ORIGINAL REPORTING: HOW UTILITIES CAN USE SOLAR TO BUILD NEW BUSINESS MODELS
How utilities can use solar to build new business models; A new RMI study offers three building blocks to make solar a grid asset
Herman K. Trabish, April 9, 2015 (Utility Dive)
The solar industry is commonly conceived as a threat to the utility sector, the chief harbinger of the dreaded "death spiral," and a constant industry gadfly. And for how much press utility-solar conflicts get across the nation, you would be forgiven for assuming that the two industries are diametrically opposed to each other.
But it doesn't have to be that way. There are ways for today's utilities to use solar to build bridges to new business models, ones that benefit not only them, but the solar industry and consumers as well.
It begins with re-framing the opportunity: Utilities shouldn’t be asking how distributed photovoltaic solar (DPV) will save them money. They need to define their future needs and see if DPV can cost-effectively meet them.
“Solar can be a grid resource for utilities in the same way that any other asset can,” explained Rocky Mountain Institute (RMI) Electricity Practice Senior Associate James Sherwood. “It will depend on a utility’s characteristics, everything from its demographics and type of load to weather conditions and the effect of solar on peak seasons and peak time of day. It is not a one-size-fits-all profile.”
“Under existing business models, utilities have negatively associated DPV with transaction costs, grid operation challenges, and revenue loss,” according to RMI’s recent report, "Bridges To New Solar Business Models: Opportunities To Increase And Capture The Value Of Distributed Solar Photovoltaics."
Turning that around will require pricing realignment and regulatory model reform, the paper explains. The new value system will make DPV more affordable and accessible It will bridge “customer-centric DPV value” to include its value to the grid and society, and it will allow “the electricity grid’s myriad stakeholders to share in that value.”
While pursuing those ambitious goals, “utilities, solar companies, and regulators can design and implement strategies that provide “a bridge to create and capture value, while also providing best practices and lessons learned to inform broader reform efforts.”
The big question
While debates tend to be about net energy metering and fixed charges, the big question is how to build a sustainable utility business model that accurately values solar, added report co-author and Electricity Practice Manager Mathias Bell.
“The answer is not static," he said. "The utility, the developer and the customer all influence how much value solar provides the electricity system, and the future business models will be built around that value calculation.”
Aligning stakeholder interests will involve:
Maximizing DPV’s delivered value by driving down costs and drawing on its benefits Enabling and incentivizing the capture of solar’s many values by offering win-win-win opportunities to solar companies, utilities, and customers.
New York’s NY REV initiative, California’s AB 327 proceeding, and Hawaii’s multiple regulator-driven proposals are in pursuit of these targets, Bell said. Though some inside the system are “championing these kinds of efforts,” he said, others remain wedded to past ways, and still others “see solar as a threat, but understand that even with a threat they need a strategy to make it into an opportunity.”
Three building blocks
Bridges to the future can be built with three blocks of strategies, according toRMI.
Building Block A is making DPV available to a “much broader customer base, including the large portion of customers for whom on-site solar is not an option.” This could be through community shared solar or utility tariffs for large commercial and industrial customers that install renewables to relieve system load.
Building Block B is optimizing DPV deployment “to capture potential operational value that is currently being missed.” This can be through west-facing solar installations whose output is coincides better with peak loads. It could also be through combining solar with “complementary technologies” like storage or smart thermostats that “provide additional grid services while balancing added costs.”
Building Block C is using DPV as part of a technology package that offers greater value such as “a ‘resilience’ package, which bundles solar with storage and advanced controls” to keep customers’ lights on during power outages.
Already building bridges
Most utilities across the nation haven't yet adopted one of the building blocks, let alone all three. But there are some that are already busy at work building bridges to the new solar business models.
Minnesota electric cooperative Steele Waseca’s pilot community solar program, Sherwood said, “cuts across the three strategies, which is how the new business model works.”
It is Block A because it is a community solar installation so “it expands access to solar.”
It is Block C because it combines its DPV offer with the offer of an electric water heater that can serve as “a form of storage and demand response.” And it is Block B because the co-op is using solar “to control load and, primarily, to reduce peak demand.”
The Brooklyn-Queens Demand Management (BQDM) program is an even more ambitious example of a bridge to a new way of doing things, Bell explained.
“Consolidated Edison (Con Ed)—at the behest of the New York Public Service Commission (PSC)—has proposed to avoid a $1 billion substation investment by instead using a portfolio of demand- and utility-side resources,” Bell recently blogged.
Con Ed will save almost half a billion dollars for ratepayers by spending an estimated $505 million on 52 MW of non-traditional solutions, 6 MW of traditional utility-side measures, two new substation transformers, and 91 MW of load transfers. The aggregated resources will meet the same need as the substation but will be "more affordable and cleaner and provide resiliency the substation wouldn’t,” Bell said.
Under the traditional business model, a regulated utility like Con Ed would lose a guaranteed rate of return on the saved $500 million. To compensate the utility, the PSC approved a 100-basis-point adder because of the project’s value as a pilot REV initiative undertaking.
“The substation is needed because demand is rising in the densely populated area,” Bell explained, “The BQMD program is a great example of how a variety of complimentary resources can achieve a goal rather than looking for a single solution or resource.”
Proving the value of DPV and other distributed energy resources (DERs) will open up new business models for utilities, solar providers, DER providers, and demand response providers, Bell and Sherwood agreed. Utilities need to identify incentives to drive the opportunities. Decoupling and performance based rates have already been shown to unlock and enable them, Sherwood added.
The challenges and choices
Some utilities may be reluctant to begin using the strategies to build bridges to new business models, Bell said. But the alternative is investments in transmission and distribution system infrastructure and rising electricity rates.
“If the utilities want to prevent major rate hikes,” Bell said, “they need to start looking into DERs.”
Any new business model must also protect the utility’s financial interests. Profits may be compromised but utilities must at least be kept whole through decoupling, performance based rates, or changing how DPV is valued, Sherwood said.
Technical barriers exist, he added, but the really complicated challenge will be getting the critical collaboration among stakeholders. In working with diverse stakeholder groups across the country, “we heard a lot about how hard it is for solar companies to work with utilities and how hard it is for utilities to work with solar companies.”
Colorado community solar developer Clean Energy Collective and third party financier Clean Power Finance are developing ways solar builders and utilities can work together, but tensions remain high over their different time perspectives and over data.
With solar company numbers, utilities could better understand solar’s impacts and opportunities. With more of the customer and usage information in utilities’ databases, solar companies could streamline customer acquisition procedures. But privacy concerns prevent sharing data.
“It is not a competitive or a harsh working relationship. There is simply not a lot of incentive for either to devote the kind of time and resources that would be needed,” Sherwood said. “The best possible incentive is if a utility was implementing a new business model that incorporates some of the building blocks in this paper. Those strategies provide a clear incentive and involve partnering with the solar industry.”
Next steps for new business models
To build bridges toward such business models, the study concludes, regulators, utilities, and solar companies must:
Address knowledge gaps on DPV adoption
Create a standardized methodology for valuing DPV and use it to evaluate DPV value
Clarify existing business and regulatory rules, and explore opportunities to collaborate
Involve federal and state agencies in creating, tracking, assessing, and sharing pilot projects
“Reform will take significant time and resources,” the RMI paper explains. “Meanwhile, utilities, solar companies, and regulators can design and implement components of solar business model strategies today that provide a bridge to the future.”