The utility business is really very simple in the U.S., particularly in regulated markets. Companies grow earnings by growing the assets the have under management.
This is the case because regulators guarantee a certain return on assets in return for operating a regulated monopoly. So, if you're going to grow your profits as a utility you need to grow your assets, as I've shown with Southern Company (NYSE:SO), Xcel Energy (NASDAQ:XEL), and Edison International (NYSE:EIX) in the chart below.
Why solar energy is a threat to the status quo
Solar energy throws this business model for a loop. Solar systems installed on a homeowner or business's roof aren't owned by the utility (in most cases) but they provide electricity to its customers and even to the grid itself in the form of net metering.
That creates a big problem for utilities, who are losing load demand that could help them grow assets. For example, say this year that 1% of customers in a utility's territory install solar energy that provides enough energy to offset the energy they use. If the total energy consumed in the utility's territory also grows 1% then the utility has flat demand for the year instead of growing 1% as it would have in the past.
The challenge could be even worse if a higher percentage of customers go solar, leading to lower demand for a utility. Not only would they not be able to grow assets, they may have to raise rates on the electricity they do sell just to make their guaranteed return on existing assets. This is a challenge as regions like southern California, Arizona, and Hawaii see solar adoption rates grow.
The solar industry still needs utilities
With this dynamic in place, in many ways the solar industry and utilities are in a competitive confrontation. But the solar industry also needs utilities more than you might think.
When it comes to small residential or commercial solar systems, companies like SolarCity (NASDAQ:SCTY.DL) and SunPower (NASDAQ:SPWR) need open policies like net metering to make their systems viable. A solar system can't provide energy at night and even energy storage systems that are beginning to pop up are designed to shift load and provide emergency backup, not make the grid obsolete.
SolarCity's Elon Musk and CEO Lyndon Rive have made this clear when talking about their competitive dynamics. Rive said last year that utilities need to be partners, especially in storage, saying, "the benefits of solar inverters and storage is massive, especially in the hands of grid operators."
On the utility side, where SunPower and First Solar (NASDAQ:FSLR) are two of the largest project builders in the world, solar companies need to work with utilities who buy power through power purchase agreements from solar projects. Without the utility to buy the power, these projects wouldn't be completed.
Utilities definitely see solar energy as a threat, as well they should. But the solar industry needs utilities to keep customers lights on 24/7 and even provide infrastructure that allows solar to be viable. If installing solar energy causes utilities to be less profitable they won't be able to invest in the smart grid, energy storage, or microgrids, which could actually help the solar industry grow long-term.
It's a complicated relationship and one that will play out in different ways in different states. At the end of the day, solar energy is definitely a threat to utilities who operate under the status quo. Utilities that learn to adapt and understand solar energy, learning where they can add value to the grid in the future, will thrive even as solar grows. In that way, they could turn a threat into an opportunity if they so choose.