Solar power doesn’t threaten electric utilities.

Why Solar Power Doesn’t Threaten Electric Utilities

Why Solar Power Doesn’t Threaten Electric Utilities

The citizen’s guide to the future.
March 4 2016 9:30 AM
FROM SLATE, NEW AMERICA, AND ASU

Why Solar Power Doesn’t Threaten Electric Utilities

Some claim that huge swaths of people can install panels on their roofs and unplug from the grid. They’re wrong. 

solar panels.
A house with solar panels on its roof.

AndreasWeber/Thinkstock

Everybody loves to hate electricity utilities. To many, they represent all of the evils (real and perceived) of the electricity industry: inefficiency, excessive and incomprehensible billing, and a conspiratorial resistance to new technologies. So it is no surprise that recent legal disputes over residential solar power have been framed as an attempt by utilities to suppress an emerging competitor. Entities as varied as Morgan Stanley and the Rocky Mountain Institute have been saying that utilities are doomed because battery technology will soon allow people to create their own electricity from solar panels, store it with batteries, and allow them to unplug completely from the grid that currently holds them hostage. But this narrative is incorrect and misleading—and worse, leads us down a risky path.

Customers aren’t going to take their solar (plus batteries) off-grid any time soon because doing so is very expensive, and current subsidies cannot scale up. If customers stay connected to the grid, anything they can do with solar and storage can be done at lower cost and more effectively by the utility. Finally, even if it did come to pass, mass defection from the grid is inefficient—a waste of resources that should be put to better use.

Advertisement

Before I get into the details, let me explain a few important and commonly misunderstood things about how electricity distribution companies operate. Almost two-thirds of Americans live in areas where the electricity industry has been deregulated. And any discussion on residential solar needs to acknowledge two facts: Distribution utilities usually do not own any electricity generation, and they are guaranteed (by law) to make a profit.

In deregulated areas, the electricity distribution company (the one that connects power to your house and sends you a monthly bill) doesn’t own or operate any electricity generation, nor does it make money from generation. Its business model is entirely built around maintaining your connection to neighbors and the greater electricity grid. In some states, the distribution company goes out and buys power on your behalf at the lowest price available, simply passing the cost through to consumers. In others, such as my home state of New York, you have the option to choose your electricity supplier. (For example, I pay a bit extra to get 100 percent wind power.) But in either case, the utility doesn’t care where you get your electricity and has little interest in supporting old generation technologies or blocking new ones. So there is no conspiracy behind the fact that customers can’t rent or buy solar panels from their utility company and must instead look to small third-party installers. The simple explanation is that utilities are usually forbidden by law from owning any generation, including solar panels on your roof.

Regulated distribution utilities are also guaranteed to make a return on investment—that is part of their deal with state regulators. If the utility makes less money distributing electricity because of rooftop solar, it is allowed to make the money back on fixed connection charges or by raising electricity prices for other customers. The main issue utilities have with heavily favorable policies for rooftop solar (like net metering, which lets you sell your excess power back to the utility at the residential electricity rate) is that these policies usually force them to charge more to nonsolar customers, in what is known in economics as a cross-subsidy. The utility makes its money back, but this structure is a bit unfair and unsustainable. Thus, while mass adoption of residential solar could threaten grid-level generation and transmission companies, it doesn’t endanger the distribution utility business model unless customers are disconnecting from the grid in large numbers.

Residential solar is not cheap, and adding storage further increases those costs. Solar panels have been getting cheaper every year but are still the most expensive generation technology we have—more than the cost of wind, coal, natural gas, or nuclear. However, solar has become popular partly because it makes sense at residential scale, competing with residential electricity rates rather than wholesale rates. In the United States, state and federal subsidies pay for about half of the capital costs of residential solar, depending on the state. This hefty subsidy plus the availability of programs like net metering make residential solar a good investment in many parts of the United States. But subsidies don’t come from a magic money hole—they are real costs that are rolled into our tax and utility bills. And the solar subsidy is so large—$5,000 to $15,000 per home—that it can’t realistically be scaled up to any significant share of homes. Rather, it is being phased out over the next five years. Which means that installed costs of solar will have to drop about 30 percent in the next five years just to maintain the same apparent cost to homeowners.

