Dear Utilities, Stop Worrying About Distributed Power and Worry About This

Dear Utility Providers,

I'm writing this letter to you because I'm concerned that you're focusing too much attention on SolarCity (NASDAQ: SCTY  ) and the other members of the distributed power movement, when you have a much greater threat knocking at your door. Sure, regulations like net metering may be eating into some of your profits, but the spectre of smarter energy consumption is a much greater threat to you. Even worse, you're letting these threats in right through the front door! 

Sweating the small stuff
During the past few years or so, we have all seen you take issues like net metering -- a tool that makes distributed solar viable for many individuals -- to court. Just recently, the state of Arizona ruled that all distributed power installations pay a fee of $0.70 per kilowatt to cover grid maintenance and transmission fees. This isn't the only one, either. In 2013 alone there were other cases against net metering in Idaho, Louisiana, and California. While I can understand why distributed solar can be a perceived threat, you're making a mountain out of a molehill here, and this is why.

Distributed solar isn't that big
SolarCity is, by far, the biggest player in this field; in fact, it's larger than its next eight largest competitors combined. Yet, despite all of the huge waves that you're claiming distributed solar has made, the company's ambitious growth targets for 2018 will only put them at 2.5% of the potential market in just the 14 states in which it operates. 

Source: Solar City Investor Presentation

You get to keep your highest earnings period
I'm sure you know this chart by heart because you're the utilities, after all, but let me show it to you again. This is the daily grid load and electricity price range for the Boston metropolitan region, one of the fastest-growing markets for SolarCity.

Source: Federal Energy Regulatory Commission

That massive spike in energy use happens right around 5 p.m., and almost anyone who has spent time in New England will tell you that there isn't much sunlight at that time for a good chunk of the year. This is your wheelhouse: Not only do you get to supply almost all of the power at that time, you get a major premium on power then, as well. Renewable energy is working on some methods to capture part of that market, but it's still quite a few years away. 

You're taking advantage of it, too
Finally, it's hard for me and others to take these net-metering threats so seriously, because a few of you are doing distributed solar installations yourself. NRG Energy (NYSE: NRG  ) has already started down the path of distributed solar, and Exelon (NYSE: EXC  ) is mulling the idea over as part of its $3 billion investment program during the next five years. If anything, these sorts of investments may be more lucrative than the megamillions you're spending on projects like Duke Energy's (NYSE: DUK  )  coal gassification plant.

Here's what should make you worried
We, as Americans, have started to jump on the energy efficiency/conservation bandwagon. Just look at Google  (NASDAQ: GOOGL  ) dropping $3.2 billion to purchase Nest Labs. This company's smart thermostat can reduce an individual's energy needs for heating by an average 20%. That may only translate to 10% of the total energy demand for a household, and electricity may only be the heating source for 38% of all U.S. households; so you may not be sweating it right now.

In reality, though, they pose a greater threat, because reduced consumption has an amazing compounding factor. Just take a look at this graphic from the Federal Energy Regulatory Commission.

Source: US Federal Energy Regulatory Commission

For every 40 units of power you deliver to the grid, only half of it actually gets consumed by us. This means that any reduction in energy use from your customers has a doubling effect on you. Also, the reason that smart energy use products like Nest are so effective is because they can also be used to conserve power during peak loading times, which can deprive you of some of your highest revenue periods. What's even more troubling about these kinds of technology developments, YOU ARE EMBRACING THEM! NRG Energy partnered with Nest earlier last year to provide clients with means to skirt peak power times and reduce total energy consumption.

Sure, these sorts of things may allow you to not fire up a couple of extra peak power generators and save on the high costs associated with them; but, ultimately, these types of movements will start to bite into your revenue streams, and it will make many of the power-generating assets on your books no longer necessary. This, to me, seems like a much greater threat than the 2.5% of customers who SolarCity may take away from you. 

What a Fool believes
I'm telling you all of this because, despite all the grumblings I may have when I get my utility bill, I still need you. We all still need you. Even if distributed solar takes off, and individuals use much less energy, we all still need that extra power to get us through peak demand and a durable, reliable transmission grid to get power to everyone. Plus, there are loads of investors out there who would hate to see those fat dividends you pay dry up. You may not get to operate like a monopoly anymore, but I'm sure you'll find a new, creative way to use the assets you have, and remain a necessary cog in America's energy picture.

Your concerned client,

Tyler

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Read/Post Comments (3) | Recommend This Article (4)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2014, at 3:15 PM, HowardShaffer3 wrote:

    As an engineer in the electric utility business, I believe the the electric utilities missed the boat. They should have redefined their business from power generation and delivery to electric energy services.

    I earlier years the power company owned the water heaters in homes and charged a monthly fee.

    Why not provide and own the solar panels and batteries in homes and businesses, service them and charge a monthly fee? They have the boom trucks to get on roofs for installation and cleaning, for example.

  • Report this Comment On January 21, 2014, at 5:51 PM, Woodenbikes wrote:

    Could you provide the link to the "Electric System Losses to Inefficiency" graphic source at FERC? It seems to over estimate the transmission and distribution losses at 25% of generation output (10/40) compared to my understanding of about 10% average. And I have never heard of the large losses to inefficient grounding... 33%! (10/30) Wow!

    Out here in California I think the distribution utilities pay (not get) the high 7 cent per kWh wholesale price shown around 5 p.m. The utility sells me energy at 13 cents in all hours. A solar system net metered would save me 13 cents/kWh and save the utility about 3 cents/kWh in the hours around noon using the graph you showed. The IOU utilities earn a set rate of return on allowed distribution and transmission assets. Generators (not utilities) make their money selling energy to the "system operator" at the prices shown in the graph. Is it different where you are?

  • Report this Comment On January 23, 2014, at 9:58 AM, TMFDirtyBird wrote:

    @Woodenbikes

    Here's the link to the FERC presentation.

    http://www.ferc.gov/EventCalendar/Files/20070216090203-2-14-...

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