Energy

The Energy Market Faces Creative Destruction

As more people get their power via solar, public utilities are threatened because the cost of the old energy system will fall on a diminishing number of people

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Never underestimate the power of creative destruction—what economist Joseph Schumpeter called capitalism's "essential fact." The pages of history are littered with the skeletons of industries left behind by innovation.

Public utilities certainly are not underestimating it. As a recent Washington Post story put it, power company executives consider rooftop solar systems "a grave new threat" to the electricity industry.

In theory, the threat is simple: As more people get their energy from solar power arrays, the cost of the old system—all the generation plants and transmission lines and fuel and so on—will fall on a diminishing number of utility customers. Those customers will then have a rising financial incentive to go solar themselves, cutting the number of ratepayers even further, and so on—a death spiral for traditional utilities.

Scenarios like that lead to stories like this, from Forbes: "Distributed Generation Poses Existential Threat to Utilities." And this, from Business Week: "Why the U.S. Power Grid's Days Are Numbered." That article quotes David Crane, the CEO of the wholesale power company NRG Energy, who predicts that "utilities will continue to serve the elderly or the less fortunate, but the rest of the population moves on."

Two years ago, the Edison Electric Institute, the trade group of the power industry, produced its own report on the "Disruptive Challenges" posed by distributed generation (i.e., the production of electric power from lots of little sources rather than a handful of big ones). It noted, among other things, the precipitous decline in the cost of solar photovoltaic cells, as well as policies such as net metering, which allows solar-power users to sell any extra juice back to utility companies—often at rates far higher than the utilities would have to charge for the same number of kilowatts.

When might all of this happen? Not tomorrow. At present, the biggest impediment to solar power is its intermittency: Sometimes it's sunny, but mostly it's not. And power storage is a huge problem. Without quantum leaps forward in battery technology, solar users will always have to be plugged into the grid.

But quantum technological leaps happen all the time. Hence even Edison "can imagine a day when battery storage technology or microturbines could allow customers to be grid independent." After all: "Who would have believed 10 years ago that traditional wire-line telephone customers could economically 'cut the cord?'"

Given the rise of micromarkets in information (think blogs), lodging (think Airbnb) and transportation (think Uber), it's even possible individual homeowners might someday buy and sell electricity among themselves without using the utility companies as intermediaries. Possible, yes, but how likely?

That would depend on a number of factors. Power generation and distribution are immensely complex, and Virginia's last effort to deregulate the system, in 1999, didn't turn out so well. (This was partly owing to the way Virginia went about it—e.g., by imposing rate caps and artificial walls between generation and distribution.) And that deregulation effort was ridiculously simple compared to a system that would allow every consumer to be a supplier as well.

There are also big technological hurdles. Utilities have to be able to ensure that every consumer receives precisely the amount of electricity she needs at every moment throughout the day—and to be able to make supply adjustments instantaneously as she turns lights, appliances, and devices on and off. They have to switch from one constant load to another, perfectly and instantly, every time.

That's hard enough to do for one customer, but utilities have to do it for everyone. What's more, the electricity has to be delivered in the proper form, or it could damage appliances. And solar power makes delivering it even more difficult by increasing the variability of consumer demand. As a piece in Foreign Affairs points out, a quarter-century ago, peak electricity demand was 55 percent higher than average demand. By 2030, it will be 90 percent higher.

But the real obstacle is economic. As the Foreign Affairs article notes, at present going off-grid "would require four times as many (solar) panels as a net-zero household has and tens of thousands of dollars in batteries." Still, assume for the sake of argument that battery technology improves even faster than, say, computing power has. Eventually, it could become economical for at least some homeowners to cut their power cord completely.

But this also assumes that the power companies will stand still while the competition evolves. That's highly unlikely; Verizon didn't just stick with landline telephone service as cellular service blossomed, after all.

If non-subsidized solar and battery technology become cheap enough for widespread consumer use, then presumably they will be even cheaper for industrial utilities, owing to economies of scale. In that case, buying solar-generated power from Dominion or another power company would involve far less hassle than installing your own solar panels, batteries, inverters, and so on.

Some consumers, of course, will want to get off the grid anyway—just as some consumers prefer to grow their own vegetables, or buy them at a farmer's market, rather than buy them at the grocery store. Many others will prefer to stick with their old, reliable utility service. Neither option is inherently superior. But it will be nice to have the choice.

