In widely covered news, Jim Rogers, CEO of Duke Energy, said that the utility sees a threat from distributed energy resources. NRG CEO, David Crane, came out and said that utilities should be concerned but they [NRG] will be providing a solution that attempts to capitalize on the opportunity. Both comments are related to an Edison report that was published earlier this year. The background coverage to my comments can be found at Bloomberg, Grist [1/2], RMI, Edison.
What stands in the way of disrupting utility models?
NRG knows that solar needs a combined solution with base-load generation to create a real threat to the utility business models. Regulated utilities have the ‘requirement to serve’ and therefore have the responsibility to provide the electricity consumers want when they hit the light switch even when a rooftop solar installation is not producing electricity. Being able to provide the guarantee to consumers that the light will come on when relying solely on distributed generation is the key to having consumers disconnecting from the grid. It is the fundamental answer to the question “What happens when the sun doesn’t shine?”
This guarantee is answered on a technical basis. Do the products and systems exist that will produce all of the energy a customer needs on site, even when the sun doesn’t shine? The answer is a resounding yes, and more importantly the value provided by these systems is greater than the utility alternative. What does such a system look like? The solution is unique to each user but could consist of one or more of these individual solutions;
- Energy Efficiency
- Rooftop Solar Generation
- Fuel Cells or Cogeneration
- Storage with analytics
The ability to implement goes back to NRG’s strength in this argument. Implementation is centered around the financial proposition being presented to customers and how to make onsite energy more valuable than the utility alternative.
The customers want to see a value proposition that has a cost factor equal to or lower than the utility costs today. Additionally, most will want to make sure the costs are predictable, almost certainly predictably lower than expected utility costs. The post-Sandy consumer is also looking for an option of providing energy for long period of time during a utility outage.
Enter Energy as a Service
The threat to utilities will be real when a complete technical solution as described by Jim Rogers from Duke can be provided to a majority of residential and commercial customers as a service. Most customers are not interested in owning energy and efficiency assets, but the majority is willing to participate in a pay as you go relationship.
It has taken the solar industry over a decade to get to where it is today. Much of the growth is based on residential and utility scale development. Both sectors have a straightforward path to credit security, FICO scores and bond ratings, and allow developers and financiers to offer energy as a financial service. This has been the key to making solar successful but more complete energy systems will need to provide the same level of financing.
NRG and others are working to piece together a base-load energy package through a lease offering for consumers. My hope is that the work will not end with residential and large corporations. In order to create the large impact, solutions need to be crafted for small and medium commercial customers; a customer segment that lacks the traditional form of credit security. Energy providers need to piece together sponsor equity, tax equity and debt for their project funds, funds that are concerned about recouping their investments and making the necessary returns for their shareholders.
Investor owned utilities and otherwise regulated utilities also work to bring a return to the shareholders. Utilities fear the day that demand charges are threatened by distributed energy resources. Demand charges are the key to showing ‘need’, and for utility regulators ‘need’ is the primary justification for building new power plants. And building new power plants is what makes most utilities money for their shareholders.
Solar energy service providers, investors and project developers are in a position to make good on the threat the utility sector sees coming. The technologies are out there and the financing products have been created. Who will be the first to attack demand charges with a complete solution? What is the size of the market and what will make customers disconnect the line? Put the pieces together, and a demand and energy evolution is on the way.
Written by Yann Brandt, President of Braya Solar Group and co-founder of Demeter Power Group.