How Will Utilities Make Money as PV Continues to Grow?

I assume my utility isn’t happy about my PV system — I’m buying less electricity! What happens when 10% of their customers have PV? What about 25%? — Frank G., Zaza, Idaho

Photovoltaics (PV) could very well become the new metaphor for disruptive technological change in the electricity sector, just as personal computers and cell phones were in their respective industries, emerging from within a centralized business model.  Economic PV markets won’t emerge in every state at the same time though.  Solar resources, electricity costs and state policies cause uneven solar adoption making PV market growth very state specific (California, New Jersey and Colorado were the top three states for installed PV in 2008 for example).

However, utilities across the country engage in 10-15 year “integrated resource plans” (IRPs) where they forecast electricity demand and the necessary supplies and most utilities should be planning for moderate to significant PV growth over these time horizons.

There are both technical and financial challenges for utilities related to the large-scale adoption of demand-side PV, i.e. net metering.  Technical challenges include efficiently and safely interconnecting hundreds or thousands of systems per year, capturing new streams of data and integrating it into the billing software, and managing concentrated areas of high penetration where peak production of PV during periods of low consumption might cause grid imbalances.

However, since you are questioning what happens on the financial side of these challenges (if more people purchase less electricity), I’ll focus my answer on that aspect of the utility business model.

First, you should know that electricity consumption already fluctuates both up and down because of weather, energy efficiency measures that consumers take, new products that consume more electricity, population growth or decline, the local economy and more.  For now, utilities cover their costs and generate profits by selling electricity.  If you purchase less, and if this was magnified many times by a larger and larger percentage of customers, the utility would, in current business models, essentially go bankrupt.  While utilities are an easy target for scorn, they do manage a large amount of infrastructure that makes our modern lives possible, including providing electricity to supplement your PV system so we need to recognize that utilities are not going away.  However, they may need to evolve.

For now, there are a variety of methods that utilities can use to manage the fiscal impacts of net metering, some of which also apply to other factors that affect consumption.

  • Net Metering Limitations – Utilities or regulators can limit the size of any one PV installation and/or the aggregate of PV systems in a utility’s territory.  This is quite common in states but results in widely uneven conditions for PV market development and runs a bit counter to the energy democratization movement that these new technologies represent.
  • Increase Fixed Charges – The utility could increase the monthly fixed charge, the monthly fee consumers pay regardless of consumption levels to recover fixed costs and lower the amount consumers pay for each unit of electricity.  Doing this wouldn’t encourage the efficient use of electricity, however, something that more and more utilities are being mandated to encourage customers to do.
  • Fuel Clause Adjustments – Utilities can calculate or estimate how much revenue they are losing and then ask regulators to reimburse them, which they do already for many other programs.
  • Decoupling – There is a new policy called decoupling, which financially reimburses utilities based on a metric other than electricity consumption, such as the number of customers, making the utility neutral to how much electricity is actually sold.  Decoupling is being discussed in many states and at the federal level.

It is important to know that all of these options (and others not listed) are either short- to medium-term patches but are ultimately incomplete if you envision an electricity world 25 years from now where a large number of homes or businesses could operate as small power plants.  That will require a reevaluation of the utility business model and the management of the grid infrastructure.  To be sure, we are on the cusp of this potential revolution, which has been long discussed, but predicting the rate of change is a fickle thing…

For more on this topic, take a look at SEPA’s recently released PDF report, Decoupling Utility Profits from Sales: Issues for the Photovoltaic Industry, which you can download here.

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Mike Taylor is currently the Principal of Knowledge at the Smart Electric Power Alliance (formerly the Solar Electric Power Association), having previously served as the Director of Research, Director of Research & Education, and Technical Services Manager. While at SEPA, Mike has published dozens of reports, hosted dozens of webinars and conference sessions, successfully applied for and managed several U.S. DOE grants, and has extensive contacts and experience within the solar industry.

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