Counting Down to the Death Spiral

A lot can happen in 30 years. Infants grow into adults, state-of-the-art computers become museum pieces and long-lived electric-utility business models can disintegrate. With the price for solar photovoltaic (PV) panels and batteries dropping quickly, a Rocky Mountain Institute (RMI) report suggests grid-supplied electricity soon could face competition from customers who decide to go it alone.

This isn’t necessarily news for anyone who has been tracking the frequency with which the phrase “death spiral” has been appearing in trade magazines and websites. What is news, though, is that RMI researchers have outlined a time frame in which this metaphorical death could occur. Given the falling price of PV panels—and, almost as important, battery technology—commercial and residential customers could begin leaving utility systems within 30 years. The report, “The Economics of Grid Defection,” predicts price parity could make such defections possible in New York within 10–20 years.

Three decades may seem like more than enough time to rework current business models, but 30 years is more like the day after tomorrow for utilities. Utilities typically amortize their investments in such equipment as substations and power lines over a 30-year schedule, meaning this is the period of time over which governing utility commissions allow a rate of return on those capital investments. So this report’s timeline could cause nightmares for utility planners now considering the massive investments needed to make our transmission and distributions smarter and more resilient.

“Many utilities across the U.S. are faced with significant infrastructure investment today,” said Leia Guccione, an RMI senior associate and one of the report’s co-authors. “This is an immediate concern for utilities.”
Additionally, the 30-year time frame affects the bonds many utilities issue to finance infrastructure improvements, said James Mandell, RMI manager and contributing researcher. Investors seeing greater risk in a 30-year utility bond offering will begin demanding a greater return than the 3.5–5 percent rates utilities typically pay.

“The utility only works if it has captive customers over that 30 years,” Mandell said.

To reach their somewhat dire conclusions, Guccione, Mandell and their co-researchers from RMI, CohnReznick, Think Energy and Homer Energy LLC, looked at the point where rising residential and commercial electricity rates met falling costs for combined PV and battery systems, along with diesel generators in their commercial scenarios. That parity point might occur anywhere from 10 to 30 years from now, with regional differences based on factors ranging from projected electricity rates to an area’s solar resources. In Hawaii, this point might already have been reached.

The researchers studied five regions: Honolulu; Los Angeles; Louisville, Ky.; San Antonio; and Westchester, N.Y.

Batteries are an important part of the equation because grid defection really isn’t possible without some means of providing electricity after sundown. The team considered fuel cells and natural gas microturbines but saw battery systems as the most logical short-term solution. Backup diesel generators are considered as part of a commercial grid defector’s system, since many commercial buildings already have generators to help ensure operational continuity in case of a power outage.

The retail price of electricity was the biggest factor in how quickly a region reaches the point grid defection and it becomes economically beneficial for customers. This is why researchers believe Honolulu, where customers now pay between $0.34–$0.41 per kilowatt-hour, might already be seeing off-grid operation as financially viable. Electricity cost even trumped available solar resources, which is why commercial New York customers might be tempted to go it alone faster than businesses in far-sunnier California.

One factor that didn’t seem to play into grid-defection forecasts is whether a utility was regulated or deregulated. Regulated utilities are allowed to own their own generation assets, while deregulated utilities are basically electricity resellers, purchasing the power they sell to retail customers from independent merchant generators. This means deregulated utilities would not be able to adapt to a market favoring on-site, distributed systems by owning PV panels installed on a customer’s roof.

“I think the challenges of what utilities are allowed to do is an important part of the topic,” Mandell said.

A follow-up report is planned to provide options to ensure the continued viability of electric utilities. One such company—NRG Energy—has its own ideas on the matter. President and CEO David Crane announced plans to offer rooftop solar to its retail customers in his February 2014 earnings call, reporting on the company’s fourth-quarter 2013 performance. And in a November interview, Crane mentioned that NRG was working with Segway inventor Dean Kamen to develop a residential-sized Stirling engine that could be used as a backup generator to PV systems.

“[We have] come to the conclusion that, within the next 12–24 months in roughly 20–24 states, residential solar will be cost-competitive,” Crane said, agreeing with the RMI report. “Where we see our advantage is in combining that with actual supply of system power."

About the Author

Chuck Ross

Freelance Writer
Chuck Ross is a freelance writer and editor who has covered building and energy technologies for a range of industry publications and websites for more than 25 years. He specializes in building and energy technologies, along with electric-utility bus...

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