For decades, the utility monopoly in the U.S. has been an investor's dream. Companies could generate a guaranteed return on assets, protecting profits year after year with little fear of competition.
But the solar industry has suddenly thrown a wrench in that model. The centralized power model is predicated on having the utility own, or buy, power and then distributing it to customers. Solar allows customers to be the generators and even to sell power to the utility, which is known as distributed solar.
This is an incredibly disruptive model, and now that solar energy is cost-efficient for homeowners, it's spreading across the country like wildfire. SolarCity (NASDAQ: SCTY ) and SunPower (NASDAQ: SPWR ) have made $0 down solar leases possible, and solar loans are available for homeowners as well. As costs fall, the solar industry becomes more and more attractive to homeowners, which puts utilities in a terrifying position.
Distributed generation changes everything
From the utility's perspective, the challenge with distributed generation is that the utility doesn't own the generating assets and the distributed power takes stress off the existing infrastructure. Since utilities generate profits from having more assets to generate a return on, that poses a problem. Depending on how a utility is regulated, the problem can be enormous.
Utilities that are more heavily regulated and own their own power-generating assets will see the biggest challenge from distributed solar. They'll be required to build fewer power plants, fewer transmission lines, and a less extensive distribution network if a lot of power is generated on-site from rooftop solar.
Even utilities that have been deregulated have incentive to keep growing transmission and distribution assets. That makes solar an enemy, not a friend of utilities around the country.
Utilities start a war against solar
The challenge with rooftop solar is that utilities can't explicitly forbid customers from installing it. The best they can do is make it harder to sell any extra power created on a roof back into the grid. That's exactly what Pinnacle West's (NYSE: PNW ) main subsidiary, Arizona Public Service, recently tried to do, somewhat successfully. The utility was fighting rooftop solar and wanted to either "pay" less than the retail rate for power sold back to the grid (net metering) or charge a fee for the right to net meter power.
APS recommended charging $8 per kW for customers with solar, which would amount to about $48 per month for the average 6 kW system. That would make solar completely uneconomical and kill the solar market. At the end of the day, regulators agreed to a $0.70-per-kW charge, which is supposed to offset costs other customers pick up for solar system owners. Whether solar shifts costs from one customer to another is still hotly debated in the industry.
California had a similar debate recently and decided to keep net metering intact, a huge win for the solar industry.
The bottom line here is that utilities are fighting solar, which they wouldn't do if they weren't terrified of the power of solar.
Can utilities and solar get along?
The old utility business model is going to be disrupted by distributed solar -- that we know. We just don't know exactly how and how utilities will react.
What forward-thinking utilities are doing is looking at solar as a way to invest in the future. NRG Energy (NYSE: NRG ) has purchased the 250 MW California Valley Solar Ranch from SunPower, partnered with Warren Buffett's MidAmerican Energy to buy the 290 MW Agua Caliente project from First Solar, and is the lead investor on the 392 MW Ivanpah solar project. It has also developed a solar canopy, put solar panels on Mandalay Bay in Las Vegas, and just completed phase one of the solar installations at the San Francisco 49ers' new home, Levi's Stadium, just to name a few projects.
Edison International (NYSE: EIX ) invested in solar financing firm Clean Power Finance and bought distributed solar developer SoCore Energy earlier this year. The company's utility Southern California Edison also has its own solar leasing program, which owns and operates distributed solar systems like SolarCity and SunPower do.
Not all utilities are fighting solar. Some are seeing it as a new investment opportunity, and I think those forward-looking companies are going to be better off long-term.
Solar power is here to stay
The solar industry isn't going anywhere; it's too economically competitive with the grid at this point. That scares utilities, and they have a choice of fighting or joining the industry's growth. There are investing opportunities to be had, and utilities that take those will outperform long-term.
Watch how utilities adopt or fight solar around the country. A long, drawn-out fight could stunt the growth of SolarCity, SunPower, First Solar, and others. Partnering with these companies could help both utilities and the solar industry.
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