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  1. I am all for technology and creative destruction too. This issue is a bit more complex, however. The problem with solar is that it is intermittent. So lets say everyone goes and gets their solar power cells on their roofs. Okay, so far so good. On a sunny day, those panels are producing all kinds of power and electricity demand from the grid is very low. That sounds great until it gets dark or the winter comes and it is dark most of the time and even when its light it is cloudy and the sun isn’t very bright to begin with. Then power demand from the grid shoots through the roof.

    So the power company has to maintain enough capacity to cover the dark or rainy days or we end up with blackouts. At the same time, it sells nearly nothing on the sunny days. On a sunny day it has huge amounts of capital equipment sitting idle earning no money. That may not be a viable business model. Our choices may be to either limit the amount of solar and have a reliable power supply or not limit it and watch the electricity companies go belly up and have no one there to supply power when the solar doesn’t work, which is a good amount of the time.

    Maybe the utilities adapt and overcome. I don’t know. There is no guarantee that they will, however. I don’t want to depend on solar power.

    1. Re: John,

      At the same time, it sells nearly nothing on the sunny days.

      I wouldn’t worry so much for the electric companies, as air conditioning and most lighting is still driven by conventional means of power generation. The use of solar power arrays is nothing more than a nice “feel-good” pacifier for guilty souls. It doesn’t matter how many times you slice it, power generation through steam power is still the most economical process BY FAR. Current solar systems are calculated to recoup initial investment in 10-12 LONG YEARS. In the meantime, the cost is eaten by YOU. If solar was your SOLE source of power, then maybe the investment is a great one especially when considering other alternatives like Wind (which has the very WORST power density of all power sources). Otherwise, you’re throwing your money away needlessly. That is why many states and municipalities offer incentives and subsidies to install solar arrays, because it is NOT cost-effective to install and operate otherwise.

      1. 10 to 12 years to recoup the investment is an 8-10% ROI. That’s not bad, much better than muni-bonds or CDs. Last time I checked, unsubsidized, smaller PV solar arrays were generating power at ~$0.15 per kWh, and retail power from the grid is at something like $0.115 per kWh. PVs are falling and retail energy prices are rising.

        I think the predictable near term outcome will be that homes, businesses and small-scale industry will install PV panels as a hedge against inflation in retail energy prices–especially for peak day-time/summer demand. Use the PVs to produce power for day time operation, air conditioning, etc, and then buy power from the grid at night. If enough users make this rational choice, this will diminish the margins that utilities now enjoy for peak demand pricing. This is what the utility companies have to fear–that PV installation will put pressure on prices for retail electricity and dimish the profitibility they get from being near monopolies for electricity.

        1. In LA, the rates are:

          0.146 to 0.216 on regular rates (based on month and how much you use per month)

          0.132 to 0.246 on time of use rates (based on month)

          So 0.15 solar is cheaper year round if you use more than 600 kWh a month and from April to September between 10 AM and 7:59 on time of use rates.

          1. So 0.15 solar is cheaper year round if you use more than 600 kWh a month on regular rates and from April to September between 10 AM and 7:59 on time of use rates.

          2. Interesting. I think it’s cool that the difference is just a few pennies on the kWh. The upside may be that power companies work to keep prices down for big users who can credibly threaten to switch some of their power to PVs. The average US household uses around 1000 kWh a month, so I imagine that big grocery stores and similar businesses are already in a position to save money by installing roof-too PVs, or will be soon. At least in LA.

            1. In the “winter”, I’m at just under 450 kWh/month but in the summer, I’m at 1296 kWh/month but my house is less than 1500 sq ft.

              It’s high because at 110-120?F, I just pass out in the house with the A/C on.

        2. Re: Meriwether3,

          10 to 12 years to recoup the investment is an 8-10% ROI. That’s not bad, much better than muni-bonds or CDs.

          You don’t have to spend in frequent maintenance on muni-bonds or CD’s, M.

        3. That 10-12 years includes significant subsidies. Citation needed for the 0.15/kwh. Wholesale baseload is multiples lower than solar. They’re not even close to parity. Net metering significantly favors solar and wind by hiding their true costs of intermittency.

    2. Why wouldn’t they just adjust the price of power to cover the costs, government permitting?

    3. There’s a third option: charge the solar and wind freeloaders the actual delivery cost including grid hookup and spinning reserve costs.

  2. As a recent Washington Post story put it, power company executives consider rooftop solar systems “a grave new threat” to the electricity industry.

