Renewable energy technologies are posing major challenges for the traditional distribution system. Utilities are losing an increasing number of consumers as they show less reliance on the grid and become prosumers, selling their generated power to the utility.
But, how disruptive is distributed generation to the utility? Has the threat been over-exaggerated? Possibly. To date, distributed generation development has been modest.
It’s true that solar panel technology prices have plummeted, but the fact remains that rooftop solar is still more costly than centralized fossil fuel generation. Even nuclear and utility scale wind and solar sources are more cost-effective.
In addition, the deployment of solar is still reliant on direct public subsidies and indirect rate subsidies. Even with these subsidies, solar generation is in its infancy. Solar has yet to generate significantly large supplies of electricity.
In Germany (a major solar leader), solar accounts for a mere five percent of the country’s total power generation. This is despite over a decade's development and US$100 billion in direct public subsidies. America’s solar leader, California is in a similar situation where only two to three percent of its total power generation comes from solar.
Massive scale renewable generation
However, the growth of renewable energy is certainly disruptive. In countries where large renewable generation is being deployed, a significant amount is generated by large, utility scale installations, not rooftop solar or any other behind-the-meter generation source.
Massive industrial scale wind and solar developments is where renewable generation is really developing. Even Germany gets over 75% of its renewable generation from large-scale wind, hydro, and biomass. Distributed generation is far from this kind of scale and will take decades to be able to run a modern economy.
For renewable generation to really kick off, centralised generation is the answer. In order to achieve higher penetrations of renewable energy, the power will need to be transmitted over many miles from where large amounts can be generated to places where it will be consumed.
Policy, Intermittency & Markets
It is therefore evident that the distributed nature of renewables is not disruptive but their intermittent nature and the policies to make them financially viable are.
Heavy public subsidization of renewables and preferential purchase requirements for the power they generate ensures that the marginal cost of wind and solar will be lower than other conventional power sources when the renewable sources are available-when the wind is blowing and the sun is shining.
It is for this reason that Germany boasts the highest retail electricity prices in Europe and the lowest wholesale prices. This is not because generation costs are low but because the majority of the cost has been shifted elsewhere. In Germany, expensive and highly subsidized, intermittent renewables generation has made the wholesale price plummet. As a result, utilities can no longer operate profitably.
This scenario, not cheap distributed solar, is what is disrupting the utility industry and in all this we come back to the elephant in the room: energy storage.