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Solar disruption

Growth in renewable energy challenges utilities, regulators

Winter 2016 | By Steve Pomplun

Solar energy and other renewable sources of electricity generation are surging, with 2015 surpassing records for added capacity at state, national and global levels. In the United States, more than 7 gigawatts of solar power came online last year. Wisconsin added a record 7 megawatts to that total.

While commercial and residential solar installations combined still account for less than one percent of domestic electricity generation, the rapid growth is sending shock waves through the industry, forcing utilities and regulators to rethink traditional business models and rate structures.

“For more than 100 years, the electric utility business model has looked the same – one private, centralized source providing all of its customers’ energy needs,” writes analyst Gary Radloff of the Wisconsin Energy Institute in a recent post on his Power Points blog. “But now this model is on the verge of changing or, more accurately, evolving. A combination of new technologies and shifting societal behaviors are altering the way we use the grid.”

“A combination of new
technologies and shifting
societal behaviors are
altering the way we
use the grid.”

That includes the growth of rooftop solar photovoltaic panels, which are turning utility customers into what some call “prosumers” – both producers and consumers of energy. Nearly half of the new domestic solar generation comes from residential installations, and a number of states, including Wisconsin, allow “net metering,” a billing mechanism that credits utility customers who own solar energy systems for the surplus electricity they feed back into the grid.

Strong growth is expected to continue for at least the next several years, driven by the recent extension of federal tax credits for investment in renewable energy, the declining cost of photovoltaic technology and other factors.

The expansion of distributed, rather than centralized, energy sources is good for consumers and the environment. People can become more self-sufficient and cut their monthly energy bills while helping reduce greenhouse gas emissions.

But distributed energy is disrupting business-as-usual for utilities and state regulatory commissions, which for a century have worked under that model of large, centralized power plants transmitting and distributing electricity across defined service territories, with fairly steady growth in demand to keep it all going. Stalled or falling energy consumption threatens company profitability under that long-standing business model.

 

RETHINKING RATES

“In the first hundred years of utilities, it was central-station power — you bought from the utility and there were really no other options for a customer,” says Jeff Ripp, energy regulation division administrator for the Public Service Commission of Wisconsin (PSC). “But the market’s been changing, and there are more options for customers to go out and put solar panels on their houses or do other things.”

Ripp, a 1998 alumnus of the Nelson Institute’s Water Resources Management master’s degree program, says the expansion of distributed energy – along with increased energy efficiency and slower economic growth — has prompted utilities to seek PSC approval for changes in how they bill for their services.

Rate-setting, one of the PSC’s principal responsibilities, is a complicated public process, requiring that costs be identified and allocated for generation, transmission and distribution, from the power plant to the customer’s meter. Customers are divided into residential, industrial and commercial classes, with different rates determined for each class based on a variety of factors.

Manufacturing a solar panel
The growth of rooftop solar panels is turning utility
customers into “prosumers” – both producers and
consumers of energy. Photo: Univ. of Salford Press

Like regulatory commissions in other states, the PSC must balance the interests of the utilities, their investors and customers, and the public through rates that are statutorily required to be just, reasonable and non-discriminatory.

For residential customers, those rates consist of a fixed charge and an energy charge. The energy charge is based on the price of a kilowatt-hour of electricity. The more you use, the more you pay, so customers have some control over the size of their monthly bills.

Not so for the fixed charge, a set fee that appears on your bill every month. Power companies across the country have been seeking significant increases in their fixed charges. They argue that these monthly rates need to cover more of the costs of transmission lines, substations and other grid infrastructure.

“Historically, the commission has allocated certain costs to the customers directly through the fixed charge,” explains Ripp. “Things like administrative costs, the customer’s meter and so on. But most of the infrastructure costs were embedded in the energy charge. And that worked great for many, many years.”

Ripp says it worked because, in simplest terms, energy demand steadily grew.

“If your sales are increasing, then everybody continues to pay for the system, and system upgrades get paid for through the growth to some extent,” he says. “So the magnitude of the fixed charge was less important to the utility because they were getting the revenues needed to invest in and operate the system.”

But with demand growth becoming less reliable, utilities are looking for other ways to pay for the grid.

 

INDUSTRY IN FLUX

Over the past several years, Wisconsin utilities have brought numerous requests for fixed rate increases before the PSC, often seeking a doubling, or more, of rates that in the past have typically been around $10 per month. The commission has not granted any requests in full, but it has approved significant increases in most cases, along with small reductions in the energy charge.

Renewable energy advocates contend that these increases disproportionately affect low energy-use households. They also say that they reduce the incentive to become more energy efficient and to pursue solar and other low-carbon alternatives.

“The renewable energy industry argues that this discourages investment in renewables because it reduces the actual cost of energy, which means that your payback on your system is longer,” Ripp explains. “And if you’re net-metered, you’re getting paid less at the retail rate when you sell energy back on the grid.”

“The extent to which
[the electric utility] is the
provider of energy may change,
or how it provides energy may
change. But absent some
major technological revolution
in storage, you still need that
central power plant when
you’re not generating from
renewable resources.”

Whether higher fixed rates discourage energy efficiency is less clear, according to Ripp.

“We’ve looked at that, and on the margin it may, but we’re not talking drastic changes in energy rates; a penny or half a penny, and for most people it still makes sense to put in LED lightbulbs and do other things even with the higher fixed charge,” he says. “For the average customer, the bulk of their bill is still a variable charge that they can impact through energy efficiency.”

What is certain is that the industry is in a period of transition unlike anything seen in decades. Ripp says the argument over fixed rates is only one manifestation, and other rate adjustments, including electricity prices tied to time of day or peak demand, will become more common as utilities struggle to adapt to change.

“This is a debate that’s happening across the United States – what is the utility of the future?” he says. “I think you’re always going to have an electric utility. The extent to which it’s the provider of energy may change, or how it provides energy may change. But absent some major technological revolution in storage, you still need that central power plant when you’re not generating from renewable resources.”

Radloff agrees, contending that a growing number of distributed resources, including rapidly developing energy storage technologies, will change the way consumers acquire electricity.

“This doesn’t mean energy utilities will go away completely — the need for larger-scale generation, distribution and transmission isn’t going to disappear any time soon. It does mean, however, that the energy world is going to get much more complex,” he writes.

That increasing complexity is shaking up the utility industry and showing up on customers’ monthly bills.

“In Wisconsin and elsewhere, commissions and utilities are struggling with what is the right price signal, and how do you allocate these costs?” says Ripp. “It’s a very interesting time to work in this industry.”



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