Utilities Strike Back! Bad rates for solar, good rates for “aircon”

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Utilities Strike Back!

Gareth Weeks, stock.xchng

Australia continues to show the U.S. what the future looks like when you price incorrectly.

In case you have not been following Australia, here is a thumbnail of the situation that makes utilities strike back. Back in the mid-2000s, air conditioning (“aircon” to Aussies) took off. In response, utilities built lots of new transmission and baseload power plants to meet a significant increase in peak demand that occurred in a very small number of hours each year.

Retail prices soared to over 30¢/kWh. Price structures did not change, so people without air conditioning subsidize those with aircon by about $330/year. They instituted retail competition that created artificial profits for retailers, so now people pay an extra $138/year for the privilege of retail competition that does nothing to lower their rates.

Then solar became much cheaper. People started installing it on their roofs to avoid the 30¢/kWh retail prices even though there is no net metering. Instead, the utilities/retailers only pay 6¢/kWh for any excess power they receive from households with solar panels.

Now the utilities want to change their price structures for solar customers to recoup the $30/year in costs they say solar households avoid. No  changes for the retailer subsidy, though. No changes for the aircon subsidy either. People are incensed.

Does the ESAA suggest that air conditioning households should be hit with higher fixed tariffs to pay for network extensions? No, of course not, because the increased use of air conditioners adds to the revenue pool of the electricity industry, and they want to get a return on their grid investment.

The use of solar, however, detracts from the incumbents because rooftop solar households draw less electricity from the grid – leading to the now well documented “death spiral.”

The ESAA wants to arrest this spiral by lifting fixed charges or introducing tariffs for solar households to maintain the revenue pool and protect its business model. This has already begun in several states, and to make itself look like an innocent bystander, the industry has brought the violins to play a song of woe on behalf of the least well off. But this is not about protecting less wealthy households, it is about protecting the business model of the utilities.

What seems inevitable however is that the industry will one day soon need to change its business model of face the same decline as fixed priced telephony or printed photos. They are fast approaching their Kodak moment. (emphasis added) Utilities want higher charges to shade business model from solar : Renew Economy.

This is exactly what Idaho Power tried to do recently. It is similar to what Hawaii Electric tried to do to forestall solar. The comments on the Renew Economy article were very knowledgeable and can be summarized pretty succinctly: charge prices that reflect how costs are incurred and make every customer subject to them.

The problem for the utilities is that they have no concept of pricing or customer service or listening to customers to retain customers and sales. They have been monopolies and have not had to deal with these issues to make money. Now they do and they are woefully equipped, tone deaf,  ham-handed, and pig-headed.

The future is being written on the walls of Australia for our utilities to see, but they do not want to look. They are worried about the next quarter, about investing more capital to raise prices to increase profits, completely unaware or uninterested that they now must compete at the point of use on price, service, and customer relationship. Long term equity and debt investors should be concerned, as an EEI report states, but instead we continue to roll toward a coming train wreck.

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EEI Highlights Coming Retail Electric Disruption

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EEI Electric Disruption CoverThe Edison Electric Institute (EEI) recently published a report titled “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business”. Peter Kind, Executive Director of Energy Infrastructure Advocates (an investor lead initiative to educate and advocate public policy that is supportive of infrastructure development) and Senior Advisor to Macquarie Capital’s U.S. Utilities and Power industry group authored the report. In it, Mr. Kind predicts dire consequences for retail utilities and their investors from “distributed energy resources” (DER) and demand-side management (DSM).

Mr. Kind sounds the alarm from, predominantly, the utility’s point of view, drawing on investor behavior. His analysis of the likely outcomes matches what I have been writing, as do many of his recommendations. Perhaps his focus on the financial aspect will light a fire under utility CFOs to do something.

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NRG & Duke Confirm Rooftop Solar Disruption. Their Plan?

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Photograph: Iconica

In an interesting interview with Bloomberg, NRG President David Crane finally has put his company’s actions behind his thinking. They have the NRG Residential Solar Solutions unit. Mr. Crane obviously wants to grow that and add more than solar.

“Crane wants to provide customers with fuel cells and microturbines, which produce electricity from gas. “The individual homeowner should be able to tie a machine to their natural gas line and tie that with solar on the roof and suddenly they can say to the transmission-distribution company, ‘Disconnect that line.’ ” Crane said.”

