High Cost Electric Utilities Will Experience Grid Defection as EVs become More Common
High cost electric utilities in mild-climate areas will experience grid defection as customers learn that on-site solar systems, stationary batteries, smart home energy management systems, and electric vehicles can work together to provide realistic alternatives to grid service. This will work best in sunny and warm climates, where power needs do not vary greatly between seasons, and where solar production is available all year. In northern climates, this solution is not yet pragmatic.
Utilities may believe that EVs will make their customers MORE dependent on utility service, and many are planning distribution and transmission upgrades in anticipation of large additional loads. In sunny climates, however, the opposite may be the case: the large storage capacity of EVs may enable more customers to install solar systems that meet their full needs, using the EV battery for multi-day storage. The Ford Lightning pickup is marketed with exactly this kind of service in mind.
In the United States, San Diego Gas and Electric Company is an example of this. With current volumetric rates about forty cents per kilowatt-hour, SDG&E is the highest cost major utility in the lower 48 states. San Diego is a mild marine climate with limited heating and air conditioning needs. Solar production is relatively high across the year. Many homes have quite low electricity requirements, partly a result of energy efficiency investment incentivized by very high electricity prices and strong energy efficiency programs.
Under its current volumetric rate design, SDG&E is experiencing a high rate of residential and business solar installation. Customers invest in a solar system costing $0.10 to $0.15/kWh, and displace utility purchases costing two or three times that cost. The Company is proposing a shift to a large fixed customer charge based on income, and a somewhat lower volumetric rate in an effort to recapture revenue from wealthier households -- those most likely to have invested in rooftop solar in the past. That shift, if approved, will encourage higher-income residential customers to give more serious consideration to cutting the cord entirely, meeting their electricity needs with on-site solar, on-site storage batteries, and use of their electric vehicle batteries as a part of a grid defection plan.
The EVs are not well recognized as an enabling technology for grid defection, but the typical new EV has a battery 3 – 5 times the size of current typical home batteries installed with solar systems. And the EV also provides the ability for the resident to bring home additional kilowatt-hours from a central charging point when needed.
If the high fixed charge proposed by SDG&E is approved, it is likely that customer attrition will result, diminishing utility revenues, and forcing a price spiral that will encourage further customer grid defection.
A 2014 report by the Rocky Mountain Institute, The Economics of Grid Defection, predicted that grid defection would become cost-effective in more places over time. That time has arrived.
How a Fixed Charge Affects Grid Defection
Many electric utilities are pursuing high monthly fixed charges for their residential electricity rates. California is most notably in the press, with a proposal for income-graduated fixed charges, but electric cooperatives have been adopting a high fixed charge rate form for a decade now.
This rate form will likely result in defection of many electricity customers from grid service.
Some of this will be very subtle and not be confrontational to utility regulators. Examples include:
Rural houses with separate services for the barn, shop, or well house are already consolidating these services by installing on-site wiring to a single service panel to avoid paying multiple account fixed charges; we are seeing this today. This will reduce the number of “customers” but will have little impact on reducing distribution system costs.
Homes with accessory dwelling units (ADUs or “granny flats") have often preferred separate metering, so that the tenant is responsible for their own electric bill. These will have an incentive to consolidate service to a single meter. We are seeing this today as rooftop solar systems are installed, in order to use more of the output on-site to displace retail purchases.
Multi-family structures will resort to master metering, with or without submetering of the premises. We are seeing this today where regulatory policies allow it. Blocking this is a form of discriminatory rate making (apartment hotels, which may be essentially identical structures, are typically allowed to use a single meter, while condominiums and rental apartments are not).
But it will become more dramatic in the future, with almost any single-family home in a sunny climate having incentives to cut the cord.
We are already seeing hundreds of thousands of small electricity uses being served entirely with solar and storage, with no grid connection.
An excellent example is pedestrian crossing signals near schools. In the past, these normally required a grid connection. Today, the cost of the solar crossing signal is less than the cost to trench a connection across the street to connect to grid power, and the signal more than pays for itself before it is even commissioned.
