Published on April 10th, 2015 | by Aisha Abdelhamid61
Off-Grid Solar Power vs Grid-Connected Solar Power In The 21st Century
April 10th, 2015 by Aisha Abdelhamid
Originally published on SolarLove.org.
The future in which power company customers transitioning to solar electricity generation can choose to either maintain grid connection or cost-effectively generate off-grid has arrived. The implications of this reality, however, are only just beginning to dawn.
Rising on the horizon of a new solar energy era, concerns for stranded assets are keeping power company stakeholders up at night. Equally disconcerting, low- and fixed-income electricity consumers with no financial ability to upgrade to solar will find themselves unable to handle higher utility bills as electricity prices increase, due to increased grid-defection.
Projecting the Rising Solar Energy Era
Only with an informed roadmap of the economic implications of America’s rising love affair with solar energy, can we navigate a socially just and economically viable way forward. The Economics of Load Defection, a new report released by Rocky Mountain Institute (RMI), offers this roadmap.
Noting that retail prices for grid electricity are climbing while costs for solar PV and batteries are declining, The Economics of Load Defection projects the coming electricity load and revenue loss that utilities could well face in the coming 10–15 years. Implications for utility companies and regulators are clearly detailed in the new report, as well as possible paths forward.
Solar-plus-battery systems are expected to play a major role in America’s future electricity grid. But exactly what that role will be is not yet clear. Retail pricing structures, utility business models, and regulatory frameworks are all evolving at a steady pace, and outcomes of these evolutionary processes will largely determine which trajectory the grid will follow into the rising solar energy era.
Focusing on Grid Load and Sales Revenue Economics
As the report authors point out, solar-plus-battery systems are increasingly becoming a cost-effective option for property owners. And, as these utility customers determine and adopt economically optimal solar energy configurations, their dependence on the grid for meeting electricity needs decreases significantly, while solar PV rises to supply the majority of their needs at significantly reduced cost. Although this sounds alarmingly like an S.O.S. from a sinking ship, the report authors offer this for reassurance:
“While the presence of such customer choice has important implications, the number of customers who would actually choose to defect is probably small. The far more likely scenario is customer investment in grid-connected solar-plus-battery systems. Since such systems would benefit from grid resources, they could be more optimally sized, thus making them smaller, less expensive, economic for more customers sooner, and adopted faster. More specifically how system configurations and economics would evolve over time, and what magnitude of customers, load, and revenue that could represent, are the focus of this analysis.”
James Mandel, RMI Principal and report author, notes, “These findings should be compelling for customers and technology providers.” Mandel continues, “No matter how expensive retail electricity gets in the future, customers that invest in these grid-connected systems can contain their electricity costs at or below a ‘peak price,’ yielding significant savings on their monthly utility bill.”
“This is not all risk,” explained RMI manager and report coauthor Leia Guccione. “Because these solar-plus-battery systems are grid-connected, they can offer value and services back to the grid. We need not see them only as a threat.”
The Implications of Increased Electricity Load Defection
Nevertheless, exploring the implications of increased load defection, the report points out that “even if only a fraction of customers adopt such systems, utilities could face lost kWh sales from central generation, potentially undermining revenue needed for ongoing grid investment and maintenance. For example, in the Northeast United States, by 2030 maximum residential and commercial load defection could total 140 million MWh and $35 billion per year.”
In reality, however, the report authors appear to favor utility company adoption of solar-friendly regulatory reform and solar energy grid-connection strategies as a way of slowing the arrival of the inevitable death of the grid. According to the report, even the prevalent “net energy metering” (NEM) strategies and more recently proposed “fixed energy charges,” are not strong enough measures to control ultimate load defection:
Net energy metering is a contentious yet prevalent policy that has successfully supported distributed solar PV’s growth in the U.S. Some argue that it hastens load loss from the grid (net-metered solar PV customers quickly reach effectively zero net grid purchases) and that abolishing net metering will preserve grid load.
