Distributed solar- a threat to the existing business model or a chance for utilities
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- January 22, 2019
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All around the world, solar power is on the rise. Not only in sunny places like California or Arizona, but in the UK as well, And Germany, not known for its sunshine, is still the biggest solar market outside China.
While much of this growth now comes from big utility style solar projects, retail solar is an equally important growth driver – and the most disruptive force in the utility industry.
For about 100 years, the power industry has relied on the business model of centralized generation and distribution to retail clients. Rates have been based on so-called standardized load profiles (SLP), i.e. statistical models about the demand curve of households over the day and year. The SLPs also were the basis for purchasing of energy in the forward market, with only the balancing being left to the intra-day market.
With distributed solar, this entire model is under threat- not only the business case, but also the base for load prediction and forward buying. New statistical assumptions are needed.
In many places, residential solar has become price competitive to power from the grid. Germany is one of the countries where home-owners can produce power more cheaply by solar than if they buy from the grid. The same holds true for the US. Greentech Media reported that “20 U.S. states are currently at grid parity, and 42 states are expected to reach that milestone by 2020 under business-as-usual conditions.”1)
Most recently, the same has become true for commercial clients, where solar power costs have started to fall below power prices from the grid.
What does this mean for the utility?
- Costs for power from solar, or even solar + battery will continue to fall, while feed in tariffs for power sold to the grid will also fall. This means, consumers will try to optimize their own consumption.
Sales volume will be going to decline, which means income will be down, and profit as well
- The cost base will not go down proportionally, as most residential clients with solar will not disconnect from the grid. This will drive up power prices, which will accelerate the process.
In order to recover the grid connection costs for customers with residential solar, a new rate system will eventually be needed.
Similar to fixed line phones, there might come a time when the main cost driver for power supply to residential clients is the cost of the line, resulting in a flat fee for most of the consumption.
This is already happening in Chile, where the price of electricity for the commercial segment, has been increased as a result of the application of Law 20,936, which has transferred the entire cost of the transmission system to the consumer. Similar changes have been introduced in Mexico.
So consumers will have to decide whether to go completely off grid, or pay the flat fee for the grid on top of the costs for their solar system.
- Customers will keep adding battery systems and new challengers such as Tesla Powerwall will arise. There will be a business model in virtual storage of excess solar power, i.e. companies that take the solar power in times of excess production and sell it back to clients at night. We at E.ON have adopted this model and offer our clients a product called “E.ON Solar Cloud”, i.e. a virtual storage which is based on yearly consumption rather than daily. This product allows clients to store excess energy without investing in their own battery and helps E.ON to maintain a close customer relationship.
These business models require a much better understanding of your clients, as there will be more than one standard load profile. For a single home, there are at least 3 types of load profiles:
- homes with no solar
- homes with solar and excess energy to feed back to the grid
- homes with solar yet no energy to feed back due to storage
This is especially important in areas like California with the load peak in the early afternoon (due to high AC demand) or South Africa with the load peak even after sunset due to heating and cooking. Utilities need to gather more data from clients, become service partners and trading partners.
On one side, residential solar is threatening the sales side of the traditional utility business, yet at the same time opening up new business models. New players will try to enter the business, while incumbent players can use the advantage of being already a business partner while offering new services. At E.ON, we have taken up the challenge and are offering our clients new services, such as E.ON Solar Cloud or array diagnostics. We see ourselves not as a pure commodity supplier yet rather as partner in production, off-take and delivery.
The utility of the future will have to be trading partner for excess and back-up power, EPC and service partner for the solar + battery system. This means, utilities have to think of virtual storage (what to do with excess power in summer days, and how to secure enough power for winter nights), become data aggregators and data analyst as well as service partners and installers.
This does not apply to big utilities like E.ON only, yet also opens the way for small municipal utilities like German “Stadtwerke” or the US coops. While the big guys have the purchasing and data mining power, small utilities can use the local presence to their advantage – and buy data services in the market, find trading partners and buy white label products. Even properties that have gone off grid might use their services in services, back-up power and data management for smart home applications.
While even 2 years ago many analysts predicted the end of the utility business, I think the opposite will be true – the role of the utility will be stronger and more important.