The current power industry business model is under pressure as solar rooftop companies and regulated utilities compete for retail market share. Independent generators are also affected since there is less need for additional capacity to the extent load growth is met through distributed generation. The tensions are playing out to varying degrees in 36 states and will lead to changes in the playing field on which rooftop companies, regulated utilities and independent generators compete. What will the industry look like in the future? What opportunities does change create? What casualties will be left in the wake? A panel debated these issues at the PV America convention in Boston in late June. The panelists are / continued page 54 MINOR MEMOS. Bernstein Research said in a July 1 report that almost all regions of the United States are expected to need additional capacity over the next 10 years to maintain reserve margins over peak electricity demand that are set by the North American Electric Reliability Corporation or NERC. Bernstein estimates that around 67,000 megawatts of additional capacity will be needed. However, the growth in rooftop solar could cut significantly into the need. Bernstein said that if rooftop solar keeps growing at the current rate, then it would displace the need for all but about 25,000 megawatts of additional capacity. There are currently roughly 24,000 megawatts of additional nuclear and gas generation under construction . . . . Total US wind capacity was just under 62,000 megawatts at the end of June. Wind developers added 619 megawatts of new capacity in the second quarter of 2014, nearly three times the first quarter number. Total US solar capacity was a little under 7,500 megawatts through the end of May . . . . The US House of Representatives voted in July to cut the IRS budget by $1.4 billion, or 13%, for the next fiscal year that starts in October. This is on top of a $526 million budget cut in 2014. The House also voted to bar IRS employees from attending conferences. — contributed by Keith Martin in Washington 54 PROJECT FINANCE NEWSWIRE SEPTEMBER 2014 Business Model continued from page 53 Ann Berwick, chair of the Massachusetts Department of Public Utilities, David Field, CEO of OneRoof Energy, Vadim Polikov, CEO of Astrum Solar, and Ron Gerwatowski, senior vice president for US regulation and pricing with National Grid. The moderator is Keith Martin with Chadbourne in Washington. MR. MARTIN: Sanford Bernstein, which is an independent Wall Street research house, estimated in June that solar rooftop companies would take away, on average, 7% of retail electricity sales nationwide from utilities. It expects certain states to be more heavily affected. The figures for some selected states are Arizona 34%, New Mexico 31%, California 23% to 26% percent, Connecticut 25%, Massachusetts 21% and New York City 14%. Ann Berwick, do these figures sound right? MS. BERWICK: No. MR. MARTIN: Why not? MS. BERWICK: I cannot imagine where the figure for Massachusetts came from. When the current administration started almost eight years ago, we had four megawatts of solar. We are now up to about 515 megawatts, and the governor has set a goal of 1,600 megawatts by 2020. Even the 1,600-megawatt goal is between 3% and 5% of our electricity load. This is far from 21%. MR. MARTIN: David Field, what do you think? MR. FIELD: The numbers are way too high. I have looked at a lot of the research data, coming from different analysts, and the tendency is to focus on gross numbers when drilling down into the numbers would tell a different story. For example, suppose we can sell a home owner on buying solar electricity at 15¢ a kilowatt hour. How many other home owners will we be able to persuade to take up solar at that price? You really have to look at market by market. The end numbers will be much smaller. MR. MARTIN: Your company is based in California. What do you think will be the figure for California? MR. FIELD: I am not sure, but I agree with Ann Berwick. Our market share will reach the single digits: a maximum of 5% or 6%. MR. MARTIN: Ron Gerwatowski, does National Grid have its own estimates? MR. GERWATOWSKI: I think you just have to look at the targets in each state and do the math as Ann Berwick did. MR. MARTIN: SolarCity says that Home Depot is selling one new rooftop system every two minutes. That is rapid growth. Vadim Polikov, will the economics of rooftop solar change once the 30% investment tax credit expires, and will the rooftop companies therefore lose traction? DR. POLIKOV: I am much more bullish about the potential for solar, especially residential solar, which is my area, than the others are on this panel. The 30% federal tax credit going away will have a big effect. We hope that, in the next two to three years, the cost will come down by more than 30% to offset the loss of the tax credit. We see no reason why that cannot happen with all the opportunities for cost savings in materials, labor and customer acquisition. I do not believe the figures you quoted earlier are too high. It is a matter of cost and time horizon. If you asked whether we can reach those figures next year or in two years, the answer is absolutely not. But if you look 10 years in the future at the trend line for