    Ha ha ha! Ah, that was a good laugh! You got me there for an instant…

    Oh, my God! They’re serious!

    HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA!

    The Problem With Renewables

    1. SUBSIDIZED is the missing word.

      Without the subsidies, very few people are buying those things and mounting them on their roofs.

      1. Pretty sure the number would be zero with a rounding error; those who are more than happy to blow money on signalling.

  3. as well as policies such as net metering, which allows solar-power users to sell any extra juice back to utility companies?often at rates far higher than the utilities would have to charge for the same number of kilowatts.

    Solar power will always be intermittent, and in a regulatory environment where power companies are forced to buy their customers’ power rather than being permitted to choose which sources or power they allow on their networks based on profitability, reliability, capacity and stability concerns, it will be a source of instability.

    The real disruptive technology will be local power generation that is non-renewable. And my prediction is that in the current regulatory environment, backyard fusion generators will absolutely be verboten.

    1. I would be fine with those. They are reliable. I don’t want to be left the mercies of bullshit like solar and wind.

      1. From my days as a Navy nuke, I recall enough about power generation and distribution to be dangerous.

        And one thing I remember is that every erg you are consuming has to be produced at the same time (unless you have a honking big battery).

        Connect an intermittent uncontrollable source feeding electricity into your network and you have a serious problem. Basically another power source has to hold the intermittent source’s hand.

        When the intermittent source drops out, the alternate source has to ramp up so that the net power generation stays constant. When the intermittent source is producing power but at the wrong phase angle, the intermittent source has to fix it, often by operating in a voltage vs. current regime that is very inefficient or even damaging to the generating equipment.

        People assume it’s very nice to harvest sunlight and make electricity from it – that there is this lovely upside and no downside. The reality is that there is a huge fucking downside which is why outside of spacecraft nobody uses solar power as a serious electrical power source without massive govt subsidies.

        1. “[…] (unless you have a honking big battery).[…]”

          Which is the reason you and I pour money into Elon Musk’s pockets! Aren’t you proud?

  4. “If non-subsidized solar and battery technology become cheap enough for widespread consumer use, then presumably they will be even cheaper for industrial utilities, owing to economies of scale.”

    How many acres of solar panels would it take to replace a 500 Mw power plant?

    1. all of them?

      1. I may very well have had an error in my calculations, so instead of 50%, it might actually be 5% or even .5% (which would obviously make a huge difference) but when I ran the numbers, assuming 100% efficiency (not happening) and perfectly sunny days all the time (also not happening) and a solar flux about 75% of what the desert southwest gets on really bright days everywhere in the country (strike three, got it), you would need to cover 50% of the entire land area of the continental US to generate the electricity the continental US uses.

        Which is obviously kinda bad

        1. Hrm. Running the numbers again based on the output and area of the Ivanpah Solar Power Facility (~1 TWh / year, 4000 acres) and the combined electricity generation of the US (4093 TWh / year, from http://www.eia.gov/totalenergy…..sec7_5.pdf) and the land area of the continental US (~3,000,000 square miles) I come up with a number that’s a lot closer to 1% of the land area of CONUS.

          Of course, I don’t think 1% of CONUS gets the sort of solar influx that the Mojave does, but… There ya go.

        2. At noon, in the best places in the U.S., after considering about 12-15% efficiency, one would capture about 700 W-h. This is instantaneous, at noon capture.

          So if you want to be very generous in an estimation.
          – There are 4047 sq meters/acre. This means at peak production one might obtain 700 * 4047 watts/acre or about 2.8 MW/acre. Again, this is instantaneous output on a sunny day right at local noon, assuming incident light on the panels.

          So, at 2.8 MW/acre, it would take 500/2.8 acres total or about 176 acres.

          Again, at noon, no clouds, incident light. So under these conditions it will take 176 acres. As the sun leaves overhead, it takes more. If there are clouds, it takes more. If it is night or there is a heavy cloud cover – forgettaboutit.

    2. PV panels are in a position to compete with retail electricity I think. It is a long way from being a competitive source for wholesale power generation. Being competitive with retail prices means some end users will put for solar for some part of their needs, but utilities won’t use it to produce power. And that is OK.

  5. It noted, among other things, the precipitous decline in the cost of solar photovoltaic cells,

    The decline in cost does not mean an increase in power density, for one. Insinuating it has any important effect is like saying the lower cost of paper helps to convey words faster, when it doesn’t.

