Under pressure: Utilities make distributed energy moves

Utilities are facing unprecedented challenges to their traditional business models.   A growing number of utility customers in the U.S. are selling electricity generated by distributed energy resources (DER) like rooftop solar back to their utility at retail rates via net metering — meaning that these customers are using the grid without having to pay for it.  Coupled with slow electricity sales growth and greater energy efficiency, this trend is driving per-customer electricity rates up for the rest of the utility’s customer base and eroding utilities’ revenue streams, even as the cost for maintaining the grid goes up.

At the same time, the world’s largest energy consumers are internalizing their energy management and power generation, and they are increasingly interested in the energy industry as a business opportunity.  For example, in January Google acquired home energy management startup Nest for $3.2 billion — a clear indication that Google is positioning itself to own all the energy data behind the meter.

In response to these and other challenges, utilities are making some very interesting moves, particularly in the DER space.  Most of this activity is occurring via utilities’ unregulated subsidiaries, but there are also interesting developments on the regulated side.

Unregulated Subsidiaries

NRG Energy has been making some major transitions in the past year, particularly in its unregulated subsidiaries.  In Q1 of 2014, NRG made several key acquisitions including Roof Diagnostics Solar, the eighth largest solar installer in the U.S.  That buy made NRG a vertically integrated solar installer and financier with a direct sales force.  NRG also purchased Dominion Resources’ retail business, adding 600,000 customers (primarily in the Northeast) and increasing its customer base by 30 percent.

A growing number of utility customers in the U.S. are selling electricity generated by distributed energy resources (DER) like rooftop solar back to their utility at retail rates via net metering — meaning that these customers are using the grid without having to pay for it.

More recently, NRG has restructured its business into three segments: NRG Business, NRG Renew and NRG Home.  NRG Business will include the company’s conventional fossil generation portfolio in the wholesale markets, and NRG Renew will encompass its utility-scale renewables projects.  NRG Home will include the company’s many unregulated subsidiaries, such as rooftop solar, home energy management, and electric vehicle charging businesses, as well as its retail electricity arm.  NRG’s overall strategy seems to be to own as much generation capacity as possible — it now has about 53 GW of capacity across its service area — and in the Northeast, at least, NRG sees that capacity moving behind the meter in the form of rooftop solar, fuel cells, and microturbines.  In fact, NRG’s portfolio now includes portable solar power, as the company just reached an agreement to acquire Goal Zero.

NextEra Energy, the largest U.S. generator of non-distributed solar and wind power, is another large investor-owned utility (IOU) looking to diversify its portfolio into high growth DER markets.  The company added to the approximately 470 MW of large-scale solar projects that it operates in the United States and Canada by acquiring Smart Energy Capital in May of last year.  Smart Energy Capital has completed more than 70 MW of distributed solar capacity for public and private schools, municipalities, commercial entities, investor and municipally owned utilities, and electric cooperatives in nine U.S. states.  NextEra seems interested in taking on the role of financial backer to Smart Energy Capital’s team, which has expertise in structured finance and financial engineering, enabling them to be more aggressive in the distributed solar space.

Exelon Corporation is also making private equity investments in DER through its unregulated subsidiaries, but it has taken a somewhat different approach.  In July, Exelon became the first energy company to invest in Bloom Energy’s electrons-as-a-service program, providing equity financing for 21 MW of fuel cell projects at 75 commercial facilities in California, Connecticut, New Jersey and New York.

Under the program, customers pay solely for the power provided to them by the Bloom fuel cell stacks over a 15-year power purchase agreement, while Bloom operates and maintains the system.  As the third-party investor, Exelon owns the fuel cells, while Bloom assumes responsibility for the system’s performance.  Therefore, it’s a relatively low-risk, low-hassle investment that increases Exelon’s DER portfolio.

E.On, the world’s largest IOU, has also taken interest in Bloom Energy, investing $100 million in the company during its financing round last summer.

Regulated Utilities

Utilities are making some very interesting moves, particularly in the DER space. Most of this activity is occurring via utilities’ unregulated subsidiaries, but there are also interesting developments on the regulated side.

Arizona Public Service (APS) has proposed a rooftop solar deployment program to the Arizona Corporation Commission that would enable the deployment to be rate-based.  APS wants to fund, install, own, and maintain 3,000 rooftop solar systems (totaling 20 MW), and it will reimburse each customer who hosts one of the systems with a monthly $30 bill credit (a lease payment for rooftop real estate) for the entire 20-year program.  As with the third-party ownership lease contracts offered by private sector companies, the hosts will pay no upfront fees and will have no ownership responsibilities.

Private sector companies like Solar City are disputing the legality of the proposed program, saying that it would grant a state-sponsored monopoly an unfair advantage.  It’s a valid point; if the program is approved, APS will be able to rate-base the investment and receive a guaranteed return.  However, this is where APS has gotten clever.  APS claims that it will not compete with private sector solar companies, since the program is targeted at the class of customers who have been ignored by the private sector: those who cannot afford a solar installation or qualify for a lease.  Another key feature is that the solar arrays would be connected on the utility’s side of the meter.

Tucson Electric Power has followed suit and is proposing a similar program in its service territory.  Assuming the proposals go through, there will be many more followers to come.

http://www.fiercesmartgrid.com/story/under-pressure-utilities-make-distributed-energy-moves/2014-10-01