costs and new energy storage and other technologies that are coming to market, sure, 25% of homeowners in the states in which we operate could go solar and reduce utility load by at least 25% to 30%. MR. MARTIN: That is that developer optimism I like to hear. David Field, how important is the 30% tax credit to continued growth? The US Department of Energy shows solar flat lining once the credit goes away until about 2030. MR. FIELD: Vadim Polikov made a good point. The solar residential tax credit for homeowners who buy solar systems will disappear after 2016. However, the investment tax credit for solar companies that own systems and sell electricity or lease the systems to homeowners will remain, but at a 10% level after 2016 as opposed to 30% today. There may be more incentive after 2016 to deal with solar companies rather than own systems, especially when you take into account that solar companies can also claim accelerated depreciation on the systems, which homeowners who own cannot. When we look at multi-year cost projections, Vadim is correct. The costs continue to fall. It is not just customer acquisition costs, which are the really big one by the way, but also better installation and a lower cost of capital as solar rooftop companies securitize customer revenue streams to borrow at lower interest rates. Cellphone Analogy MR. MARTIN: There was a debate at a conference last spring in New York about whether solar rooftop is to utilities like mobile SEPTEMBER 2014 PROJECT FINANCE NEWSWIRE 55 still rely on the grid for reliability reasons. Another thing that is lost on the analysts is we fund all of our clean energy initiatives in the Northeast by having utilities collect for them through utility bills. If we want to bring electricity from distant wind farms or utility-scale solar projects to large cities, you need transmission and distribution lines. Will some folks leave the system? Sure, but it will not be as destructive as what happened in the telecommunications industry. MR. MARTIN: Vadim Polikov, you are the youngest member of this panel. What is your view? Will we reach a time when the only people buying central power are those who are too old and resistant to change? DR. POLIKOV: I think it has much more to do with whether your home is suitable for solar than whether you are old or young. Not everyone has the ability to put solar panels on his or her roof. But if the cost of storage comes down as the trend lines suggest, then when you combine solar panels with storage, the analogy becomes fairly close. Cellphones can do so much more than your land line, but that was not the case when cellphones first came out. They looked like a big brick, and they were uncomfortable to use. Over time, they became smartphones. Imagine a system where, in the future, your home energy system does a lot more for you. It manages your home. It does a lot of the home automation stuff that today is being sold separately by other companies. Low Cost Provider? MR. MARTIN: You said the cost will come down. Won’t the competition between rooftop solar and utilities distill ultimately to who can deliver electricity more cheaply? Ron Gerwatowski, utilities have the advantage of scale. They can put a large, central power plant — a solar power plant — in a place where the solar insolation is greatest. MR. GERWATOWSKI: National Grid does not own any power plants. We are strictly a wires company. But if you are a vertically-integrated utility in Arizona that owns both wires and generating facilities, then you are right. / continued page 56 telephony was to land lines. Ann Berwick, is that a good analogy? MS. BERWICK: Not really. People can just bail from their land lines, as all of my kids have done. Cellphones can do lots of things, as we all know, sitting here, waiting, with everybody on their cellphones . . . MR. MARTIN: Let the record show that we are 10 minutes into this panel and no one has pulled out a smartphone. [Laughter.] MS. BERWICK: So I don’t think it is a good analogy. With storage, the analogy gets a little better but still . . . . Think about what cellphones can do for you versus what your land line can do. MR. MARTIN: Is that the only flaw in the analogy that cellphones can do more than a solar panel? Is the analogy accurate in that younger people rely solely on their mobile phones? Will they also move to solar panels? MS. BERWICK: No. They can’t right now because, in the absence of readily available storage, with solar, unless you are willing to forego power at various times, you cannot actually leave the grid. MR. MARTIN: So you need both at a minimum. Does anybody think that mobile telephones were to landlines what rooftop solar is to utilities? Ron Gerwatowski, you are shaking your head no. MR. GERWATOWSKI: It is not a good analogy for reasons that Ann Berwick mentioned. You also have the issue that not everyone can switch to solar. If you have the money and income, you can get a cellphone. If you have shade or live in an apartment building, rooftop solar is not an option. I also think everyone will Estimates that rooftop solar will displace 21% of retail electricity sales in Massachusetts sound way too high. 56 PROJECT FINANCE NEWSWIRE SEPTEMBER 2014 We are a delivery company like the FedEx truck delivering