    The MOST EXPENSIVE part of a photovoltaic system, by the way, is not the array. It’s the batteries and the power inverter/conditioner. A house still needs to have electrical power fed at 120V, which means batteries and an inverter, whether you like it or not. Just because your array costs you 20% less than last year’s models does not mean your overall initial cost is lowered by 20%. It ISN’T.

    1. Which is why people are talking about switching houses to partial DC.

      1. I do have a lot of stuff now that could do fine off 12V (or even a 12to5 regulator for usb chargers).

        DC DC DC!

        1. I’ve often wondered why UPSs don’t have a DC out and computers/monitors don’t have a DC in, so you could skip the DC to AC then AC to DC conversions when powering

          But it’s probably because you’d have to get all the manufacturers to agree on them.

      2. Re: Puddin’ Stick,

        Which is why people are talking about switching houses to partial DC.

        When they start spending their hard-earned money on it, then we can talk. In the meantime, talk is cheap.

  6. This article is pretty spot-on. I work in the rural electric and telecom industry and cooperatives are already seeing distributed generation as an opportunity instead of a threat. Its certainly the future, but it won’t be here for quite some time. Battery technology simply isn’t there yet.

  7. Are the solar panel factories running on solar power?
    Solar looks like to be part of the energy mix but just a part.

  8. If non-subsidized solar and battery technology become cheap enough for widespread consumer use, then presumably they will be even cheaper for industrial utilities, owing to economies of scale.

    That is an ABSURD assumption, even if batteries became as cheap as dirt. The WORTH of batteries is in their PORTABILITY, not for their power-storage alone, which can’t be very great considering the PHYSICAL LIMITS of chemical conversions (which limit the types of battery you want to use, because if there’s ONE thing people don’t want their batteries to do is fucking EXPLODE.)

    This means that economies of scale only relate to PRODUCTION OF BATTERIES and not on their power delivery. You could store thousands of batteries under your home to get some sort of advantage; or you can use the space to make a nice play room for the kids and JUST BUY YOUR FUCKING ELECTRICITY FROM A FUCKING POWER STATION, which is much easier and cheaper thanks to ECONOMIES OF SCALE.

  9. I’m not selling my utility stocks yet.

    But I wouldn’t mind seeing BC Hydro take a hit. (Unlikely, as they would just go to the Government to get the rates raised again – for those who don’t know, BC Hydro is fully owned by the Provincial Government.)

  10. At present, the biggest impediment to solar power is its intermittency: Sometimes it’s sunny, but mostly it’s not. And power storage is a huge problem. Without quantum leaps forward in battery technology, solar users will always have to be plugged into the grid.

    The intermittency isn’t a problem for me. I just want a solar array to supplement my regular power service at the time when it’s the most sunny ? midday when it’s freaking hot and I want to crank the A/C.

    Power storage isn’t a problem since I just want it to power my A/C during those days when the weather is 100-120?F and it’s sunny and clear. I’m fine with running off the utility otherwise.

  11. I still think we’ll see something like bio fuel is far more likely. It is similar enough to fossil fuel: it isn’t intermittent like solar or wind, it works well in scaling for distributed power, and they’re already gaining traction in vehicle fuels. I could more easily see algae farms that are used to feed a power plant than I could giant solar fields trying to power the country (think of the the power losses on distribution) or distributed power (do the unwashed masses really want to deal with trying to properly size and maintain their own power system).

  12. the alt-text should read: some guy talking to a gay wedding cake topper.

  13. Most people have pointed out the obvious downsides of solar, but the biggest one by far is the lost opportunity cost. Instead of wasting time on renewables of dubious value, we could have been spending the last 10 years building new nuclear fission plants and shoring up our efficiency.

    Our children will look back at this time and wonder what the hell we were thinking.

  14. We could have ample energy tomorrow with pre-fab, small nuclear generators (125-200 MW).
    These can replacing aging coal plans and be used to augment existing generator facilities.

    Let’s get Yucca Mountain operational and reduced regulations for modern pre-fab technology.

    Let’s quit wasting resources and doing contortions trying to make solar and wind work. These two sources can be useful supplements, but we fool ourselves thinking they will be solid replacements. Honest scientists will tell you we need a technological breakthrough in battery technology and honest scientist will tell you that this has been worked on for many decades and there is no breakthrough in sight.

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