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1 Industry Terrified of Solar Power

http://www.fool.com/investing/general/2013/12/07/1-industry-terrified-of-solar-power.aspx

Travis Hoium
December 7, 2013

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.

Residential rooftop solar installations built by SolarCity. Image: SolarCity.

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.

An image of California Valley Solar Ranch, built by SunPower and owned by NRG Energy. Image: SunPower.

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 MidAmerica