boxes, but not manufacturing the product. From our perspective, we have no issues with displacing the generation. We have the fixed cost of the delivery system, and we have some rate-making issues that will have to be addressed. From our perspective, we do not think of ourselves as losing retail sales. We just see it as a need to rearrange how we are covering the cost of the delivery system. MR. MARTIN: But does a wires company have less product to carry if people are generating it themselves? MR. GERWATOWSKI: It is not really a question of volume. The issue is whether you need the grid as an insurance policy. Are you willing to disconnect and put redundancy in your house or business or industrial park or will you still rely on a pretty cost effective system that is already in place to provide the insurance? Maybe I am not forward thinking enough, but I have doubts about whether we will see a wholesale exodus of people who are willing to build redundancy into their homes and businesses. MS. BERWICK: I am probably just about as bullish as Vadim on solar. I wonder what happens when there is a new technology. I have no idea how close we are to this, but what about solar panels that are part of the siding in cases where a roof will not accommodate solar? Technology will expand the potential reach of solar over time. MR. FIELD: Keith, I would like to go back to your analogy of a moment ago because there is a point that everybody misses: why have cellphones proliferated so widely versus land lines? It is not just the technology. It is not just the infrastructure. Cellphones addressed the issue of consumer choice and that is what gets lost in the discussion about the electric power industry in the United States today. The reason why new solar companies sign up a customer every two minutes at Home Depot is consumer choice, and it should be a huge wakeup call for a lot of people. Consumers want something more. It is not just about savings. There are a lot of consumers who put a solar system on the rooftop and really do not save much money at the end of the day, but they want independence. They want the pride of clean energy. Last month, we as a company began experimenting here in Boston with a bundled energy package. The idea is if solar provides, say, only two thirds of a homeowner’s electricity, why not also provide the remaining third from another source? When you look at the number of consumers who actually make the choice in Massachusetts, it is alarmingly small. People do not want to deal with the hassle of changing electricity providers, and yet they are willing to sign a 20-year solar lease for very little savings today. Those are the types of things that we as an industry need to understand so that we can be the better solution for the homeowner. MR. MARTIN: If your customers are not saving very much money by switching to solar, then how are you weaning them away from the local utility? MR. FIELD: It is really interesting when you ask homeowners why did you go solar? You are saving $10 a month; why go solar? They will say, “I don’t like my utility.” Now we may all agree that the infrastructure is critical and it has to be paid for, but homeowners are switching for small savings. MR. MARTIN: Why don’t they like the utility? MR. FIELD: It is a behavioral issue. They do not like being forced to buy from a single source. DR. POLIKOV: Returning to the technology question, from what we have seen, the technology seems to be getting more efficient every year. The change is not by leaps and bounds; maybe it is improving at the rate of 5% a year. Now compound that over 10 years, and suddenly it is a much more efficient system. The point is correct that there are people today who cannot go solar because they have too small of an unshaded roof space and, in the future, that will not be a problem because the panels will be much more efficient. There are billions of dollars going into research and development at universities and in companies to keep driving this forward. You are absolutely right about why people go solar. Most people think that people go solar for the green aspect of it, and there are certainly some people who do. A much larger portion of our customers go solar because they want to get away from the local utility. Ratepayer Erosion MR. MARTIN: Your companies are draining revenues from the utilities. As the utilities lose customers to solar, they have less revenue. The utilities earn revenue from delivering and, in some cases, selling electricity. They then have to increase rates to cover their fixed costs and that drives even more people away. Ann Berwick, is that correct and does it worry you in Massachusetts? Business Model continued from page 55 SEPTEMBER 2014 PROJECT FINANCE NEWSWIRE 57 MS. BERWICK: That is the direction in which we, at least in Massachusetts, and in the longer term the country, are headed, but I actually think it is a boon for utilities in the following sense. We have no option, if we are going to deal with climate change, to decarbonize the electric grid. Once we do that, then we have to move toward electrifying building heating and cooling and transportation. In the big picture, that is how you deal with climate change. The point is we are moving to much more electrification then