Utilities Want Regulatory Rescue From 'Death Spiral'

Electric utilities want regulators to allow pricing changes that will save the industry from what Wall Street has dubbed a "death spiral" spun by rooftop solar.
Utilities need pricing structures that will compensate them for the value of the grid they maintain, even as solar liberates customers from some reliance on the grid, panelists told about 60 people at a Monday night forum sponsored by the University of Chicago's Booth Energy Network. It's an issue between regulators, one panelist said, and the regulated.
"You have to come up with a regulatory model that ensures you're going to be able to preserve the integrity of the system," said Ross Hemphill, the vice president of regulatory policy and strategy for ComEd, an Exelon company.
The utility industry has been abuzz with the term death spiral since Liam Denning used it in a Dec. 22 Wall Street Journal article:
The death-spiral thesis runs thusly. Subsidies and falling technology costs are making distributed solar power—panels on roofs, essentially—cost-competitive with retail electricity prices in places like the southwestern U.S. As more people switch to solar, utilities sell less electricity to those customers, especially as they often have the right to sell surplus power from their panels back to the utility.
The result: Utilities must spread their high fixed costs for things like repairing the grid over fewer kilowatt-hours, making solar power even more competitive and pushing more people to adopt it in a vicious circle.
Utilities like ComEd have high fixed costs for maintaining a grid that was designed to deliver power from a few sources to many customers. Hemphill estimates that more than 90 percent of utilities' costs are fixed, but only about 35 percent of revenues are fixed.
Those unfixed revenues look vulnerable in the face of tremendous growth in solar energy.
"What you have to be concerned about is a situation where you have such a high proportion of fixed costs being recovered through a volumetric rate, and then you have fast growth of a technology that starts pulling kilowatt hours off the grid," Hemphill said. "And then you have this problem of just where are you going to be able to recover that?"
Under current pricing regulations, utilities recover it from those who continue to draw power from the grid. That encourages even more of them to install solar—if they can afford it. Which means grid costs may be concentrating among those who can't afford to install solar.
"You actually could find yourself where you've got an inequity across income levels," Hemphill said.
The current pricing system worked fine when energy flowed in one direction, the panelists said. But as costumers began to produce power, many states required utilities to pay them for it, and those net-metering regulations may also undervalue the grid.
Even customers who produce their own solar power will need the grid either for rainy days or to sell their surplus—at least until cheap energy storage becomes viable.
"I don't see very soon a situation where it's going to be a regular occurrence that a customer's going to be able to disconnect entirely," Hemphill said. "It's going to be more like finding a way to generate some of your own electricity but you're still going to need that grid as more of a backup. And there's technologies where you can be a producer, so you need the grid to be able to sell that out on the market as well."
Industrial customers have produced their own power for decades, said Casey Herman, a specialist in the power sector with PricewaterhouseCoopers, but they still rely on the grid in ways that may not be reflected in pricing regulations.
"I've never seen companies disconnect from the grid. The variability of their needs, the variability of their own supply is too great," Herman said.
"I agree with [Hemphill] completely that there's a lot of value to the grid. There's also a lot of value to that backup generation that provides support. How do you make sure there's adequate compensation for those backup resources? I think that's a very challenging question."
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