Why Are Utilities Increasingly Announcing New Solar Initiatives?

In the past year, utilities have started to embrace solar as part of their business at an unprecedented rate. The same attributes that make solar a high value distributed generation technology, such as modularity and quick construction time, also make it appealing to utilities that rely largely on centralized generation.

A large photovoltaic power plant can be built in segments as customer demand increases, seldom taking more than one year from conception to project completion. In comparison, a traditional coal, oil or nuclear plant can take more than ten years before coming online. Additionally, with other forms of power generation, utilities bear risk associated with long-term customer demand forecasting and increasing construction costs. These risks are reduced with solar projects.

While many solar projects are driven by public policies encouraging or requiring renewable energy development, they are also providing operational and business experience for the next generation of utility involvement. Ultimately, with the growth of utility involvement in solar, the solar industry will benefit from increased economies of scale and the development of previously untapped markets.

Generally speaking, recent utility announcements fall into two primary categories:

Utility development and ownership of solar systems

A good handful of utilities have announced plans for utility-owned photovoltaic systems so far this year. Three major utilities, Southern California Edison (SCE), Duke Energy, and Sempra Energy (San Diego Gas & Electric) have filed regulatory requests to rate-base the development of utility-owned solar generation. SCE's proposed program is the largest, with a request for approval of a 250-megawatt (MW) rooftop program, in which the utility will lease customer roof space for solar generators, but maintain ownership and send the electricity back into the distribution grid (the systems won't affect a customer's bill since they are leasing their roof like a farmer leases his land to a wind turbine operator).

The Duke and Sempra programs are similar in nature. In addition, Florida Power and Light also filed for a 110-MW project using both PV and CSP. Many other utilities around the U.S. are currently exploring utility ownership of solar electric systems and more announcements are expected in the coming months.

Utility power purchase agreements (PPAs) with solar generators

This model is the most common utility business arrangement to date, allowing solar developers to use available tax incentives to build solar projects at the lowest cost possible and then sell the power to an electric utility through a long-term contract. Utilities are motivated to purchase the solar electricity to help fulfill their state's renewable portfolio standard requirements. PG&E, Duke Energy, Florida Power and Light, Sempra, Long Island Power Authority, Sacramento Municipal Utility District (SMUD), and the Florida Municipal Power Authority are all examples of utilities that have announced this year the purchase of solar electricity through PPA arrangements.

PG&E just announced plans to purchase the output of a 550-MW and a 250-MW PV plant - sizes previously unheard of in the photovoltaics arena with the current largest system in the world coming in at 40-MW.

In the case of LIPA, it is following a similar model to Southern California in that the systems are sited on customer locations, feeding straight into the distribution grid, but they are developed by solar companies rather than the utility (as a municipal utility, LIPA can't utilize tax credits).

In the case of SMUD, it is purchasing the power from a 1-MW project but developing a program called SolarShares, where customers can remotely net meter their home, business or apartment, in effect buying a share of the output at a fixed price that offsets their personal bill.

While the two categories listed above encompass the majority of recent utility solar announcements, there are other innovative models emerging as well. For example, the New Jersey Board of Public Utilities has approved a US $105-million loan program by Public Service Electric and Gas for the purpose of developing 30 MW of customer-owned solar, equating to about half of its renewable portfolio standard requirement. This particular program is unique because while utilities have offered financing for customers to invest in energy efficiency technologies for years, PSE&G is the first utility to offer this type of financing on a large-scale for solar technologies.

Capturing the full solar generator value chain will result in even more innovative utility business arrangements. SEPA just completed a Utility Business Models report which was developed though a collaborative process with utilities and the solar industry and has further information on the new approaches to utility scale solar. It can be downloaded here.