Will solar power and other distributed energy resources (DER) kill the utilities? Distributed energy refers to any combination of small-scale production or storage of electricity connected to the grid and not associated with the utility’s own generating capacity. Not long ago, the utilities feared it. Times are changing.

Just five years ago, an Edison Electric Institute report brooded over the possibility that DER could put utilities out of business. It acknowledged falling costs of DER among other disruptive challenges to the traditional business model of electric utilities. Electric rates were rising at the same time solar technology was becoming economically viable. Customers, regulators, and politicians increasingly demanded development of more DERs while the economy struggled in the Great Recession.

These disruptive challenges created financial risks, including long-term declining of utility revenues and increasing costs. Government subsidies for rooftop solar installations and the demand that electric companies purchase excess electricity they generated threatened to kill the entire industry.

The author looked back at regulatory changes to the airline and telecommunications industries in the 1970s. He noted that every airline in existence before deregulation eventually faced bankruptcy.

The government forced AT&T, informally known as Ma Bell, to divest itself of the companies that offered local phone service. The monopoly broke into several “Baby Bells.” Within a few years, a spate of mergers and acquisitions took place. The current AT&T is not the same company that was forced to break up. Southwestern Bell eventually acquired its former parent and took over its name.

So the report viewed the future with gloom.

Utility business models

Even in 2013, regulation had brought changes to some utility business models. Formerly, they were all regulated monopolies that controlled both generating electricity and selling it to consumers. They owned the power plants, the transmission lines, and the distribution lines.

Some state utility commissions had forced companies they regulated to split. Power companies in these states generate electricity. Utilities sell it to customers. Power companies can sell electricity to any utility. Utilities can buy electricity from any source.

In either case, utilities make money from selling power. They want to sell as much electricity as possible to make as much money as possible. Their rates have to allow them both to receive a  good return on investment for stockholders and maintain their part of the grid. And therefore, they have a disincentive to promote energy efficiency or demand response programs unless compelled by regulation or encouraged by subsidies.

How distributed energy can threaten utilities

Whenever customers––residential, commercial, or industrial––installs their own solar or wind power systems, utilities experience it as a drop in demand.

Worse for the utilities’ business interests, solar power is strongest at midday. Midday coincides with the utilities’ peak load time. That’s when it can charge the highest rates. So any solar or wind installations the utility doesn’t own reduce demand. And not just for its electricity in general, but its most valuable electricity.

The EEI report envisioned a time when technology like microturbines or energy storage could enable some of its customers to go offline entirely.

If a large enough number of ratepayers reduced or eliminated their purchases from the utility, the utility would have a smaller number of rate payers to recover its investments. They would have to pay higher rates. That would give them incentive to acquire their own renewables, which would reduce the customer base still more. That would force the remaining customers to pay higher rates. This viscious cycle would eventually make it economically impossible for utilities to continue to function.

Taking a second look at distributed energy

No wonder utilities have fought so hard against renewable energy! All they could see was the potential collapse of the entire industry.

The EEI report failed to notice one fact about the transformation of the telecommunications industry. Cell phones have greatly reduced demand for traditional land lines. But the phone companies didn’t go out of business. They offer both cellular and wire-line service. Therefore they profit no matter which service or services their customers choose.

Some devastating storms persuaded at least one power company CEO to see advantages of DER and microgrids for electric companies. William DiCroce of Veolia North America notes that Hurricane Sandy in 2012 left millions of people without electricity. Many for days and some for weeks. New York University and other facilities, had distributed generation and microgrids. They continued to function when most of the region couldn’t.

The same happened after Hurricane Harvey in 2017. Many hospitals had to close and transfer patients elsewhere. But some had onsite power generation. These, therefore, didn’t depend on restoration of the grid to maintain services. DiCroce therefore declares the time has come for the energy industry to embrace microgrids. They should offer them as a service. Instead of building barriers to DER, he says, the industry must work with regulators to eliminate them.

