In the not-too-distant future, 5 to 10 percent of the electric generation market will be distributed. This is not a 'chicken little' statement but a simple matter of economics and customer value propositions. Some markets and geographies will experience less share loss and have a little more time; others will experience greater share loss and have less time. And while 5 or 10 percent may not seem like a lot of market share, we don't know of any CEO who would tell his or her shareholders that there are no plans for defending threats to his or her market of that magnitude.
In MetaVu Business Consulting's utility practice we work with several clients that operate in markets with mandatory solar energy and/or distributed energy targets. Our experiences have provided us with a glimpse into the future that we believe all Energy Central readers will want to understand. In summary, we believe significant market share will be lost to renewable DG before grid cost parity is reached. How could this be? Isn't electricity a commodity? Why would someone pay more for a commodity than necessary?
Our prediction is based on the premise that electricity generated by renewable DG is not a commodity. Renewable DG electricity is distinguishable from grid electricity in that it offers different value propositions to customers. These value propositions are important; they have economic value for which customers are willing to pay a premium.
These value propositions, which grid electricity does not offer, include:
Today, the installation of renewable DG is expensive relative to system energy. But system energy costs are rising. Fuel cost volatility, GHG reduction legislation, and rising infrastructure costs are just a few of the reasons why system energy cost increases can be expected to continue. When customers install most types of renewable DG they can typically count on two decades or more of energy with virtually zero risk of incremental cost. Customers are aware of this situation and are willing to pay extra for this cost certainty. In our experience, some customers are currently electing to pay up to twice as much on a kWh basis for renewable DG with expected energy production lasting 20 years or more.
Capital investments are required to install renewable DG. While this would seem to be a benefit for system electricity over renewable DG, capital investment does offer its own advantages. Federal tax policy has long encouraged capital investments by offering tax breaks to businesses that make them. In effect, this is a subsidy for renewable DG and reduces the cost of renewable DG relative to system electricity. And these benefits are in addition to the lucrative Production Tax Credits recently extended as part of the banking bailout bill recently passed by Congress.
Favorable Public Relations
You'd have to live in a cave to miss the degree to which consumers have demonstrated their preference for all things renewable and environmentally sound. Products created or services delivered with less environmental impact enjoy a competitive advantage over other products or services. Consumer preferences have percolated up through the supply chain of almost every industry. Even state and local governments, which compete with other state and local governments for employers and talented citizenry, are looking to improve their brands and competitive position through environmentally sound practices. Electricity, as a key part of most supply chains, is more valuable when it is generated by renewable DG than when it is sourced from generic system supply.
Greenhouse Gas (GHG) Liability Reduction
Some form of GHG reduction legislation will be passed by the next administration. The public wants it, it has economic development and national security implications, and it will serve as a key public barometer for 'getting something done' in Congress. While utilities and generators are concerned about the liabilities such legislation might create, their customers are trying to figure out how they can reduce their own GHG liabilities. One way customers can reduce GHG liabilities (and in some cases byproduct disposal costs) is to use any waste products they might have available as energy sources.
While most consider PV solar as the primary type of renewable DG, there are other significant (and less expensive) types. The following chart is a partial list of industries with significant waste products that could be used as energy sources for renewable DG. Customers that use waste products as energy resources cost-effectively reduce their GHG liabilities. Many of these industries are also large electricity consumers.
If you agree that electricity from renewable DG is more valuable than system electricity, you must also agree that utilities and generation companies will begin to lose market share before grid cost parity is reached. In future articles I'll discuss how soon renewable DG penetration can be expected, in which geographies, in which market segments, and what steps utilities and generation companies should be considering to maximize opportunities in the electricity market of the future. I look forward to your comments.