Our findings suggest that eliminating net metering merely delays inevitable significant load loss. Grid-connected solar-plus-battery systems will gradually but ultimately cause a near-total load loss even in net metering’s absence. However, fixed charges — which some utilities have recently proposed — don’t ‘fix’ the problem. Similar to our “with” and “without” NEM scenarios, residential fixed charges would likely alter (i.e., delay) the economics for grid-connected solar and solar-plus-battery systems, but likely wouldn’t alter the ultimate load defection outcome. Customers might instead wait until economics and other factors reach a tipping point threshold and more dramatically “jump” from grid dependence to off-grid solar-plus-battery systems that offer better economics for electric service.
Major Findings of The Economics of Load Defection
The major findings reported in The Economics of Load Defection are as follows:
• Solar-plus-Battery Systems Rapidly Become Cost Effective
From the utility customer’s economic perspective, a grid only system configuration evolves in the near term to grid-plus-solar, and then to grid-plus-solar-plus-batteries in the longer term. The report states, “Grid-connected systems of this analysis become economic for customers much sooner, with substantial utility load loss well within the economic life and cost recovery period for major assets. Smaller solar-only systems are economic today in three of our five geographies, and will be so for all geographies within a decade. New customers will find solar-plus-battery systems configurations most economic in three of our geographies within the next 10–15 years.”
• Solar PV Supplants the Grid Supplying the Majority of Customers’ Electricity
The utility customer initially receives the majority of his electricity supply from the grid. “Over time as retail electricity prices from the grid increase and solar and battery costs decrease, customers logically reduce their grid purchases until the grid takes a backup-only role. Meanwhile, solar-plus-battery systems eventually provide the majority of customers’ electricity. For example, in Westchester County, NY, our analysis shows the grid’s contribution shrinking from 100% today for commercial customers to ~25% by around 2030 to less than 5% by 2050. Inversely, solar PV’s contribution rises significantly to make up the difference.”
• Potentially Large kWh Defection Could Undermine Revenue for Grid Investment Under Current Rate Structure and Business Models
The report authors estimate that the grid requires an approximate investment of $100 billion a year, or $2 trillion between 2010 and 2030. This annual investment is expected to be recovered through electricity sales revenue. They point out, however, that a large impact on system economics can come from a relatively small decline in kWh sales revenue. “Notably, our analysis shows that grid-connected solar-plus-battery systems become economic for large numbers of customers, and those systems have the potential to supply greater and greater portions of customers’ electricity. Assuming customer adoption follows optimal economics, the magnitude of potential kWh defection from the grid is large.”
As an example, the report projects what the maximum possible kWh sales erosion might be in the US Northeast by 2030, only 15 years away:
- ~58 million MWh annually (50% of utility residential kWh sales)
- 9.6 million customers
- $15.4 billion
- ~83 million MWh (60% of utility commercial kWh sales)
- 1.9 million customers
- $19.4 billion
Significant Implications vs Emerging Opportunities
While implications from the above findings could be very large, the report also recognizes emerging opportunities. Although grid-connected customers are projected to represent significant electricity load loss, the customers’ grid-connected solar-plus-battery systems “can potentially provide benefits, services, and values back to the grid, especially if those value flows are monetized with new rate structures, business models, and regulatory frameworks.” Crucially, grid-connected customers are projected to maintain their connection to the grid, as long as grid defection isn’t encouraged by penalizing charges and/or changes to retail electricity price rate structures.
Participants in the electricity system market and other stakeholders are facing profound impacts which, according to the report authors, come with the following considerations:
• For customers that invest in solar PV and solar-plus-battery systems, the emergence of choice is good news.
Report analysis suggests that, “with smart solar-plus-battery investments, customers could see peak pricing emerge, insulating themselves from rising prices for grid-supplied electricity.” However, traditional grid-supplied customers would see higher pricing from rising retail prices, and defected customers (off-grid) would face the necessity of larger, more expensive stand-alone solar-plus-battery systems.