Solar Powered Pedestrian Crossing Signal
Pedestrian crossing signals use only a few dollars per month of electricity. But this type of defection will expand as solar and batteries get cheaper, and grid power gets more expensive. High fixed charges will gradually cause other small users to abandon their electricity connection entirely. First the crossing signals. Then the traffic signals. Outdoor advertising signs. Sewer lift pumps. These are all examples of relatively small users of electricity that may be able to produce and store their own power, often amounting to only a few dozen kilowatt-hours per month.
Next will be vacation cabins, often served by rural electric cooperatives that already have implemented high fixed charges. These utilities deviate from the generally-accepted utility rate design principle that fixed charges should only recover customer-specific fixed charges, such as meters, meter reading, service drops, and perhaps a ahre of the final line transformer. Some do so because they serve vacation cabins that only use a small amount of power in a few weeks of the year. While there definitely are distribution system investment costs associated with this service, these homes are excellent candidates for defection – particularly as people learn to use their electric cars (and trucks) as mobile power sources, discussed below.
Eventually, residential customers, and even entire residential developments may find this economic. And the alternative – low fixed charges and high volumetric prices – will also chase higher-use customers to install solar to avoid most grid power purchases, as has been the case in Hawaii, California, and Australia.
I’ll take the example of a realtor in Maui who lives on a rural distribution line. While he had utility service, he regularly experienced distribution system outages of multiple hours, and purchased a backup generator to ensure that his essential loads could be serviced on an uninterrupted basis. He later installed a solar plus battery system. Initially, he retained electricity service, paying the $25/month “minimum bill” to have that backup service. After two years, his on-site battery bank had never dropped below 30%, and he had not needed to rely on his backup generator once. He cut the cord. He still has the gasoline generator as a backup, but has not used it for five years now.
This option remains available for customers. In some states, the operation of fossil energy backup generators may be restricted when grid power is available. Another Hawaii customer, on the Big Island, got around this another way. She installed solar plus battery backup. During one distribution outage, she invited her next door neighbor to plug into her house with an extension cord to keep the fridge, freezer, and some other key loads active. During a multi-day cloudy spell, the same neighbor invited her to recharge her battery bank by reversing the extension cord to his grid-supply. The customer that still has grid supply is exempt from the prohibition on running a gasoline generator during an outage. Both therefore still have access to the backup generator at the grid customer’s home. A very small microgrid, but likely to be a model for the future in some areas.
Electric Cars Can Change the Equation Dramatically
As more and more customers buy electric cars, this situation will change dramatically. The typical battery storage system paired with solar has 10 – 20 kWh of battery storage. This is enough to store excess generation during the day, to power the house overnight until the sun comes up the next morning, but on multi-day cloudy periods, on in winter, it may sometimes not be enough.
Electric vehicles now come with 50, 75, or even 130 kWh (Ford Lightning) batteries This capacity provides EV owners with MUCH more storage than typical solar customers installed in the past.
The hardware and software to operate these vehicles in vehicle-to-home (V2H) form is rapidly expanding. This enables the cars to normally charge FROM the house, but in an outage the car can also supply power TO the house. These vehicles become large mobile storage batteries (with seats, radios, and air conditioning).
In fact, the retail price of a Ford Lightning with 131 kWh of storage is lower than the equivalent retail cost of 131 kWh of Tesla Powerwall batteries. In a sense, for a customer that wants a large home battery, the “pickup truck” is “free.” [Powerwall price: $9,200 / 13.5 kWh, or $681/kWh; Ford Lightning $81,269 / 131 kWh, or $620/kWh. Both prices are without the installation of the battery-to-home hardware at the premises.]
Once a residential consumer has an 80 kWh or larger battery at home (in their vehicle), their options to disconnect from the grid expand. If the home battery is not adequately charged to support the house, and the sun is not shining, the resident can recharge it from the vehicle. If the vehicle is starting to run low, the resident can drive it to the nearest charger, and recharge it, leaving the house operating on a smaller on-site battery. Just as some people receive home delivery of milk, while others buy it at the supermarket, the day is coming when some people will receive home delivery of electricity, while others will buy it at the … supermarket parking lot.
This is essentially what people with home gardens do. If they run short of lettuce, tomatoes, or green beans from their garden, they can always go to the supermarket or specialty greengrocer, and buy the additional produce they need. The off-grid home with an EV can go to the nearest public charger and get some more kilowatt-hours and bring them home in the EV.