I do note that Crane has a problem. “NRG, which acquired GenOn Energy Inc. for $2.2 billion in December and Texas Genco for $5.8 billion in 2006, has stakes in 94 power plants, with all except about 1.5 percent of the generating capacity driven by fossil fuels.” If solar is as successful as Crane thinks, he will be losing money on those investments.

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Duke, too, recognizes the problem. Continue reading

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Is Your Head Still In The Sand? Big-Bang Disruption In The Electric Industry

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Solar+Battery+Transmission=Disruption HorizontalFinancial firms, news firms, industry CEOs, real world experience, even bloggers have identified the coming sea-change to the electric industry. A new paper from Harvard says disruption now happens at warp speed. Why aren’t you doing something about it?

Very recently, many financial and news firms have written about the coming electric industry disruption that will be caused by onsite solar, including Deutsche BankUBSMacquarie Group, and Reuters.

We have real world experience of disruption from onsite solar in GermanyAustralia, and Hawaii.

Leaders of two large electric conglomerates (David Crane, NRG and Jim Rogers, Duke Energy) have publicly talked about the coming disruption to the industry, although they seem unable to get their company’s cultures on board.

I have previously written about corporate responses to disruption, referencing a Harvard Business Review article about newspapers and asking how much their dilemma sounded like what was going on with electric utilities and other electric industry participants (Clay Christensen, newspapers and the cliff of despair).

I have also written about the coming disruptive effect of onsite solar on the electric industry paradigm and on distribution utilities, and about what they need to do.

Now we have a new paper by Larry Downes and Paul F. Nunes in the March 2013 Harvard Business Review. After many years of analysis and study, they think the pace of disruption has changed and that the old playbook for incumbents will no longer work.

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SolarCity Winning Competition With Utilities For Customers

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Competition For Existing Utilities – It Is All About Price

A lot of people think of SolarCity as a solar company. According to their CEO, Lyndon Rive, that is a mistake. They are not a financing company, either, although many have called them that because they finance the installation of solar panels with no money down. They are, instead, an energy company, and one that has big plans to compete for the customer electricity dollar.

In an interview with Fortune Magazine, Mr. Rive talked about what SolarCity is trying to do and how. His statements in the interview indicate how focused the company is on (1) clean energy, (2) competing with electric utilities for customers, and (3) the huge potential for solar growth in the U.S.

Electric utilities need to gear up for competition at the point of use. They need to look at their prices and determine when they will be subject to retail competition from solar. They need to figure out the best ways to meet that competitive threat. Time is very short; the utilities need to act now.

Lyndon Rive on the type of company SolarCity is:
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German Rooftop Solar Juggernaut Is “Unstoppable”

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Giles Parkinson is a keen, if perhaps partisan, observer of the energy and climate change world, especially with regard to Australia. (Australia is, in many ways, the canary in the coal mine for the United States.) He receives copies of research reports from leading companies all over the world. He recently used a research report by Macquarie for a blog post: Macquarie says rooftop solar juggernaut is unstoppable. This report focuses on rooftop solar in Germany, but the implications translate to much of the developed world.

According to the Macquarie report, as reported by Mr. Parkinson, the two key drivers of the cost-effectiveness of rooftop solar in Germany are the drop in solar costs and the rise in retail prices.

“Macquarie notes that wholesale prices in Germany have fallen 29 per cent over the last five years, while retail prices have risen 31 per cent – both movements at least partly due to the impact of renewables. But those movements pale in comparison with the dramatic fall in the cost of rooftop solar PV.”

We know all the reasons solar costs have fallen and continue fall. Wholesale prices have dropped in Germany predominantly because of a huge increase in renewable capacity that has essentially zero variable costs (wind and solar). This capacity has been added to the bottom of the dispatch stack, effectively squeezing out higher variable cost units that set the wholesale market price as well as removing all surplus pricing capability from the suppliers.

But the real driver is the increase in retail prices, which now makes self-consumed solar power cost-effective with grid-supplied retail energy, i.e., grid parity. How did that happen?

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The economics have changed, new baseload power is likely dead

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Centrica’s withdrawal from the Hinkley and Sizewell projects will damage government’s nuclear ambitions. Image credit: Topato

Centrica has announced that it will not be going ahead with the construction of new nuclear power stations at Hinkley Point and Sizewell.

