Can electricity generation companies live off two hours of demand a day? And what if utilities actually tried to slow down the rollout of rooftop solar? If these are questions energy utilities are asking themselves in the current market environment, they may not like investment bank Bernstein’s answers.
Following on from our story last Friday of how the extraordinary plunge in the cost of solar could cause price deflation in global energy markets within a decade, with potential big implications for the liquid fossil fuel industry (oil and gas), we look today at what investment bank Sanford Bernstein says the falling cost of solar means for utilities – both generators and network operators.
Numerous other studies – and even the industry itself – have talked about the threat of the so-called “death spiral” and the need for incumbent utilities to adapt their business models.
The best way to begin this explanation is to revisit the so-called “Peaking Duck” – which is not, as the Bernstein analysts point out, a delicious Asian-Latino poultry dish, but the future of merchant power markets.
This graph above documents the impact of solar PV, which generates electricity during the day and so reduces peak power demand from non-renewable sources as adoption increases. The lower lines point to the future, where generators are squeezed out of the market by the proliferation of rooftop solar.
“Instead of high-cost (and high-priced) gas-fired peaking power plants being engaged in the middle of the afternoon when all of the air-conditioners are operating and all of the factories are running, solar addresses that load. California – like Germany and Australia – is already seeing this effect,” Bernstein writes.
Indeed, as we have recently documented, grid operators in South Australia have highlighted the impact of solar in the recent heat waves in South Australia, gas assets are being written down, and demand for peaking power plants in the US are already being dumped in favour of large solar PV farms.
Bernstein points out that by 2020, the installed capacity of solar will be so great that the demand profile will resemble the green line and daytime power demand will have effectively collapsed. (Note, the peaking duck graph was provided by Edison International, a utility fighting the proliferation of solar. See this story for a different take on the “duck” chart).
“For companies selling electricity into merchant or competitive markets like California, this is a disaster,” the Bernstein analysts write.
“Demand during what was one of the most profitable times of the day disappears. With it, the need for part of the merchant fleet disappears too for all but the dinner hour. And that is the issue competitive generators face globally in this 2020-scenario: how to live off demand of two hours a day.”
It’s bad news, too, for regulated distribution businesses, of the type that exists in Europe, Australia and in the US. And given, as we noted in last week’s article, Bernstein identifies the global “addressable market” for rooftop solar as two billion backyards, there can be no doubt that utilities will react. The question is how they can do so effectively.
Historically, for these businesses – usually natural monopolies that have high fixed costs and recover those costs by charging per kilowatt/hour – the loss of volume risks deflating returns. The utilities usually would look to recover this loss of volume by lifting power prices, but that simply increases the incentive for consumers to install rooftop solar PV.
“The response of simply raising prices per kWh is therefore unsustainable,” the analysts note. And they are faced with increasingly unattractive choices.
These are those choices as laid out by Bernstein.
1. Refuse to accept power into the grid that has been generated from roof-top solar systems (or pay a reduced rate for that electricity). These steps are being adopted or proposed in Hawaii and California currently. This merely creates economic incentives for homes and businesses to start thinking about domestic energy storage solutions. (We can see similar things happening in Australia, where utilities are refusing connections or upgrades and/or are forcing consumers to downsize their plans)
2. Second, charge a connection fee to reflect the true value of the service (the ability to buy electricity whenever it is required, rather than the electricity itself). This step is being adopted in Arizona and California. But this step cements the attractiveness of battery storage to time-shift the power. (Again, this is taking place in a haphazard fashion in Australia).
3. Third, admit defeat and become a roof-top solar developer. (German energy giants RWE and E.ON appear to have realised this, as have US companies such as NRG)
4. We cannot think of a fourth option.
As Bernstein concludes:
“The behavior from here seems clear: the solar industry will expand. Retaliatory steps from distribution utilities will increase the market for cost-effective battery storage. This becomes – initially – a secondary market for battery technologies being developed for the auto sector. A failed battery technology in the auto sector (too hot, too heavy, too rigid a form factor) might well be perfect for the home energy storage market…. with an addressable end market of 2 billion backyards.”
Later this week we will look at what happens – and how – if solar really does go mainstream.