In regions with cold winters, this is not going to work very well, because the solar system will provide only a fraction of the kilowatt-hours needed in the winter season. But in Hawaii, Southern California, Arizona, Texas, or Florida, and in Australia, equatorial island nations, and northern Africa, a solar system can be designed to meet MOST winter needs, leaving the customer to only need to use the vehicle battery to bring extra kilowatt-hours home a few times per year.
Like the gardener who goes to the supermarket to buy extra tomatoes, the EV owner who goes to the nearest public charging center will be served without price discrimination. The price for high-speed charging is quite high (up to $0.51/kWh in my city, according to Plugshare), but if you are avoiding a $100/month or larger fixed charge, and only rely on high-speed charging a few times per year, the economics are likely to be compelling.
For many people who can charge at their workplace, during the day when the sun is shining using solar power, the opportunity may be more compelling. Just as many of us who work in offices never need to buy a pen, printer paper, or notepad for home use, workers may begin bringing kilowatt-hours home as well. This may actually be beneficial if it means that more electricity used overnight at home can be generated from solar panels during the daytime.
The Basic Conundrum: Utilities Are Becoming Uneconomic In Some Places for Some Users
One hundred years ago, electric utilities served cities and towns, but not rural areas. There simply was not a business model to serve sparsely-populated areas. The Rural Electrification Administration, created in the 1930's, subsidized expansion of electricity service. But today, there are more alternatives than before, and many customers may have options that are preferable to grid electricity service.
If utility regulators allow utilities to raise fixed charges, they are pushing smaller users to depart the grid. This can be via consolidation with other meters, carrying kilowatt-hours home in an EV, or true on-site independence. If utilities retain low fixed charges, but their volumetric prices get too high (as is the case in California), they are pushing large users to generate some of their power on-site, while relying the utility for supplemental power.
Either of these can break the utility business model, which depends on being a “monopoly provider.” But in the current technological environment, high-cost utilities simply cannot compete effectively against the sun.
This not the first time that the sun has been viewed as an unscrupulous competitor. In 1845, Frederic Bastiat penned the Petition of the Candlemakers, which stated:
We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us. http://bastiat.org/en/petition.html
The innovation about which Bastiat was really complaining was the development of sheet glass, making larger clear windows affordable to the masses, enabling people to have sunlight in their houses during the day. It was wrong for France to have prohibited windows then, and it is wrong for utility regulators to obstruct solar today. Technology evolves.
What Needs to Happen for This Kind of Grid Defection to Become Reality?
Essentially nothing. All of the elements of this transition are already in place or underway:
- Consumers are buying EVs and solar plus battery home systems;
- Ford, Peugeot, Nissan, Hyundai and other EV manufacturers are configuring bi-directional charging systems, enabling V2H connections; Europe is ahead of the US, in part because electricity prices are higher in most of Europe than in most of the US, and solar systems are equal or lower in cost in Europe.
- High voltage DC chargers are being installed across the country, making them geographically convenient to most homes to obtain extra kilowatt-hours when home solar generation falls short;
- Utilities are imposing higher fixed charges on solar customers;
- Battery costs are declining, and several new battery technologies are in deployment testing with order-of-magnitude price reductions;
- Utility regulators in many states are implementing policies that are favorable to utilities, but these same policies will alienate customers who can cut the cord economically with modern technology.
This Is Really Inefficient
This scenario will mean a lot of wasted investment. Residential customers will install bigger-than-optimal size solar systems, to meet more of their own needs, because their alternative, using HVDC EV chargers as a supplement source of supply is expensive. Utilities will install duplicative battery and other storage systems, which would not be needed if the customer storage was available to the utility when the customer did not need all of the capacity. Diminished numbers of customers sharing the cost of the grid mean that those who remain dependent on the grid – apartments and businesses – will pay much more for their electricity service. Collectively we will pay more. But individual customers will act in their own self-interest, and many will pay less.
Smart rate design, with low fixed charges, steeply differentiated time-varying prices, and fair compensation to customers for use of customer storage will produce a much more efficient result. But many utilities are actively pursuing higher fixed charges that will make this smarter future less likely.
Smart utilities like Green Mountain Power are seeing this future, and embracing it. They are offering customers attractive terms to make their batteries available for grid service when not needed in power outages. They are offering low-cost EV charging during hours when the grid is not stressed. They are working to be partners with their solar customers, not adversaries.