Via Centrica pulls out of UK new-build nuclear | Solar Power Portal.

Centrica is one of the largest energy companies in the U.K. They decided to pull out of the proposed nuclear power stations at Hinkley Point and Sizewell based on the economics: “Since our initial investment, the anticipated project costs in new nuclear have increased and the construction timetable has extended by a number of years.”

Time is money, and increasing the length of time until commercial operation means a lot more money. Perhaps more importantly, though, is the advent of retail competition, distributed generation, and alternatives that can be built more quickly.

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In the past when utilities had captive customers, Continue reading

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The Death of Load Response – By Solar, On The Roof, With The Battery

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What is load response and why is solar (with the battery) going to kill it?

Load response (LR, often also called demand response (DR) means that customers use less electricity at specified times and get paid for the electricity they did not consume. Originally, this meant classic DR, the reduction in usage by customers when there is a likelihood of insufficient supply to meet demand, typically during the peak hours of the year. Most wholesale markets pay DR program participants based on market capacity rates and the amount of capacity the participants supply during peak hours. Classic DR primarily targets capacity.

Relatively recently, people in the electric industry increasingly define LR to include both classic DR, and, more broadly, reductions in usage that address energy and ancillaries (see Constellation Load Response). PJM states:

PJM’s Economic Load Response program enables demand resources to voluntarily respond to PJM locational marginal prices (LMP) by reducing consumption and receiving a payment for the reduction. Using the day-ahead alternative, qualified market participants may offer to reduce the load they draw from the PJM system in advance of real-time operations and receive payments based on day-ahead LMP for the reductions. PJM Economic Load Response Description

LR has become big business. Many companies work with customers to enable them to participate in LR,either as their primary business (EnerNOC) or as a significant portion of business (Constellation, Direct Energy, Hess Energy). In turn, many customers can make a significant amount of money from participating in LR. So, both companies and customers have a vested interest in LR.

But,without high capacity market prices and a relatively small number of hours of supply demand imbalance, classic DR will become economically unattractive to customers. And  without spikes in spot prices, economic load response in  reaction to market prices will also become economically unattractive. So how will solar, on the roof, with the battery do this?

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For the U.S. Electricity Future, Look To Australia

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In many ways, Australia is similar to the U.S. It has abundant natural resources, an individualistic bent, large resource corporations that exert considerable market and political power, a schism between bedrock conservatives and bedrock liberals, and a free market mentality. Two differences, though, are high electricity prices and a lot of sun.

How high are the electricity prices? A residential customer’s marginal price ranges from 30 cents USD to 50 cents USD. There are two main drivers of these costs. First, extremely high peak demand and peak prices (some estimate generators get 30% of their revenues from 30 hours in the year (The world’s electricity business models are broken. What’s next?)). Second, extremely expensive additions to transmission and distribution investments driven by super peaks from air conditioning. Though the super peaks represent only a small proportion of hours, the electric industry chose to invest in transmission and distribution instead of some more cost-effective approach (see Air conditioning is peaking out, time to rethink cool comfort.)

Because Australia has so much sun, and such high prices, rooftop solar has been taking off, much to the chagrin of the utilities. The utilities’ efforts to deal with the explosion of rooftop solar have been, generally, public relations disasters. They seek to stop their customers (not ratepayers!) from doing things that are in their own economic self-interest. Naturally, customers see this as a transparent power-play for the utilities to continue to enrich themselves at their customers’ expense. And when the customers are the voters, this is not a wise approach. See How solar PV is turning utilities against consumersUtilities say no to gross tariffs, yes to battery storage; Is the solar industry being blindsided by utilities?

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Disruption On All Sides – What Is A Utility To Do?

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Utilities and generators face lower sales, lower prices, lower profits, disruption on all sides. What is a utility to do? It must identify and defend existing advantages and become a disruptor itself where there is no defense.

Technological change and regulatory requirements besiege utilities and independent generators today as never before. New means of delivering what customers want appear daily. Regulators increase demands to implement social programs, not always recognizing the full implications. Utilities struggle with a business organization designed for another time. Generators watch as lower demand leads to excess supply, leads to cratering prices, leads to capital destruction.

