Utilities and Grid Defection Problems

Defections happen when economic and political situations make the risk of leaving one system behind for another worthwhile: Think East Germany to Western Europe during the Cold War, or Cuba to America in today’s era of baseball.

So what’s it going to take for utility customers to leave the centralized grid, the only power delivery system they’ve ever known, and go off grid for a future where they must generate their own electricity?

If the Rocky Mountain Institute (RMI) is right, it’s the combination of distributed small-scale solar photovoltaics (PV) and energy storage systems – and the tipping point for grid defection may come as soon as ten years, leaving little time for utilities to reinvent their business models.

Grid Defection Projection

Source: Rocky Mountain Institute, Economics of Grid Defection

Grid Defections > Revenue Decay > Utility Death Spiral?

In The Economics of Grid Defection, RMI theorizes the falling costs of distributed electricity generation combine with rising availability of battery-based energy storage systems to create a “utility in a box” empowering customer grid defections.

The moment when installation costs meet the price of utility service to achieve grid parity for each customer is key. RMI analyzed anticipated electricity price increases for five regions of the U.S. – California, Hawaii, Kentucky, New York State, and Texas – finding grid parity in Hawaii and looming for millions of residential and commercial customers in New York and California within this decade.

Utilities rely upon a set number of customers paying a fluctuating price to maintain existing power plants and transmission infrastructure, earn enough to invest in future capacity, and turn a profit while maintaining reliability, making grid defection a potential “utility death spiral” accelerant.

RMI expects utility revenue decay will slowly begin as customer subsets start defecting before the overall defection tipping point due to specific factors like favorable individual economics, improved reliability in an age of extreme weather, or a desire for zero-carbon electricity.

Those inputs mean fewer and fewer customers, and thus less ability to recoup infrastructure investments based on kilowatt-hour (kWh) sales through the traditional cost recovery model. With each defecting customer, costs rise for remaining customers, speeding the march toward grid parity.

commercial timeline

Source: Rocky Mountain Institute, Economics of Grid Defection

Maybe The Point Is Moot

And RMI isn’t alone in their outlook – Morgan Stanley predicts between 240-415 gigawatts (GW) of off-grid distributed solar could come online by 2020. While this scenario is already playing out in Hawaii, where homeowners are going off-grid instead of paying for expensive oil-fired electricity or connecting rooftop solar to utilities that can’t use all their power, America’s not alone.

Germany’s Energiewende has turned entire neighborhoods into net solar producers and the country’s energy storage subsidy generated 4,000 new battery system installations in its first year. In Australia, investment bank UBS forecasts grid defection will be cost-competitive for an average household by 2018. So clearly utilities are speeding toward a cliff, and grid defection will empower individual customers to lead us into a clean energy future, right?

Actually, not so fast – if utilities can evolve, they may make the grid defection threat a moot point while boosting renewables. Peter Rive, co-founder and Chief Technology Officer of SolarCity, arguably America’s most successful third-party solar installers, thinks grid defection could limit solar’s potential to decarbonize our power system.

“While cutting the cord enables one household to be 100% renewable and self-sufficient, it limits what these technologies can do…When batteries are optimized across the grid, they can direct clean solar electricity where and when it is needed most, lowering costs for utilities and all ratepayers. This is true of homeowners’ behind-the-meter storage units, and it’s also true of larger commercial and utility-scale units.”

This very scenario may already be underway in the regions RMI expects to hit grid parity soonest. California’s landmark AB 2514 mandates the state’s three major utilities install 1.3 gigawatts of new grid-connected energy storage by 2020, Hawaii’s primary utility is quietly seeking up to 200 megawatts of new energy storage on Oahu by early 2017, and New York State has a host of incentives and state-funded incubators designed to advance energy storage.

What If Utilities (Gasp) Innovate?

Beyond these states, distributed generation may become an opportunity for utilities, not a death spiral – if they’re willing to change. Ernst & Young acknowledges the threat, saying “blocking the inevitable outcome by penalizing customers who adopt distributed energy generation is futile,” before suggesting utilities “go on the offensive and lead the revolution.”

Ernst & Young concludes energy efficiency, new product and service offerings, two-way communication between customer and utility, full cost recovery of legacy assets, and accurately valuing distributed generation can all help utilities transform today’s grid and survive far into the future.

Even more promising, some utilities are already leading the charge. GreenBiz recently highlighted several major utilities running toward distributed renewables including heavy-hitters like NRG Energy, Berkshire Hathaway, and Pacific Gas & Electric.

These may just be a handful of America’s thousands of utilities, as noted by energy finance analyst Elias Hinckley, but they’re a start, and proof that realizing a problem exists and taking corrective action – no matter how incomprehensible it may be – can prevent mass defections from destabilizing any system while benefiting everyone involved.

“The notion a utility needs to learn and understand customer needs is probably the most powerful element of this whole transition, said Jon Creyts, RMI managing director, in an Energy Gang podcast. “A fundamentally different set of value drivers than simply selling kilowatt-hours are going to be a part of whatever emerging business model utilities can shape and participate in going forward, or they’ll lose their customers.”