington, a bill that would have given utilities control of the leasing market failed this year. The bill’s author, Representative Jeff Morris, said he expects to introduce a compromise between the solar and power sectors next year.

A compromise between electric utilities and solar installers could push PV into the mainstream, with utilities offering financing while installers do the work of putting panels on rooftops.

Rooftop solar is still just a long-term challenge for investor-owned electric utilities, the “death spiral” described by the EEI in its January 2013 paper: Customers install solar panels on rooftops and generate their own electricity, with only emergency reliance on the grid; increasing migration off the system of generation, transmission and distribution that’s been in place for decades threatens a revenue structure, supported by regulators, and critical infrastructure reinvestment.

But templates for solutions are beginning to emerge.


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