The smart utilities will survive and thrive. Those that implement discriminatory or predatory pricing will find that the sun is a tireless competitor.
What Can Electric Utilities Do About It?
Utilities are in a market bind, and some will fail financially. High fixed charges will push many small users off the grid entirely; high volumetric rates will push larger users to install solar and storage, to make more of their own electricity. Efforts to punish solar customers in order to protect lower bills for non-solar customers will simply alienate more solar customers to leave the grid.
This could be large urban utilities like San Diego Gas and Electric, which already have above-market retail prices and many small-use residential customers with solar systems or the rooftop space to install solar systems. Customers can create formal or informal micro-grids to share storage capacity and grid connections, just as many suburban homes now share internet service (which is usually characterized by a high fixed charge rate design). Ultimately, the City or Community Choice Aggregator will likely take over the distribution system at a discounted price. A municipal owner will perhaps be able to operate it economically with a lower cost structure than a private utility, or with tax subsidies. This has happened with many public transit systems that were previously privately owned.
Or it could be rural electric cooperatives in sunny regions that fail first. These may entirely lose small homes, vacation cabins, and other customers to solar plus storage plus EV options. Many of those customers already haul propane, boat fuel, or even drinking water to these remote locations, and can easily add a top-up of the Lightning at the nearest store to their en-route shopping list. These will be more difficult for the utilities to counter, because most rural electric cooperatives were formed with subsidies, and without those subsidies provided on an ongoing basis, may not have a viable business model at all.
We’ve been through this before. The Market Street Railway was a streetcar line in San Francisco. After World War II, it began to lose passengers to the automobile. It sought a rate increase to continuing customers in order to recover the lost revenue from departing passengers. The California Railroad Commission denied it. The U.S. Supreme Court ruled that public service companies are NOT entitled to recover costs that become stranded due to technological change. This is one of the anchor cases of utility regulation, along with Hope Natural Gas, and Bluefield Water Works.
What Should Policy Makers Do?
Congress, state legislatures, and City and County elected officials have a choice of whether to enable or obstruct this future of customers choosing to make some or all of their own electricity.
Utilities are already successfully lobbying in many places for obstruction, such as California and Hawaii state refusal to allow new housing subdivisions to install shared storage and shared generation, presenting the entire subdivision to the utility at a single meter and point of interconnection. We will see more of that.
This kind of obstruction will work for a while. But it will not prevent fundamental market economics from prevailing in the long run. Once customers can produce power on-site, store it on-site, and bring extra kilowatt-hours home with their EV when needed, they can cut the cord. They will increasingly do so if higher-cost utilities are allowed to implement rate designs that are unfavorable to solar customers.
A better choice for policy makers is to encourage, enhance, and facilitate creative responses to high energy costs. This includes enabling customers willing to pay the continuing cost of being connected to the utility, and paying non-discriminatory rates for service over that connection, to become partial requirements customers.
Smart Rate Design
The proper rate design to recover these costs is the same as for any other customers. There are three guiding principles to smart rate design:
- Customers should be able to connect to the grid for no more than the cost to connect to the grid;
- Customers should pay for power supply and grid services in proportion to how much they use, and when they use it;
- Entities supplying power or services to the grid should receive full and fair compensation, no more and no less.
See: Smart Rate Design for a Smart Future
In practice, for electric utilities this means a rate much like the following:
- Customer Charge: $10.00/month (a cost to connect to the grid)
- Site Infrastructure Charge: $.10/month per ampere of electrical panel capacity (a cost to connect to the grid to cover the service drop and final line transformer); there are several ways to structure this to cover the site infrastructure (at the customer premises) but NOT the shared grid costs.
- Energy Charge: Varies by time of use (power supply and all shared primary voltage grid services)
- Backfeed Credit: Varies by time of day, and likely somewhat lower than the energy charge in most time periods
All of these rate forms are in place at different utilities today, but perhaps not all of them at any one US utility.
A good example of one that comes close to all of these is Burbank Water and Power’s optional TOU rate:
Burbank Water and Power TOU Optional rate July, 2023
Hawaii’s long-term plan to achieve 100% renewable energy includes heavy reliance on rooftop solar. This is because there is insufficient land available and suitable for large-scale solar systems to meet all needs, at least on Oahu (Honolulu). As a result, the Hawaii PUC has adopted rates that are acceptable to solar customers, and resisted any pressure to make solar customers pay a disproportionate share of shared distribution or generation system costs.