we have now. When you look at so-called anemic load growth, I think that is merely a short-term issue. MR. MARTIN: Ron Gerwatowski, the Edison Electric Institute issued a paper a year and a half ago called “Disruptive Technologies.” It was worried about potential credit downgrades for utilities as they lose revenue. Is that potentially an issue for wires companies? MR. GERWATOWSKI: Not really, and I agree with Ann Berwick. We see change as an opportunity. MR. MARTIN: Do you believe that the solar rooftop customers should be required to pay a backup charge to remain connected to the grid? MR. GERWATOWSKI: I think when we use the phrase “backup charge,” it pushes buttons for some folks. What we see developing in Arizona and California, and we are considering in Massachusetts, is having some basic minimum so that customers understand they are receiving a delivery service from the utility even when they are able to use net metering to eliminate the charges. There are three levels of service that customers with solar rooftop systems receive. One is ordinary service at night when the sun is not shining. Another is during daylight when the solar system is producing, but the customer still needs voltage support. The third service is where the solar customer uses the grid as a storage device because the solar panels are over producing. The excess electricity must go somewhere. A minimum bill can be modest in amount and still serve its purpose. MR. MARTIN: David Field, is a backup charge appropriate? MR. FIELD: I agree with a lot of what Ron just said. It is in the interest of our society to have a healthy utility industry and not to create stranded assets that weaken the grid. The issue really becomes what is a fair charge and how do you calculate it? The issue has become highly politicized in places like Arizona and California. The good news is that with costs falling, we should be able to absorb a minimum charge and still provide homeowners with a real choice and savings. MR. MARTIN: Another area of contention between solar rooftop companies and utilities is over net metering. Utilities say that they should not have to pay retail rates for electricity bought from homeowners; they can buy the same electricity more cheaply in the wholesale market. Ann Berwick, are backup charges and net metering on the agenda in Massachusetts and, if so, where is the state headed? Value-Based Solar MS. BERWICK: Yes. I made sure they are on the agenda. The interesting thing to me is that we assume that having utilities pay retail rates for solar electricity is overpaying; I don’t know why we make that assumption. It may be right, but maybe they are underpaying. Minnesota and Austin, Texas are looking at the value of solar electricity. I don’t think we know the answer. Whenever I ask the question, everybody freaks. MR. MARTIN: On both sides? MS. BERWICK: Both sides. Everyone says it is rough justice for utilities to pay retail rates. I think everyone is afraid that his or her side will lose if the issue is really examined. MR. MARTIN: Value-based solar is a hot-button issue. Can you explain what Minnesota or Austin, Texas is doing? MS. BERWICK: Someone else might be better able to explain it. I do not think Minnesota has moved beyond the theoretical. I am not sure where Austin is. It is an effort to look at the question what the solar electricity being supplied to the grid is worth. If we had a price on carbon, then the answer would be different depending on whether the carbon price is $12 or $100. We have a carbon valuation proceeding pending before us at the Massachusetts Department of Public Utilities currently. Without a price on carbon, it is hard to assign a value to solar electricity. MR. MARTIN: So your view is running the meter backwards at the retail rate may be assigning too high a value to solar electricity - or too low a value - you just don’t know yet. I think the Austin, Texas and Minnesota approach is to have the solar customer sell his entire electricity to the grid and then buy back what he needs, but the sale to the grid is at whatever the value the state thinks is appropriate. MR. MARTIN: Do the rest of you have a view on value-based solar? David Field? MR. FIELD: The location matters. It is hard to look at an entire state and say “This is the price across the state.” There should be a public debate, and not a debate in the press or in closed-door sessions. / continued page 58 58 PROJECT FINANCE NEWSWIRE SEPTEMBER 2014 Business Model continued from page 57 MR. GERWATOWSKI: I am glad to hear you say that because it really is location. There are some places where it could have a really high value and others where the value may be low. We need to find a price for solar electricity that actually gets the solar built, does not overpay, does not underpay, but hits the sweet spot. We do that in regulation all the time. It is something that we are considering here in Massachusetts now, with a little bit of controversy associated with it. What is the return really needed by a solar developer? What else do you need in order to get a customer to put solar on the roof? MR. MARTIN: Should utilities, Ann Berwick, be able to move into rooftop solar and put the assets into rate base? MS. BERWICK: Massachusetts allows utilities to