Advertisement

However, I expect that solar prices will probably fall enough for continued strong growth in residential solar, even with expiring subsidies. Will this growth be a problem for utilities? Probably not. It turns out that Americans like to have reliable electricity, even at night. Which gives customers a choice: Stay connected to the utility or buy enough batteries to disconnect. And the right choice depends on the relative costs of these options. Right now, many states offer customers net metering. By selling your power back to the utility at the residential electricity rate, you are basically using the utility as an infinitely large, 100 percent efficient battery. In some states, there is no additional cost for net metering, but many utilities are requesting or planning additional connection fees that work out to $5–$50 per month. Make no mistake: Net metering is the greatest deal in town, even if you have to pay a high monthly connection fee to cover the costs of service. That is because the alternative—actual batteries—is even more expensive. A few simple framing calculations can explain a lot.

The Energy Information Administration says that the average U.S. home consumes about 11,000 kWh per year (30 kWh per day). If you want to get this electricity from solar, you’ll need a capital investment of about $25,000. If you spread this over 15 years at zero percent interest, it works out to $140/month, but subsidies cover half, and you would end up paying $70/month. That’s pretty good, but batteries are an additional expense. If you want relatively reliable electricity, through cloudy periods and winter months, you’ll need several days of battery storage. At $350 per kWh (the approximate cost of the Tesla Powerwall), five days of storage will cost $52,000, or $430/month if spread over the 10-year life of the battery (still at zero percent interest). If you had pretty reliable sunshine, you could get away with half of that: $215/month just for storage. While the rooftop solar costs you just $70/month, adding enough batteries to go off-grid will quadruple the monthly cost to $285/month for the smaller system. (And note that this calculation unrealistically assumed zero interest and neglected battery losses.).For reference, the average U.S. electricity bill is only $115/month. Thus, even if the utility charges me $50/month for net metering of my solar generation, this is still a bargain compared to the battery alternative.

But solar and batteries will get cheaper over time—won’t that change the situation? Not really. While we should expect the cost of both solar and batteries to decrease, to be competitive with average utility prices, both unsubsidized solar installation costs and battery costs need to drop more than 50 percent. That’s possible, but tough. And while I wouldn’t be surprised to see the price of solar panels fall 50 percent in the next decade, bringing down the installed cost is much harder because it involves lots things besides the panels themselves. More than half of the price tag of installed solar is due to these “balance of system” costs, which include lots of things that are harder to price compress: mounting hardware, wires, inverters, and paying some person to climb on your roof to install everything. 

Let’s assume that this happens, though. Solar and batteries become cheap enough to compete directly with utility prices. Even this is unlikely to cause a mass customer exodus because those low-cost solar and battery technologies will also be available to utilities, which have superior technical know-how, can balance supply/demand across customers, and can borrow money at lower interest rates. (Banks love utilities because they are guaranteed a return on investment.) In other words, anything that you can buy/operate on your own can be done more effectively and at lower cost by the utility. If distributed storage makes financial sense for customers, the utility should be able to sell it to you as a service at lower cost. In fact, this is already being done by some more progressive utilities. Of course, utilities could decide not to adopt new cost-effective technology (like distributed storage), but they have the right of first refusal and, maybe more importantly, would have to defend their decisions to public utility commissions around the country.

Advertisement

Even after all this explanation, maybe there is still a part of you that just wants to watch utilities burn. I wouldn’t blame you—utilities are not known for their high customer satisfaction. But it would be an expensive and inefficient outcome for society. Distributed resources, like solar and batteries, are a lot more effective when tied together over local areas. If your rooftop solar is connected to the grid, your excess energy can power your neighbors (and vice versa), essentially balancing generation and load over a local area and reducing the total need for both solar panels and storage. The Electric Power Research Institute calculated the relative costs and estimates that off-grid solar costs four to eight times as much as grid-tied solar. While I think that estimate is a bit high (note that EPRI is a nonprofit funded primarily by electric utilities), the point stands that going off-grid is an inefficient use of resources.* A war between utilities and solar/storage would just end up wasting money that could be put to better use (for more renewables, better energy efficiency, or just video games and beer). If we find that residential generation and distributed storage are the preferred solutions to our energy and climate goals, we should work to ensure that the utility business model adapts and evolves to integrate these technologies rather than cheering for a battle between old and new.

This article is part of Future Tense, a collaboration among Arizona State University, New America, and Slate. Future Tense explores the ways emerging technologies affect society, policy, and culture. To read more, follow us on Twitter and sign up for our weekly newsletter.

*Correction, March 4, 2016: This piece originally misstated that the Electric Power Research Institute works for the utility industry. It is a nonprofit funded primarily by electric utilities. (Return.)