Until 2015, Hawaii allowed conventional net metering, where solar customers could send surplus generation to the grid during the day, taking an equal amount back at other hours. If their “net” use was zero kilowatt-hours, they paid only a small minimum bill (now $25/month).
After 2015, Hawaii eliminated conventional net metering, moving to a “customer self-supply” option, where solar customers could not backfeed to the grid, but could buy supplemental power as needed at non-discriminatory rates. This evolved to a “smart export” framework, where backfeed is allowed when it is beneficial to the grid, but at a price far below the retail tariff. This provides benefits to both the solar system owner and to the other customers of the utility.
In addition, Hawaii now pays a “battery bonus” to customers with on-site batteries, if they make those batteries available to support the grid.
The Hawaii approach reflects the fact that renewable energy is useful and valuable to the grid, but prevents overpayment for power from new solar systems. These solar customers generally find that the connection to the grid is a good thing for them – they occasionally need more power than their solar systems can provide. They also benefit from limited export of power to the grid during very high demand periods when the grid is stressed, reducing the utility need to invest in generation, transmission, and distribution to meet customer needs during occasional hours of system stress.
The Lesson from Telephone Utilities
If utilities proceed with high monthly fixed charges and other rate design elements that penalize small users, they will alienate customers who have the option to self-supply and supplement that with power from their EVs.
We have seen this in telecom. Prior to telecom restructuring, a phone line and number cost only a few dollars per month; the company recovered a lot of the system cost from long distance charges. When the Bell System was broken up, and long distance was made a competitive service, the wireline companies increased monthly fixed charges to $30 per month or more. This pushed a lot of people to discontinue second phone lines (the “teenager” line), and to replace data lines with cable or DSL data service.
Then cellular telephone costs dropped, and provide a direct competitor to wireline service. In most cases, the service was not as reliable (cellular users experience “dropped” calls from time to time). But it had other benefits, including portability and data access on smartphones. Customers began to abandon their wireline phones.
More than half of American households have already “cut the cord” from wireline telephone carriers, relying exclusively on cellular service (mine is one of these households; we pay T-Mobile $70/month for two unlimited lines, including free Netflix and taxes). And half of “wireline” telephone service is now voice over internet (VOIP) service, not traditional “phone company” service. More than 75% of the former customers served by “telephone companies” has now migrated to other services.
We are not talking less; we are doing so more cheaply.
The cellular telephone industry has segmented service to large and small users, providing attractive options for each.
While most cellular subscribers choose monthly “unlimited” plans from Verizon, T-Mobile, and AT&T, other companies like Tracfone and Consumer Cellular provide limited service plans at much lower monthly fees. These are popular with small users.
For example, my local bicycling club wanted to have a phone number for people to call. It chose a Tracfone plan costing about $100/year, versus nearly $40/month for traditional telephone company wireline service. That provides plenty of minutes, voicemail, call-forwarding, and the ability to have a single contact number for a major ride organizer that goes with them during the ride. In essence, the wireline phone service priced itself out of the market just as the cellular industry was evolving to provide very attractive alternatives for this type of service.
The result of this customer loss due to pricing that is not competitive with the costs for a new market entrant is predictable. Many of the telephone carriers have gone through bankruptcies, and many have dramatically reduced their service territories by abandoning areas with a sparse customer base. The phone companies that remain financially healthy have mostly expanded into providing data service, home security service, and other services.
The same may happen to electric utilities that do not recognize that small users have increasing options, particularly as they acquire large storage batteries on wheels.
Conclusion
The electric vehicle provides a huge tool to enable grid defection from high-cost electric utilities. A large storage battery on-site means that a solar system that produces enough power across a week to support a house can rely on a multi-function large battery to enable the household to use that power when they need it.
EVs will also provide a simple way to “bring home” extra power when the on-site solar system production is not adequate.
In San Diego, where the utility is proposing to charge higher-income households $128/month, we may see a real-world test of this very soon.
Smart rate design can help a utility adapt to a changing market environment; efforts to retain a monopoly cannot work in many places: the sun is an increasingly strong competitor, aided by storage in electric cars.