put up to 15 megawatts of solar into rate base. No utility has taken full advantage of this. MR. MARTIN: Why do you think that is true? MS. BERWICK: Maybe we should ask Ron Gerwatowski. MR. GERWATOWSKI: We have five megawatts installed. We have a proposal before the department to do more. We are testing the technologies by putting solar in places where we think it has value and then having our engineers evaluate it. But it is really hard for us at this point to say we want to put solar on the roofs of residential customers because it elevates the temperature of everybody in this room that somehow we are going to dominate the market. Utilities would be perfect partners for solar companies. It would help get more solar on roofs to have a partnership relationship rather than a competitive relationship. That is something that may unfold in the future. MR. MARTIN: How would such a partnership work? MR. GERWATOWSKI: Like what we do for energy efficiency today. We do not install the light bulb or dimmer switches; we have incentive programs where we work with vendors. There is room for something like that to happen in solar. Rate Based Solar MR. MARTIN: Vadim Polikov, does the thought of utilities owning rooftop systems and putting them in rate base make the hair stand up on the back of your neck? DR. POLIKOV: Honestly, it does. The utilities have market power and recognized brands. It does not really cost them to install because they can put the cost into rate base. This allows them to do things that the private market cannot do. It is not a fair competition. It is really hard to sell this stuff because it is not an absolute need; it is a want. The cost of customer acquisition is so high because finding customers is not easy. People generally do not like the local utility because it is a monopoly. It does not offer the kind of service that you would expect in a competitive market. I do not think the consumer would be well served if the monopoly provider ends up dominating the market. MR. GERWATOWSKI: We heard at least three or four times that customers hate the utility. Our customers tell us, “We trust you. Which vendor should we work with?” There is something incoherent about the idea that our customers hate us and trust us at the same time. DR. POLIKOV: I think you can both trust the government and hate the government at the same time. MR. GERWATOWSKI: Really? DR. POLIKOV: Or trust the utility and hate it at the same time. They trust that their lights are going to be on. They trust that if they ask you to come fix a downed power line, it will get fixed. But they hate the idea that they cannot choose who is providing the service, and they dread the idea of waiting on the phone to get through to a customer representative and then trying to get a problem with a bill fixed. We as consumers are so used to having choices that when we are faced with having to deal with Imagine a future where home energy systems manage many automation tasks that are being sold separately today by other companies. SEPTEMBER 2014 PROJECT FINANCE NEWSWIRE 59 MS. BERWICK: I agree with Vadim, although I would make an exception for communities that are underserved. We are going to have the same conversation about electric vehicle charging stations. Should utilities be in that business? Should unregulated affiliates be in the business? Should we leave it to a thoroughly nonutility world? The issues are the same. MR. MARTIN: There are some utility commissioners who believe the utilities should be held at bay to let innovation take hold and give smaller companies time to develop. What is your view? MS. BERWICK: We have a pending proceeding on electric vehicle charging infrastructure and one of the specific questions in the preceding is that very question, so it is not a question I can answer yet. MR. MARTIN: Let me challenge in the other direction. Is the boom in rooftop solar just a fad? Will homeowners decide that they are better off having an engineer at the utility handle the power supply and not have to worry whether their own equipment is working? David Field, will we go back to central station power plants? MR. FIELD: There are many CEOs of energy companies who believe the next turn of the wheel is for energy to go through the same transformation that communications has. Predictions MR. MARTIN: So the genie is out of the bottle. Last question: Ron Gerwatowski, what is the future for the power industry business model? Do we continue with what we have or, if not, how will it change? MR. GERWATOWSKI: We will always need a central grid, but we will see new configurations. The system at the distribution level will have to accommodate more distributed generation. The engineers will design the system differently, and we will get to a point of equilibrium between the rates needed to support the grid and the desire not to erect barriers to distributed generators. MR. MARTIN: And do you think it is inevitable that we will move to some sort of flat monthly charge? MR. GERWATOWSKI: Utility customers will always pay a mixed rate. Net metering has a significant value and is important for the solar industry, particularly for residential customers who want to put solar on their roofs. However, if the part of the rate that pays for the commodity ends up