Most of utility / generator money is in assets, power plants and distribution. There is a huge incentive to protect their interests, to keep doing what they already know how to do. This means keeping the central station / distribution paradigm.

But the advent of new, distributed technologies eats away. Energy efficiency is already cost-effective, solar on rooftops increasingly so. Energy efficiency lowers sales. Solar on rooftops lowers sales. Lower sales mean lower prices and profits for generators without rate base regulation, lower profits for generators with rate base regulation, and lower sales and profits for all utilities.

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Lower sales, lower prices, lower profits, disruption on all sides. What is a utility to do?

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Energy Efficiency and Distributed Generation Reduce the Need for Urgent New Transmission in Germany

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This is a follow up to my post Just The Beginning Of The Awakening To Disruption From Alternative Energy. It turns out that last month Germany drastically reduced its forecast for grid expansion.

In my original post I talked about how a consultant told the NARUC conference “that cost alone will drive the power industry toward “non-transmission alternatives” (NTAs).” (NTAs include all forms of distributed generation plus energy efficiency.) Quite simply, energy efficiency, solar, combined heat and power (CHP), and load response will make additional new transmission unnecessary. Now that has occurred in Germany.

The Network Agency in Germany had projected an urgent need for 74 new power lines spanning 3,800 km. Now it thinks the urgent need is only for 51 lines of 2,800 km. Though not explicitly stated, it could be that the slowing in the development of offshore wind reduced the urgency of the lines necessary to carry the power from north to south.

One key result is that “two of the main cost drivers in the energy transition have been reduced considerably: offshore wind and grid expansion.” With the continued, electrifying growth of solar power in Germany, I expect urgent transmission need to further decline.

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Texas PUC Does the Right Thing, Relies on Markets and Innovation

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On October 25, 2012, the Texas Public Utilities Commission (PUC) decided to rely on market prices to provide adequate capacity instead of creating a capacity market to reward central station power plants, opening the front door for customer participation in the market through load response, energy efficiency, and solar. 

What Happened

On October 25, 2012 the Texas PUC decided to rely on market energy prices to provide adequate price signals to customers and producers with regard to the value of electricity in ERCOT. The Texas PUC voted to allow price caps to increase to $9000/MWh by 2015 from the current maximum of $4500/MWh. For reference, the average daily market price in ERCOT typically is $25-30/MWh and the average daily peak price typically is $40-50/MWh.

Texas faces a potential shortage of electric generating capacity, which could cause brownouts or rotating blackouts in two or three years. The Brattle Group presented three alternatives: 1) keep the current energy-only marketplace, 2) keep the current energy-only marketplace but add administrative programs to encourage demand response to help ensure adequate generating capacity, or 3) create a capacity market, similar to PJM, to pay central station power plants for existing and being able to generate power if needed.

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The Brattle Group’s evaluation all but recommended door number 3; the Texas PUC chose Continue reading

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Just The Beginning Of The Awakening To Disruption From Alternative Energy

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Non-Transmission Alternatives (Distributed Generation, Energy Efficiency) Take Spotlight At NARUC Conference

A consultant from Synapse Energy Economics, Doug Hurley, tells the National Association of Regulatory Utility Commissioners (NARUC) “that cost alone will drive the power industry toward “non-transmission alternatives” (NTAs).” NTAs include all forms of distributed generation plus energy efficiency. The FERC Chairman and state commissioners recognize regulatory rules do not give economically correct signals, and instead favor the existing paradigm.

That’s getting pushback from traditional transmission suppliers who see themselves left providing the backup power for consumers who expect to pay little each month but be able to turn to the grid on the hottest summer days or during blizzards.

Speakers said major transmission providers are already asking state regulators to require users with larger on-site generation capacity to pay grid stand-by charges. They also worry large new investment in transmission lines may end up being stranded as more areas find ways to meet their electric needs with NTAs.

Quick Thoughts:

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Clay Christensen, newspapers and the cliff of despair

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I feel a sense of foreboding with our current electric industry structure.  There is the increased spending on transmission, distribution, and smart grid.  There are huge amounts of development money being spent on technology that could make these very investments uneconomic.

Are we careening toward the cliff of despair?  If you work for a big, leading company, whether it is a utility, generator, wholesaler, or retailer, do any of the descriptions of newspaper incumbents, below, look familiar?  Or are you confident in the future?

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