15th April 2015
We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade.
—Barclays, Utilities Credit Strategy Analyst Report, May 2014
In 2014, a chorus of analyses from major financial institutions—including Bank of America, Barclays, Citigroup, Fitch Ratings, Goldman Sachs, Morgan Stanley, and UBS—found that solar-plus-battery systems pose a real and present threat to traditional utility business models.
Many of them directly cited RMI’s report The Economics of Grid Defection, which assessed when and where distributed solar-plus-battery systems could reach economic parity with the electric grid, creating the possibility for defection of utility customers. Their perspectives varied, but all echoed the common theme of increasing challenges for the current utility business model.
However our recently released report, The Economics of Load Defection, shows a much more likely scenario—one that is coming sooner for more customers in more places, with arguably far greater implications than grid defection—the migration of load from central systems to distributed ones, what we call load defection.
The customers don’t leave, but their load does, “defecting” from grid supply to behind-the-meter, grid-connected solar PV and batteries. They thus risk becoming phantom customers.
BANKS SPEAK OUT
This is not the lone voice of RMI. If you want to see where the grid is heading, follow the money. And by that measure, the banks have spoken loudly.
A 2014 report by leading investment bank UBS noted, “Our view is that the ‘we have done it like this for a century’ value chain in developed electricity markets will be turned upside down within the next 10–20 years, driven by solar and batteries.” UBS surmises that less-expensive batteries, solar PV, and electric vehicles will empower customers to make their own energy decisions, and effectively make traditional power plants irrelevant by 2025. HSBC, in its report Energy Storage: Power to the People, suggested that deployment of energy storage will accelerate the utility revenue decay trend already started by rooftop solar. And a Morgan Stanley report stated that, “Over time, many U.S. customers could partially or completely eliminate their usage of the power grid. We see the greatest potential for such disruption in the West, Southwest, and mid-Atlantic.”
Though each bank’s analysis has a different cost projection, market focus, and means of comparison—it is clear they expect solar-plus-storage to present a threat to the traditional utility/customer relationship as we have known it until now.
GRID DEFECTED VS. GRID CONNECTED
From the publication of The Economics of Grid Defection and since, we’ve tried to make clear that the economic cost competitiveness of solar-plus-battery systems does not mean they will be adopted en masse by customers overnight. And there are plenty of reasons why we wouldn’t want that to happen, anyway. Adoption will follow its own curve distinct from the economics.
In fact, as Moody’s in January and The Washington Post in March pointed out earlier this year, defection is not an optimal outcome and may not happen as fast as people think. In those points, we agree. This is why our newest report is so important. It shows that people may stay connected to the grid while more and more of their load is powered by customer-sited renewables.
Compared to the off-grid systems analyzed in The Economics of Grid Defection, optimally sized, grid-connected solar-plus-battery systems can reach economic parity sooner, and across more geographies, with likely faster customer adoption. This will herald a marked shift in the relationship between customers and utilities, and between customers and the grid. But since such systems remain grid connected, they can offer value to that grid, rather than be seen solely as load defection from it.
THE NEED FOR NEW BUSINESS MODELS
For utilities to enable and capitalize on these grid-level benefits from customers with solar-plus-battery systems, they will need to change their business models. Banking institutions have not been shy in taking notice and even making recommendations. Overall, the banks see utilities as helping distributed generators succeed by facilitating a decentralized electricity system. From the view of a financial analyst, the final shape of the grid is less critical than the financial impact of that grid; analysts as a whole see this this future as DER-rich, requiring additional investment, and facing pressure on traditional pricing and revenue.
Financial institutions thus recommend utilities develop a smart grid by partnering with solar, battery, and smart meter providers; maximizing their relationship with customers through full-service tailored services; and taking advantage of the Internet of Things in a smart connected grid.
UBS sees the potential of pairing solar-plus-battery systems (plus EVs) with responsive demand as a perfect fit for a smarter grid of the future, with nightly EV charging smoothing the demand curve. Stationary storage will store excess solar production during the day and release it in the evening. The utility fills any gaps in supply during the night and early morning hours, which coincides with low prices due to excess base load. Utility power could also be used to charge the stationary battery during that time, so the battery is ready to supply the morning peak.
HSBC makes a similar suggestion, recommending that utilities leverage their relationship with customers and existing assets to become full-spectrum service providers via a smart grid. It thinks utilities could market value-added services to customers or provide backup power.
Citigroup agrees, adding that utilities have the option of boosting their asset base by investing in storage. Alongside vehicles and consumer electronics, Citigroup sees utilities taking advantage of storage as a pillar of growth.
Morgan Stanley similarly highlights the greatest value is gained from a utility integrator model, especially in Europe, to offer energy services including finance, design, and installation of solar-plus-storage solutions. Addressing central generators, the recommendation was fairly straightforward—invest in renewables since fossil plants will lose out due to fuel costs.
COMMON THEMES COME TO THE FORE
The analyst community made specific recommendations, but also laid out some common themes that are especially relevant in a grid-connected solar-plus-battery future.
- These technology trends are real, and changes to accommodate them need to start now.
- These technologies can improve grid operations and lower overall costs. In particular, utility-scale solar, distribution-level storage, and other innovations can improve grid function and lower costs.
- The electric industry should prepare for two-way flow. While specific recommendations vary, the utility at some point will need to work with customers who make distributed investments, allow them to share values on the distribution grid, and provide them new services as well.
THE CHOICES AHEAD
The grid of the future may still be coming, but the trends that will likely define it are already here. But what will be the industry’s next move?
Decisions made today can set markets down extremely different paths. One path leads to grid defection as utilities offer pricing structures, business models, and regulatory environments that favor non-exporting solar and solar-plus-battery systems. The other path leads towards an integrated grid in which pricing structures, business models, and regulatory environments appropriately value distributed energy resources such as solar PV and batteries. At this metaphorical fork in the road, utilities have the opportunity to learn from those outside their industry and partner with their customers in a whole new way. Like the financial institutions point out, solar-plus-battery systems are showing more promise than ever, and will play an important role in the electricity system of the future.
The electricity industry can start acting quickly by developing evolved pricing and rate structures, new business models, and new regulatory models. Those changes should make a win-win situation for all. We don’t pretend that all such changes will be quick or easy, but the time to start making them is now.