Combination of Energy Storage and Solar May Downgrade the Utility Market

The next decade will see residential-scale power storage and solar generation disrupt the status quo.
Published: Wed 02 Jul 2014

Decreasing solar panel costs and major improvements in both price and capacity of lithium ion batteries could be keeping electric utilities up at night.

Disruption is closing in

Analysts in the credit research division of Barclays investment bank warns that the cost-effectiveness of self-generation and storage technologies will create a huge disruption for utilities. The research warns that this disruption is closing in quicker than utilities care to think.

Barclay’s credit strategy team points out in their research report, “The Solar Vortex: Credit Implications of Electric Grid Defection,” that the cost of solar and storage for the residential sector is already competitive with the price of utility grid power in Hawaii where prices per kilowatt hour of solar-generated power are less than half of grid power. Consumers are switching to solar faster than the electric company can change pricing to account for it. [Engerati-Hawaii Encourages Energy Storage Development and Microgrid Technologies and Learning From the Solar State-Hawaii].

California, another major market, is set to follow suit by 2017 [Engerati-California’s Energy Storage Mandate-Will Others Follow?] and New York [Engerati-Reforming New York’s Energy Vision] and Arizona will reach this point by 2018. In the years following, Barclay’s research suggests that multiple states will join the group until, by 2024, utilities in all but a handful of states will face major competition from solar power.

“In the 100-plus year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power. We believe that solar and storage could reconfigure the organization and regulation of the electric power business over the coming decade,” reads a note authored by the team of analysts led by Yung Chuan Koh. “We believe that solar and storage could reconfigure the organization and regulation of the electric power business over the coming decade. We see near-term risks to credit from regulators and utilities falling behind the solar and storage adoption curve and long-term risks from a comprehensive re-imagining of the role utilities play in providing electric power.”

Disruption may take time

Koh is quick to point out that the report has taken a very long-term view of the market disruption. Koh explains that his analysis of the sector is “too early” and that this trend may take a long time to hurt electric utilities.

Over the next decade, residential electric customers in most US states will have a viable alternative to regulated electric utilities, as long as they are able to pay thousands of dollars to install the photovoltaic panels and batteries. Millions of consumers will be unable to afford the outlay for a solar system. However, California may be a different story as they experienced a major increase in electricity rates in 2000 and 2001 and many consumers may be happy to switch to solar despite high initial investment costs.

Solar is appealing

The combination of cheaper solar technology and reliable energy storage solutions has solved two of solar power’s biggest problems: upfront cost and continuity of power.

In the past, many residential consumers were put off by solar power due to its high costs and unreliable nature. Without the availability of copious storage, solar could only be relied on during the availability of direct sunlight.

With both of those constraints eliminated, Koh and his co-authors note in their research that the electricity business will see major disruption in the coming years. They also warn that the market may turn very quickly.

Investment bank Morgan Stanley has released a similar report to Barclay’s and adds that Tesla’s big battery bet [Engerati-Tesla’s Gigafactory to Lower Battery Energy Storage Costs] and escalating electricity prices will also be major drivers for consumers to disconnect from the grid.

Solar-Opportunities

“There may be a 'tipping point' that causes customers to seek an off-grid approach,” Morgan Stanley writes. “The more customers move to solar, the [more the] remaining utility customers' bills will rise, creating even further 'headroom' for Tesla’s off-grid approach.”

The bank suggests that utilities should view solar as an opportunity-they should be looking at ways of becoming enablers of these technologies instead of obstacles.

In a recent interview [Utilities: Focus on Capacity Not Generation] with Engerati, Stephen Berberich, President and CEO at California ISO, points out that utilities should re-evaluate their current business models in order to remain viable in the power industry.

He explains that they will literally need to move quickly in order to create a pricing structure which does not drive existing generation out of business.

Further reading

Barrons-Barclays Downgrades Electric Utility Bonds, Sees Viable Solar Competition