Edison International (NYSE:EIX) has been very vocal about the problem with rooftop solar systems that sell power back to the grid, called distributed power, at elevated rates. Essentially, the company says, those without rooftop systems are subsidizing those with systems by nearly $0.22 per kilowatt hour. That's huge, since it only costs Edison International about $0.09 per kilowatt hour to acquire electricity. No wonder the utility industry sees solar as such a threat.
A really big problem
Solar isn't big in every state, so some utilities can sit by and watch the changes caused by this new technology. However, others can't sit around and wait. California is a leader in solar, which is why Edison International is speaking up. But it isn't alone in this problem. For example, Sempra Energy's (NYSE:SRE) San Diego Gas & Electric (which accounted for roughly 40% of the company's earnings last year), has a solar penetration rate of nearly 6%. But Tom Bialek, chief engineer at the San Diego utility, expects that to double by 2016.
Bialek summed up the problem: "Customers are changing how we view the world just because they are making choices." But those choices aren't getting made with the utilities; the local power company just has to deal with the consequences as they come. In other words, it's hard to see what's coming next in states, like California, where solar is expanding rapidly.
This is one of the reasons why Arizona Public Services Group, a division of Pinnacle West Capital (NYSE:PNW), asked regulators to let it charge as much as $50 a month to allow customers to sell power back to the grid. Regulators didn't go for that, but did allow a charge that will amount to roughly $5 a month. That, essentially, will allow Pinnacle West to get paid something from customers who once used its valuable infrastructure for free.
But charging for the this privilege isn't the only answer, and it may not be the best one. For example Tuscon Electric Power, a division of Canada's Fortis (NASDAQOTH:FRTSF), and none other than Arizona Public Services Group are looking to co-opt the rooftop solar movement.
Although their plans are different, they are both looking to install solar on the their customers' rooftops. That would put them in competition, to some degree, with installers such as SolarCity (NASDAQ:SCTY). However, if the utilities succeed in this effort, they would continue to own and control these generating assets -- assets that would otherwise wind up in the hands of upstart rooftop solar companies such as SolarCity, which expects to have as much as a gigawatt of solar power installed by the end of this year.
It's a state of mind
For reference, Southern Company is building a controversial coal plant, with carbon capture technology, that will produce roughly 600 megawatts. So by the end of this year SolarCity will have the equivalent of nearly two power plants under its control. That helps explain why utilities are so concerned, and why trying to get a piece of the residential solar pie makes so much sense.
At the end of the day, utilities are facing a potentially existential threat. Fighting the changes rooftop solar pioneers like SolarCity are causing is one way to deal with it, but that doesn't appear to be working so far in big solar states like California. Trying to become a partner in the change, by owning rooftop solar systems, most likely has better prospects.
Energy industry change is coming fast in some regions. If you own utilities, you need to watch the rooftop solar issue and, more importantly, how your companies are adapting. Ignoring this issue won't be an option for long. And decisions made now could make or break a utility.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of 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.