Will the flare of solar development finally break the utility business model?

The energy utility industry is collectively moving away from its historic emphasis on central station power generation delivered by high voltage transmission systems and substations to a more nimble, inclusive, and flexible utility system. There are two interrelated drivers to this transformational change that we are presently witnessing:

  1. The rapid emergence of new, distributed energy resource (DER) technologies; and
  2. An incremental, state-by-state revision of the regulatory policies that support the growth of these technologies.

This new system is characterized by a combination of DER, energy efficiency, renewable energy, and smart grid solutions to effectively manage electricity distribution and use. The reduced cost and widespread availability of key technologies such as photovoltaic solar panels, community battery storage, electric vehicles, and smart meters are creating new choices and options for customers. Moreover, regulatory mandates, energy policies, and carbon emission control have also driven interest in renewable energy and energy conservation.

The market is responding to these drivers.

  • Independent power producers, solar developers, and new energy providers are actively seeking new residential, commercial, and industrial customers.
  • Customers who invest in stand-alone solar facilities can decrease their energy bill, but also shift the costs of building and running an integrated grid to the meaning customers.
  • Utilities are responding to these drivers initially by investing in utility scale central station solar and offering purchase power agreements for competitive projects. More recently, utilities are in dialogues with their regulators as they struggle to plan, approve, integrate, and manage a wide variety of distributed resources.

As utilities struggle to plan and incorporate solar projects into their integrated resource plans, a variety of business models are emerging and several strategies exist for utilities:

  • Continue to invest in third-party projects
  • Develop and manage community or shared solar plants as a substitute for disaggregated roof-top solar options and an option for asset ownership and management
  • Invest through unregulated subsidiaries in this growing solar development market

Recent examples of this last strategy include AES purchasing Main Street Power, Duke Energy’s investment in REC Solar, and SCE purchasing SoCore Energy (as well as equity stakes in other solar firms). Other investor-owned utilities, such as NextEra and First Energy are actively involved in developing renewable energy projects across the country.

There is a critical mass of customer, market, and investor demand that encourages utilities to move from single project perspectives to owning a portfolio of projects and even an unregulated subsidiary in this market.

Investor-owned utilities need to balance stockholder risk, regulatory support, and business model alignment. The lack of stakeholder alignment in the renewable resource marketplace can cause serious consequences such as the problems NextEra and Exelon are experiencing with key regulatory approvals. Customers served by regulated utilities who desire the benefits of solar energy may be best served by a variety of competing options, but their local utility may not be the provider of choice.

Phone: 312-602-4000
Email: marketing@westmonroepartners.com
222 W. Adams
Chicago, IL 60606
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