As the cost of distributed solar, like rooftop solar, continues to become cheaper for home and business owners, utilities are getting worried that distributed solar will hurt their bottom line. Sunrun CEO Ed Fenster says that to thrive, these utilities should take a page from telecom companies, which changed their business model from entrenched monopolies to savvy retailers as the cellphone revolution took over.
Currently in many parts of the U.S., utilities are regulated entities with guaranteed returns on investment that are decoupled from the power they’re selling to customers. Those rates of return are often guaranteed at higher rates than they could get from the market and tilt the utilities to large investments, Fenster says. "The ultimate utility project is a transmission project, because they always end up three times over budget and the utility is already guaranteed a 9 or 10 percent rate of return on the whole cost piece and then of course, there are no unpredictable ongoing costs operating transmission.”
Easy access to distributed solar, through net-metering and low or no up-front cost offerings like Sunrun’s third-party financing options, is challenging the utilities’ operating model. After all, when more people are generating their own power and putting the extra power generated back into the local grid, the need for more large transmission projects is obviated.
“Utilities are in a very bad place organically to do distributed solar in the traditional context like rooftop solar,” Fenster explains. “The reason for that is that the real confidence you need to do rooftop solar is in sales and marketing and utilities are monopolies and never had to sell in the market. ...It's very difficult to get into a competitive business where they need to actually sell.”
They may have to start adapting to the changing market however. For instance, Maui Electric Co. (MECO) in Hawaii, recently had their guaranteed return on investment snipped down to 9 percent from 10 percent. “What just happened in Hawaii is that the regulator there said to MECO: ‘You don't have satisfied customers, you don't have a plan to integrate distributed generation, you keep showing up here for handouts and we don't like it’,” Fenster says. “It was a message from a regulator that said it you're not willing to learn and deal with distributed generation, then we're going to take it out of your pocketbook.”
In New Jersey, Public Service Electric and Gas Co.’s (PSE&G) solar plans were changed by regulators to incorporate more distributed solar than they originally wanted to support. Even after that, the state’s Office of Rate Counsel advised against approving the plan because of the high guaranteed rate of return PSE&G wanted. Ultimately, however, the proposal was approved.
As more regulators see the value of distributed solar, this trend is likely to grow. Fenster likens it to the telecom revolution. “The question of whether or not [utilities] thrive is going to be whether or not they adopt their business models to do other things, like distribute solar or telecom or any other sort of thing that they might do,” he says. “The telecom companies went through this transition in the year 2000 and some folks who were in landlines got into cell phones and some people got into cable television or broadband internet. [Utilities] are going to have to innovate. But that's the nature of the United States economy. It turns out that at least once every hundred years you have to innovate to stay alive.”
For utilities, the challenge is that many of them "don't have don't have the competence," Fenster said, due to the customer acquisition competencies that are required, "which a good deal of them don't have."
Prior to the telecom revolution, most telephone companies didn’t have the competencies either. But as cell phones became cheaper and more prevalent, they had to start competing for customers, according to Fenster. “They developed it ... Verizon was a Bell company, it was a monopoly. It didn't know how to originate a customer. Clearly they solved that problem. But that was something that they had to do first.”
To maintain the movement toward more distributed solar, utility participation is not required. “All that's necessary to encourage distributed solar right now is a policy we've had in 43 states, which is net-metering. With net metering anybody can install solar,” Fenster believes. “The challenges utilities are seeing in Arizona and California is that distributed solar works without any of their subsidies and has a clear path in many cases to working in 2017 with only a 10 percent tax credit and they're no longer viewing solar as this kind of temporary nuisance to put up with for a few years, but the new reality,” he says.
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