• For owners and operators of central generation and transmission (such as independent power producers and merchant power plants), report findings are likely bad news.
The report analysis predicts that the decline of sales from central generation will accelerate with the adoption of solar-plus-battery systems, and the risk of stranded assets is real. As noted in the report, “Existing assets still within their economic life and cost recovery period will serve a smaller and smaller remaining load, requiring price increases to cover costs and returns. Meanwhile, assets in the planning pipeline won’t see the future demand to justify their capacity and generation output.” Reductions in peak price spikes are also likely in deregulated markets, and solar-plus-battery systems are additionally expected to encroach on markets for ancillary services.
• For distribution grid operators (such as wires-only utilities), the emergence of distributed solar PV and batteries is good news.
Distribution grid customers with solar and battery systems are anticipated to provide value to the grid including upgrade deferrals, congestion relief, and ancillary services. However, the report notes that in order to fully capitalize on these opportunities, new business models, pricing schedules, and regulatory reforms need to evolve.
• For vertically integrated utilities, these systems will strain current business models, and adjustments will be necessary.
New business models are needed to fully capitalize on the rising adoption of solar PV and batteries. The report authors anticipate that similar challenges will be faced by distribution utilities whose revenue depends on volumetric sales of electricity.
Stranded Assets vs Integrated Grid
Jules Kortenhorst, CEO of Rocky Mountain Institute and Carbon War Room notes, “Today’s electricity system is at a metaphorical fork in the road. Down one path are pricing structures, business models and regulatory environments that favor eventual grid defection.” The report authors explain that this path favors grid defection, resulting in an upward price spiral. This path leads to the inevitable stranding of grid assets serving a dwindling load.
Adopting an off-grid solar-plus-battery option will become increasingly appealing for increasing numbers of customers, leading to skyrocketing prices for customers remaining on the grid. In particular, low- and fixed-income customers will be forced to bear a disproportionate burden of the rising retail price for electricity. Down this path, resources on both the grid side and the customer side reach a point of being overbuilt and underutilized, a classic example of stranded assets leaving excess capital on both sides of the electric meter.
On the other hand, RMI CEO Kortenhorst explains this possible future, “Down another road, those same factors are appropriately valued as part of a transactive grid with lower system-wide costs and the foundation of a reliable, resilient, affordable and low-carbon grid of the future in which customers are empowered with choice.”
This alternative path favors business models, regulatory reforms, and stable price structures in which, as the report authors suggest, “distributed energy resources [DERs] such as solar PV and batteries — and their inherent benefits and costs — are appropriately valued as part of an integrated grid.” Such an integrated grid offers a future, according to the report, where grid and customer-side resources collaborate with far greater efficiency in the generation and usage of both capital and physical assets.
Optimizing the Future Grid of the Solar Energy Era
These two pathways into the rising solar energy era are not set in stone. There is ample room for innovative thinking, entrepreneurial planning, and socially just strategies. However, the decisions being made today are likely to set us on a course that becomes more and more difficult to correct. The time frame for optimizing the future grid is relatively short, and growing shorter and more urgent for some geographical regions where solar options are already prevalent and appealing.
Kortenhorst summarizes this urgent need for determining the best path forward: “That’s why RMI is focused on new utility business models, regulatory reform in places like New York, and accelerated adoption of rooftop solar and other DERs—so that the grid of the future can provide customers reliable, clean, affordable power for decades to come.”
Founded in 1982, Rocky Mountain Institute is an “independent, nonprofit think-and-do tank.” Engaging with businesses, communities, and institutions, RMI promotes advanced market-based solutions to drive a cost-effective divestment from fossil fuels to efficiency and renewables. Their work aims to accelerate and scale replicable solutions that transform global energy use for a clean, prosperous, and secure future.
All Photo Credits: © RMI.org