Last week I spoke with Clean Power Finance CEO Nat Kreamer about the future of the solar market and how utilities and new leasing options will affect the energy industry. Clean Power Finance provides financing and software services to solar installers and works with a number of utilities and module manufacturers across the industry. Here are the highlights of our discussion on how utilities will adapt to solar.
Will utilities fight, embrace, or just accept solar power?
The utility industry is notoriously slow to innovate, using essentially the same technology to generate and transmit power as it did a century ago. But until the ability to generate your own power came along -- i.e., residential and commercial solar -- there were few viable alternatives to the traditional business model.
As a result, some utilities will fight the adoption of solar energy, particularly on rooftops, and some will embrace it. The answer to who will prefer what depends on what a utility's incentive is.
After the deregulation of wholesale power -- which some in the industry also fought, by the way -- there are now regulated and deregulated markets. A regulated utility will own power generation, transmission, and distribution and get a set rate of return that's regulated by the state and regional regulators. Deregulated states are far more complicated -- every state is different, but in general, a power plant owner will sell power to a utility at a market price instead of a set price, and customers can choose the utility they buy their power from (though reality isn't quite this simple).
If you're an unregulated power producer or utility and you see an opportunity to own solar assets, it may be an attractive investment option because you're in a competitive market. But if you're in a regulated market, there's little incentive to adopt new technology that might upset the profits of your monopoly, especially if someone else owns the asset (i.e., a solar lease).
The forward-thinking utility
It is Nat Kreamer's belief, and one that I agree with, that eventually solar power will infiltrate utilities across the country whether they do so willingly or kicking and screaming. The utilities that view solar as a productive asset that can generate a steady return on investment will be the ones that profit more quickly.
In essence, Kreamer thinks the role of leasing solar, which is currently dominated by Clean Power Finance, SunRun, SolarCity (NASDAQ:SCTY.DL), and SunPower (NASDAQ:SPWR), can eventually be dominated by utilities -- where CPF could provide financing. If you think about it, this model makes a lot of sense. Utilities have available low-cost capital and already have monthly contact with their customers. Why shouldn't they play a role in building the future of electricity generation?
NRG Energy (NYSE:NRG) and Edison International (NYSE:EIX) are starting to make this transition. NRG has built a solar leasing subsidiary called Residential Solar Solutions, and Edison International subsidiary Southern California Edison was one of the first utilities to embrace solar, with a 250 MW plan for commercial solar in 2008. The parent company, Edison International also recently invested equity in Clean Power Finance itself so it's hoping to profit from the company's growing finance presence.
The exact model utilities take state by state may change, and it may even evolve over time, but the ones that find a way to make solar a part of the future will prosper. Those that allow third-party installers such as SolarCity and SunPower to own the power-generating assets give up power in the electricity market and will eventually pay the price.
Solar is coming
Like it or not, solar power is coming, and with installations up 76% last year and residential solar growing rapidly, companies have to evolve. The transition utility companies make will be very important, and it will be key to see who is able to make solar an asset and who looks at it as a liability.
Fool contributor Travis Hoium manages an account that owns shares of SunPower. He also owns shares of SunPower and has January 2015 $5, $7, $15, and $25 calls on SunPower. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.