Solar power, even with government incentives, is relatively expensive when compared to the per kilowatt hour cost of electricity offered by utilities. However, as solar power costs come down, that math is changing. Two states are already at or very near the tipping point: Hawaii and New York.
What does it cost?
Power prices vary considerably across the United States. The average price is around $0.13 per kilowatt hour. That's up from a little over $0.07 in 2001. And that's the first important takeaway: Electricity prices are going up across the board. Then there's the variation around the average. For example, electricity in Hawaii costs an astounding $0.38 per kilowatt hour. At the other end of the spectrum is Washington state, where homeowners pay roughly $0.09 a kilowatt hour.
That's a big spread, with most states falling much closer to the average. For example, the second most expensive state is New York, where the cost per kilowatt hour is just under $0.21. It's worth noting that Hawaii is such an outlier because it relies on imported oil for a significant portion (as much as 75%) of its power.
New York state's power prices, meanwhile, are affected by Con Edison's (NYSE:ED) New York City focused business, where infrastructure is much more difficult to deal with because of the population density of the region. In fact, New York state is looking at up to $30 billion worth of infrastructure upgrades over the next decade alone.
How about solar? According to Sanford Bernstein, solar costs between $0.18 and $0.23 a kilowatt-hour. That large variation exists even within states. For example, in mid-2013 solar cost roughly $0.19 per kilowatt hour in Los Angeles and $0.29 in Seattle (before government incentives).
However, solar costs are heading lower. For example, SolarCity (NASDAQ:SCTY), the country's largest rooftop solar installer with a 29% market share, has cut its installation costs nearly 28% since the start of last year. The company's goal is to cut another 17% off of that figure by 2017. So, as the rooftop solar industry is expanding, costs are, inevitably, going down. And in parts of New York and Hawaii, they've already crossed.
What happens to a utility when it's cheaper for customers to make their own power? That crossover is what's being called the utility death spiral. That's because as more customers install their own generation, a utility's costs get spread out over a smaller number of customers. That leads to higher costs and, you guessed it, more customers converting to solar (and raising remaining customer costs even further).
Hawaiian Electric Industries (NYSE:HE), which provides power to most of that state, is right in the crosshairs and is looking to do something about it. It has recently proposed an aggressive plan to lower costs by switching to natural gas from oil in the near term and embracing renewable power over the longer term. The current plan includes an almost three-fold increase in rooftop solar, from 328 MW as of July 15 to just over 900 MW by 2030.
In fact in one of Hawaiian Electric's regions, rooftop solar is already pretty big. "Distributed generation [rooftop solar] on O'ahu currently exceeds 200 MW total nameplate capacity. This is about the size of one of our largest power plants," according to the company. And SolarCity just opened its second operation in the archipelago state, so clearly there's growth potential. But the end goal of embracing rooftop solar and changing the utility's fuel mix is to lower costs by around 20% from recent levels by 2030. That may not be enough, but it shows that Hawaiian Electric is taking the threat seriously. That said, the relatively low cost of solar has led to around 1,000 customers installing rooftop solar without so much as telling their local utility — and hooking themselves to the grid.
New York has a similar cost reduction plan in mind. State regulators are calling for the role of the utility to change materially, shifting to more of an intermediary than a supplier. Power costs are already broken out from transmission costs in the state, so in some ways it's already heading down the right path. Only the electric grid has historically flowed one way and now that's all about to change if utilities like Con Ed want to avoid the death spiral some see on the horizon.
Watch these states
Look for big upfront costs and long lead times as utilities put new systems and technology in place to deal with distributed power like solar. And as solar prices come down, the push for change will only get more urgent and spread from New York and Hawaii to other states. In fact, the changes taking place now could be the foundation on which a new utility model is built.
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.