U.S. electric utilities are participating in a growing number of solar projects with an expanding variety of utility solar business models (USBM). These USBMs can effectively, and often uniquely, align utility interests with policies favoring solar development. Many examples benefit both utility ratepayers and utility shareholders, while helping to further develop solar markets.
Since early 2010 utility business models have grown from 22 to 65 programs created by regulated utilities nationwide. This growth in USBMs — which can encompass utility solar asset ownership, community solar programs that expand customer participation at reduced costs, and financing for customer and industry projects — is a nod to the value that innovative methods for acquiring solar electricity can bring to the utility bottom line. The upshot: utility industry innovation and creativity that is helping to diversify solar markets and spur new solar capacity additions.
Utilities are initiating business plans that enable them to play a more integral role in the solar value chain. This trend is positively benefiting utility customers, solar industry and public constituents, as well as the utility’s own financial outlook as solar deployments increase. In some cases, utilities are participating in solar market downstream activities by offering financial incentives or low interest loans to customers and third party developers. In others, utilities are partnering with building and land owners to add PV power systems that feed energy back into the grid. Either way, utilities are beginning to identify strategic solar business approaches that both benefit the PV industry and provide solar electricity access to ratepayers. Seen through this lens the most successful USBM:
- Creates a utility role and value proposition in the centralized and/or distributed solar marketplaces;
- Coordinates with current public policy and utility customer preferences; and
- Sustains a utility solar business that captures the full value of solar to support the grid.
To create utility value that will naturally compel expanded solar activity, a USBM must define a strategy for reducing costs, minimizing customer transactions, improving efficiency, expanding customer access, and/or generating profits within the solar value chain. Most of the solar market’s development can historically be attributed to federal and state policies that act as “sticks” for a utility’s business, and in some cases have lead to reduced utility revenue or higher costs. In contrast, USBMs are intended to create “carrots” for utilities that accelerate solar markets in ways that can achieve sector and economy-wide efficiencies.
For example, traditional net metering and photovoltaic rebate programs, so-called “stick” measures, typically do not offer any compelling utility business proposition. Utilities simply present an incentive whose cost is passed through to ratepayers and whose net-present value is most likely higher than associated avoided costs. For investor-owned utilities (IOUs), this type of program does not benefit shareholders. Several EPRI and SEPA studies have examined the life-cycle benefits of solar, including avoided costs, renewable energy credits, environmental externalities, capacity, and other tangential benefits, which may bring the incentive costs and benefits closer together, in theory. However, in practical application, utilities have trouble effectively quantifying, monetizing and capturing these additional values in actual business operations. Though rebates and net metering are important solar market policy instruments, they offer little in the way of utility value as business models.
However, innovative incentive programs can be fashioned to provide the kind of utility value that is a core part of our USBM definition. To wit: If an IOU were allowed to treat all or part of its rebate expenditure as if it were a capital asset, it would be able to earn a rate-of-return for its shareholders. This business model “carrot” would consequently incentivize solar market development. (Note: A state commission would need to weigh this new utility compensation with the costs and benefits to utility ratepayers and the social benefits of expanded solar market activity as they align with energy policy goals. The bar to show benefit is usually set relatively high. As a result, few rebate programs are structured in this unique way to date.)
Gainesville Regional Utilities (GRU), a municipal utility in Florida, has found business value in designing a feed-in tariff (FIT) program as an alternative to its rebate program. Consequently, GRU has realized the following benefits: installed solar systems that are no longer net-metered (which disassociates them from revenue loss issues), rebate expenditures that are amortized over a five or ten year period (instead of up-front), payment for actual performance (clear benefit calculations and reduced investment risk), and a clear contractual understanding for purchasing the solar generation and accompanying renewable energy credits (versus ambiguity that exists in many states).
Ownership of utility PV assets — an approach that Southern California Edison, Duke Energy and Arizona Public Service, among others, have pursued — is perhaps the clearest example of a USBM. For IOUs, the regulated rate of return generated through capital investment is a conventional means for earning shareholder profit. However, for these regulated utilities to recover the cost of owning solar assets, they need approval from their respective state utility commissions. They must demonstrate that utility ownership has a compelling benefit for ratepayers compared to private-sector ownership, such as lower price, expanded market activity and risk mitigation.
In contrast, purchasing the solar electricity from a third party through a power purchase agreement (PPA) — the predominant manner in which utilities acquire solar electricity — involves only recovering the costs of the purchase from ratepayers, and offers little inherent utility value (except perhaps for RPS compliance). State and federal energy policies may still compel utilities to sign PPAs, but the utility value is missing. Creating a business model proposition for a PPA, such as treating the expenditures (or portions) the same as a physical capital asset, could have positive social benefits, such as market acceleration or mitigating PPA debt costs.
For municipal utilities and cooperative electric utilities that are not driven by profit earning and that cannot generally take advantage of various federal tax incentives available to IOUs there is potential value in creating solar programs that expand customer participation at reduced cost. Interestingly, these programs, represented by Sacramento Municipal Utility District’s Solar Shares Program or Orlando Utility Commission’s Share the Sun, are often, but not always, developed through PPA contracts.
Ultimately, each utility must assess its context-specific company, regulatory, and policy frameworks to determine its optimal solar business model strategy. Innovative business approaches can serve utility business interests and at the same time motivate utilities to accelerate renewable energy deployments.