The utility industry is changing and one of the biggest shifts is distributed power. That's when a customer generates electricity and sells it back to the power company. SolarCity (NASDAQ:SCTY) and SunPower (NASDAQ:SPWR) are the leaders in this emerging niche. They are, effectively, building a different electric utility one rooftop at a time.

Not in my backyard
Southern Company (NYSE:SO) is building a new coal plant with the latest, cleanest technology in Kemper, Mississippi (580 megawatts). It's also building two nuclear power plants, also using the latest advances in technology, in Georgia (2,230 megawatts). However, these three projects have faced stiff opposition. That's one of the problems with big projects, especially when they involve coal and nuclear power.

Southern's position is that it has to build these plants to satisfy customer power demands, particularly as older electric plants are retired. Opponents vary from those who don't want the plants "in their backyard," to those who want Southern to find cleaner alternatives. While the pros and cons of different power options can be hotly debated, there is a new model taking shape that sidesteps these issues and shows a new way to look at this old-line industry.

The roof, the roof, the roof is on solar
Solar power was once the purview of the environmental fringe, but with advances in technology and price declines, its slowly joining the mainstream. Utilities like NRG Energy (NYSE:NRG), with backing from Google (NASDAQ:GOOGL) and others, are building giant solar power plants like Ivanpah in California. Ivanpah is so big it can reportedly be seen from space and generates an impressive 400 megawatts of power.

(Source: Sbharris, via Wikimedia Commons)

But the big solar news isn't happening at that scale, its happening one rooftop at a time. That's where companies like SolarCity and SunPower come in. This pair works with individuals and home builders to install solar panels on rooftops throughout the country. SolarCity expects to have up to 525 megawatts of power installed throughout 2014—that's more power than NRG's Ivanpah produces.

SunPower is well behind that, with just about 150 megawatts of power installed at the start of 2014. However, the company's model is much broader than SolarCity. SunPower makes solar cells as well as building solar installations from the ones on your neighbor's roof to power-plant size facilities. SolarCity focuses mainly on installing rooftop systems.

(Source: BrokenSphere, via Wikimedia Commons)

Although being green is nice, the real benefit for customers is the ability to reduce electricity bills by selling excess power back to the grid. This is so enticing that, according to SolarCity, "12% of new U.S. Generation Capacity in 2013 was distributed solar." That includes more than just rooftops, but it shows that there's a real opportunity for these two industry leaders.


Not in my backyard—the other way round
Part of the opportunity comes from government mandates that utilities buy power from their customers, often at premium prices. Needless to say, utilities don't like that idea. For example, Edison International (NYSE:EIX) is pushing back, saying that it has to pay as much as a $0.20 premium per kilowatt hour for distributed power. That means that customers without rooftop solar have to pay more, essentially subsidizing those with solar.

Note that Edison International is happily buying power from NRG's Ivanpah. So it isn't against solar power, just against having to buy it from its customers at inflated prices. But as solar panel prices come down, the government's support should become increasingly less important. On that front SunPower expects solar panel costs to fall by 35% while efficiency increases by 10% between 2012 and 2015.

The new utilities
SunPower and SolarCity are slowly building the solar utilities of the future. While you have to keep a close eye on the regulatory front, this pair is in the early stages of what could be a sea change for the energy industry.

Here's another big change taking place in the U.S. energy landscape...

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Google, SolarCity, and Southern Company. The Motley Fool owns shares of Google and SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.