A credit ratings agency just put the fear of the unknown into the so-called utility death spiral. Fitch Ratings has said that as utilities potentially lose more money to distributed generation, there would be less money to maintain their wires. It says that regulators should allow them to recoup more money from customers so as to prevent the downward spiral.
“The key to sustaining long-term investor-owned utilities creditworthiness in the face of rapid distributed generation (DG) growth is modification of volumetric-based tariff design to incorporate a larger fixed charge component,” says Fitch. “Failure to address net energy metering (NEM) rate design issues could lead to an unsustainable cycle of rising monthly bills for non-NEM customers, incentivizing them to acquire residential DG systems and leading to further rate increases and more departures.”
At issue here is net metering, which measures the amount of money that rooftop solar customers should get paid relative to retail electricity rates for surplus power they channel into the grid. Homeowners and businesses that generate an excess supply of electricity through their panels say that crediting them at the retail rate — the same price at which utilities sell — is fair because solar produces power at the most expensive time of day.
The utilities, in comparison, want to pay solar customers the wholesale rate, which they say provides the funds needed to maintain the grid that is used by the masses. Even those who put panels on their roofs must use the grid, either to sell their excess back to the utility at whatever rate or to buy from the utility when they can’t generate enough power like when the sun is behind the clouds.
Indeed, one side is saying that the process results in a wealth transfer from those who depend solely on the grid to those who can afford the panels on their homes. The other side is saying that customers who generate electricity through rooftop solar panels are preserving the grid while improving the environment.
“The conundrum for regulators and utilities from an energy policy point of view is facilitating development of distributed PV solar and its clean energy attributes without unduly burdening non-NEM customers with higher bills due to cross-subsidization of NEM customers,” says Fitch.
Rooftop solar is growing as the price of the panels is dropping and as federal and state tax policies favor their deployment. According to Fitch, annual residential photovoltaic installations increased 71 percent in 2015 and at a 55 percent compound annual growth rate from 2005 to 2015. Still, it is small part of the US electricity production at 1 percent.
Utilities point out that they spend $25 billion a year maintaining the grid. The Edison Electric Institute says that fewer connected customers lead to higher costs for the remaining ones. And that dynamic could potentially cause utilities to have less revenues and greater borrowing costs that are needed for business expansion.
For those reasons, some say that the transition to more distributed generation could be “painful” for utilities. “Utilities are poised to be part of the future,” says Darren Hammell, co-founder of Princeton Power that makes energy storage devices and micro-grids. “But they may play a much smaller role and they may not have totally come to terms with potentially smaller revenues.”