Debates around regulatory rate structures for electricity may not be the most exciting news to follow for investors, but it could drive a multibillion-dollar industry that's upending fossil fuels. Utility rates and policies are what drive returns for solar projects, especially small systems from SolarCity (NASDAQ:SCTY.DL), SunPower (NASDAQ:SPWR), and Vivint Solar (NYSE:VSLR).
Rates and policies are also how utilities (driven by Koch funding) are attempting to fight off solar. Minimum bills, fixed charges, and reductions in net metering are all tools that reduce the benefits of residential and commercial storage, making it harder for solar energy to compete.
But fighting the explosion of solar energy comes with trade-offs. If a utility makes it less beneficial to send electricity back to the grid (net metering), they could inadvertently make it more desirable to cut ties with the grid altogether (through energy storage). Some recent rate changes in California could show both good and bad signs for solar energy in the country's most renewable friendly state.
The battle between utilities and solar energy
Solar energy in the U.S. generally relies on two structures to make money: either a system has a contract to sell power to a utility at a certain price, which is how utility scale solar projects are built, or customers use net metering and send any electricity they generate during the day to the grid, only paying for net energy usage, known as net metering.
Utilities have been fighting the net metering structure for residential and commercial systems with increasing success recently because they can argue that solar customers are sending them too much electricity during the day and causing too much stress at night when the sun goes down and demand goes up as people get home from work (see the duck curve). Utilities argue that solar customers don't end up paying their fair share because net usage can be negative if a solar array is big enough.
Two ways utilities have been able to fight the growth of distributed solar is by getting regulators to approve fixed charges or minimum bills, making sure everyone pays something. Both make solar less economical.
California creating a structure energy innovators will love
In a recent rate case, California's regulators agreed to a minimum bill for residential solar customers in the future, but also said utilities have to begin testing time of use (TOU) rates and create structures that can be launched to all customers in 2019.
Time of use rates are simply dynamic prices that change throughout the day depending on how much electricity costs in the marketplace. At times of low demand, prices will be lower and at times of high demand, prices will be high. This is what utilities pay on a wholesale level but residential customers, in particular, rarely see this because they pay a single rate for the month, which ends up being an average of the cost the utility incurred.
In theory, time of use rates will give an incentive to customers to lower demand during the day when rates are high and just generally make smarter energy decisions. In reality, customers will only do this if they don't actually have to do anything. I'm not going to check how much electricity costs every hour and adjust my air conditioning accordingly. Are you?
But solar companies combined with energy storage and demand response providers are now building the infrastructure that will be able to dynamically adjust to time of use rates, maximizing cost savings for consumers. Energy generated from a rooftop solar during the day during peak times (for example at $0.30 per kWh) can be saved and used at night (when rates may be $0.08 per kWh).
This will give further financial justification for solar energy generation as well as energy storage and smart devices. Combine them all together and you get maximum savings for consumers. That's why it's a game changer for renewable energy. It creates a platform for the industry to make money by adding multiple services, creating a stronger value chain overall.
Renewable energy's game changer
Rate structures will evolve around the country over the next few years and the companies who can adapt and adjust will add immense value for shareholders. SunPower and SolarCity have the partnerships in energy storage and demand response to begin rolling out these platforms when the time is right.
Vivint Solar, at least for now, is behind the curve and is just entering the California market. It could pick up ground in the full-service energy business, but for now its business model hasn't evolved a lot since launching as a solar lease company.
Changing rate structures can be a challenge for solar companies but they're also an opportunity in many places. If solar installers can install dynamic energy systems that adapt to rate structures and regulatory policy on the fly, they'll begin creating more value for customers than ever before. That's the next phase in growth for the solar industry and California's rate debates will play a big role in how the industry's growth plays out.
Travis Hoium owns shares of SunPower. 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.