being three quarters of the bill, then net metering does not affect a delivery company like National Grid. It will create some issues for utilities that still own generating assets. the cable company or the utility company, it is a source of despair. MR. MARTIN: The problem is the fear of calling to get repair service and being on hold for half an hour. The problem may be more with the cable company than the local utility, but people tend to lump them together. Ann Berwick, you have a comment. MR. BERWICK: We are talking about the fact that customers are motivated to go to solar in part because they “hate their utility” and then when we talk about letting a utility into the business, solar companies are afraid that they will not be able to compete. There is a disconnect. DR. POLIKOV: If utilities had to compete through an unregulated affiliate, I guarantee they would not be able to compete. The ability to put systems into rate base gives them an unfair advantage. MR. FIELD: I think that ultimately utilities will be in the business. It is a capital-intensive business. The utilities have brand recognition. A customer may not like his utility, but he trusts it to be able to provide the service. MR. MARTIN: Then what is the future of your company? MR. FIELD: We built our company to be a transaction platform for others. We have water and gas utilities coming to us and saying, “We would like to cross sell rooftop solar leases to our customers. How can we partner with you to be able to do so?” We are happy to partner with them. As Vadim said, this is a hard business; 95% of solar in America is sold door to door. It is not scalable. It is not low cost. Utilities will make headway in the market because people buy from companies whose brands they trust. MR. MARTIN: Vadim Polikov, if David Field is correct, what is the future of your company? DR. POLIKOV: Let me make sure I say what I actually believe. I think utilities will get into the solar rooftop business through their unregulated affiliates. Exelon has a minority stake in my company, Astrum Solar. A lot of utility holding companies are trying to get into this space, and for good reason, as this is the future. To use an analogy from earlier: this is AT&T getting into mobile telephones. AT&T knows this is the future. But I do not think that it is the regulated utility that will end up in the business; it is the unregulated side that knows how to sell to customers and how to be innovative, and that is fine. I am not against having large energy companies take over this space. I am just concerned about rate basing and using the regulated utility. / continued page 60 60 PROJECT FINANCE NEWSWIRE SEPTEMBER 2014 MR. MARTIN: Vadim Polikov, what is the future of the power industry business model? DR. POLIKOV: The cost of distributed solar is coming down quickly. Energy storage is not here yet, but it will be here in the next two to four years. If you look 10 years out, there will be a lot of people who can put solar on their roofs with storage and no longer need to rely on the grid. If you look at the moves that Exelon, GDF Suez and other large and established power companies are making, they are moving into distributed solar because they know that it is the future. Consumers will benefit. We will have more options within our houses than we can even dream of today. Who would have dreamed of smartphones in 1995. It is impossible even to imagine all the possibilities once you have a digitized system in your home for energy. MR. MARTIN: Ann Berwick, what is the future of the power industry business model? MS. BERWICK: I think we will find out more about it in Massachusetts in the very near future. The Massachusetts Department of Public Utilities issued two new orders about 10 days ago, one on hybrid modernization and the other on time-varying rates. These orders start introducing real opportunity for the utilities to look at providing a platform for a whole range of services. MR. MARTIN: So it is a brighter future for the regulated utilities? MS. BERWICK: We are giving them a lot of opportunity to define this space. The bottom line is we need to ensure that the utilities remain healthy because, unless we live in a very different world than we are imagining, we will continue to need the services they provide. MR. MARTIN: David Field, same question. MR. FIELD: I was at the DNV Kema conference in Scottsdale, Arizona last month. It is the retail conference for all of the energy providers. The CEO of nearly every company said that his or her company plans to go into rooftop solar. We are starting to see thousands of newly-appointed sales reps in that market. That is just an example of how a disruptive change is coming to the industry. Big data is trying to get into the sector. Pretty soon we will be able to take a million addresses here in the Boston area and automatically map every rooftop, identify which are best suited for solar, cross reference that to credit scores, cross reference that utility estimated data and be able with pinpoint accuracy go to individual houses, give the owner a two-page customer solar proposal, tell him or her how much can be saved on the utility bill and list other services that we are able to bundle for them. That is where this whole industry is going.