A month after Hurricane Maria in 2017, 88 percent of Puerto Rico still lacked electricity. Juan de Bedout, Chief Technology Officer at General Electric’s Grid Solutions, expressed excitement at the ability of photovoltaics, energy storage, and demand response to offset at least some of the problems that come in the aftermath of major storms.

GE has been working on microgrid technology for years now. Even microgrids can suffer storm damage. But GE has long experience exploring how to make them more resilient. Northeast Utilities (formerly NSTAR) used GE technology after Tropical Storm Irene in 2011. It fixed half of its system’s 6,000 power outages in less than an hour.

A new study of distributed energy

The National Renewable Energy Laboratory projected what the transmission grid in the Eastern United States could look like by 2026. The study’s model assumed that 30 percent of the electricity will come from renewable sources like wind and solar.

In many ways, the American power grid remains the same patchwork of interconnected bits and pieces it has been for years. It can’t handle more than 30 percent penetration of DER. Work has started on developing a digital grid that will be both more robust and more resilient than what we have now.

Among other things, energy storage and the digital grid will make it possible for gas turbines to shut down completely at times of the day when renewables can meet all the demand for energy. If they need to come back on line quickly, the batteries will serve as a bridge while they black start.

To make the idea work, transmission system operators would have to complete transactions among themselves five minutes ahead; today, they do it an hour ahead. Aspects of the digital grid, such as good control technology and software, will facilitate this increase in speed.

Utility distributed energy projects

Nearly two years ago, I wrote about a virtual power plant project in New York City. It turned solar panels on rooftops into a utility-scale solar installation. It integrated 300 separate residential installations into a functional unit.

The California Energy Commission and the Redwood Coast Energy Authority recently awarded a grant to build a multi-customer microgrid in Humboldt County. Its customers include the regional airport and a US Coast Guard air station.

It will include 2.3 MW of solar panels and 8 MWh of battery storage. It is the first such microgrid in Pacific Gas & Electric’s service area, but it is intended as a test case. Once the partners learn appropriate operating procedures, regulations, and tariffs, it will be possible to integrate other microgrids into the entire state’s grid.

Now that utilities are beginning to see the benefits of incorporating DER, renewable energy faces a surprising threat from a different direction.

California has pushed its utilities to accept DER and invest money in them for years. The first phase of something called a Preferred Resource Pilot resulted in 100 megawatts of contracts in 2015. Contracts for the second phase were awarded in 2016.

Now, two years later, the California Public Utilities Commission may deny Southern California Edison the ability to raise rates to obtain capital to pay for them. Why? It appears to me that progressive consumer advocates have declared war on progressive energy policy because of progressive hatred of the thought that corporations will make a profit.

Eventually utilities all across the country will have to embrace DER as a resource instead of a threat. As the latest flap in California shows, the route to a workable regulatory framework is littered with the orange construction barrels of conflicting values.

Not all the technology is ready for prime time, either. But it will probably mature before the corporations, politicians, regulators, and activists do.

Sources:
Can this airport help pave the way for microgrid success in California? / Renewable Energy World editors. March 9, 2018
Disruptive challenges: financial implications and strategic responses to a changing retail electric business / Peter Kind, Energy Infrastructure Advocates, prepared for Edison Electric Institute. January 2013.
How distributed energy resources contribute to a more resilient grid / Diarmaid Williams, Decentralized Energy. March 22, 2018
Solar Panels Could Destroy U.S. Utilities, According to U. S. Utilities / David Roberts, Grist. April 10, 2013
Turning hindsight into foresight for U.S. energy infrastructure / William DiCroce, Power. April 9, 2018
Why Southern California Edison’s 125 megawatts of DER contracts may get rejected / Jeff St. John, Greentech Media. April 4, 2018

Photo credits:
House with solar and wind. Some rights reserved by Richard Masoner
Transmission substation. Public domain from Wikimedia Commons
Walmart roof. Some rights reserved by Walmart
Hurricane Sandy. Satellite image from NASA
Houses with solar panels. © Copyright Christine Westerback and licensed for reuse under this Creative Commons Licence.
Microgrid diagram. US Air Force photo illustration by Jeff Pendleton