If you listen to SolarCity (NASDAQ:SCTY) CEO Lyndon Rive talk about the relationship between his company and utilities, you'll hear a conciliatory tone. In the company's first-quarter conference call on Tuesday, he said, "Customers removing themselves from the grid is a bad policy outcome." Not exactly the utility-breaking comments you might expect from a company pushing self production of energy, and now launching an energy storage product.
Rive's vision of the utility of the future is one where a utility acts as a component or integrator of energy infrastructure, not the monopoly owner of it, like they've been. In theory, that makes a lot of sense. If it's financially viable for homeowners to generate their own electricity through installing solar panels on their rooftops, they should be able to do that, and the grid can augment that production with electricity when the sun isn't out, or a home's battery backup is low.
But I have a hard time seeing utilities taking up such revolutionary ideas. They've been in the business of owning and operating the entire grid for over a century, and the only way they know to grow is to build more power plants, more transmission lines, and more distribution. Sharing the infrastructure they've built for a better tomorrow for everyone will be a hard sell.
Are we friends or enemies?
The conciliatory tone comes at a time when solar companies and utilities are fighting over access to the grid and how much customers should be paid for solar electricity. Net metering -- which pays residential rooftop solar customers the same to feed electricity to the grid as they pay for electricity from the grid -- has been the dominant policy for solar across the country until now.
But utilities argue that it doesn't fairly compensate them for building the infrastructure to off-take a solar system's extra electricity during the day. The response has been to ask regulators to approve minimum fees, fixed charges, lower rates for electricity provided to the grid, and other schemes that would compensate solar systems less than net metering does.
This has negatively affected states like Arizona, where SolarCity is pulling workers out, and it could kill markets like Wisconsin before they even get started. Instead of figuring out a way to work together, utilities and residential solar installers are undercutting each others' businesses, which could lead to a shift away from utilities faster than anyone ever imagined.
Enter energy storage
Without net metering, most solar installers would be hard-pressed to make a residential solar system economical. Whether it's SolarCity, Vivint Solar, or SunPower, the same policies make the electricity their systems produce economical for homeowners.
If policies change, as utilities and the Koch brothers are pushing for, solar energy may be compensated at a lower rate by utilities. That would hurt the solar industry we know today, but it would suddenly make energy storage a valuable way to consume more of the energy a solar home produces and, in extreme cases, even make grid defection possible.
Last week's unveiling of Tesla Motors (NASDAQ:TSLA) Powerwall and Powerpack energy storage products got all of the headlines, but dozens of companies have been pushing into energy storage over the past few years. They know that either utilities or homeowners need to store energy to reduce the volatility in the grid from solar electricity -- the question is how these new products will be deployed, and what the economic drivers will be.
Change is up to utilities
How the disruption of rooftop solar energy and energy storage impacts utilities is largely up to utilities themselves. They could embrace new technology, playing a role in the future grid, or fight it and make defection a very real possibility for consumers long term.
Right now, utilities are testing some large-scale energy storage, but that's driven by regulators who are forcing them to -- particularly in California. But owning energy storage and facilitating community solar parks could be a way for utilities to adapt to distributed sources of energy, like solar, instead of fighting them. This is something I think utilities should be embracing, because they could play a key role in the future grid.
What's actually happening in most locations is that utilities are fighting rooftop solar through rate structures, which means solar won't be economical until it's cheap enough to install solar panels and batteries to power the home 24/7. By then, it's too late for utilities to adapt. Homeowners could leave the grid entirely, or have the grid only as a supplemental source of energy.
That's not what utilities want, and ironically, it's not what SolarCity says it wants, either. But SolarCity may be forced to develop the technology that makes grid defection possible because utilities are fighting to keep them out of the market in some locations. That strategy will backfire long term, and it could ultimately lead to the death of utilities as we know them.
Don't bet against innovation
Utilities are in a tough spot right now. Solar companies are taking away consumer demand when they install solar systems, and anything utilities do to fight that trend could lead to further defection down the road.
At the end of the day, utilities should embrace innovation, including owning and operating energy storage systems close to the customer. If they don't, consumers will find alternative forms of energy, and utilities will be left in the dust. Not even SolarCity wants that to happen.
Travis Hoium owns shares of SunPower. The Motley Fool recommends SolarCity and Tesla Motors. The Motley Fool owns shares of SolarCity and Tesla Motors. 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.