The electric utility industry has been buffeted by two recent trends that threaten to upend the profitability, and in some cases the future viability of, those companies that are slow to adapt to a new, rapidly changing landscape. Specifically, in the past decade, the industry has had to grapple with both waning demand and the growth of distributed energy generation.
Electricity demand has been slowing as both commercial and residential customers construct buildings with better insulation and more energy efficient glass and install better heating and cooling systems. At the same time, there has been a faster than expected buildout of distributed energy generation systems, mainly rooftop solar, which are changing both supply and demand patterns. Both of these trends create meaningful challenges for an industry that has relied on steady, predictable growth in both supply and demand.
Power shifts to the consumer
Distributed energy generation creates significant challenges for an industry that has been built on steady baseload power generation from centrally located facilities sent over an established distribution grid. Predictable energy generation and usage are ideal so that voltage and volatility can be effectively managed in order to avoid power disruptions. Distributed generation, which is typically intermittent and volatile, causes instability and requires greater use of sensors and upgraded distribution equipment in order to prevent voltage spikes and other disturbances.
The electric utility industry has responded to the distributed energy threat with two primary tools: time-of-use charges and grid connection charges. But the effectiveness of these responses is being impacted by a third recent trend: behind-the-meter (BTM) energy storage. This rise in the installation of energy storage systems, especially in residences, has been happening much sooner than expected by the electric utility industry. Suddenly, the passive energy consumer has become an informed and active consumer that can both generate energy and manage its usage. BTM energy storage systems empower the customer while increasing costs and limiting the flexibility and revenue opportunities for the utilities. This is a significant threat to those utilities that are not prepared for the new landscape.
Faster than expected cost declines
The faster than expected adoption of home energy storage is being driven by both cost declines and changes in financing. Most of the home energy storage systems being installed today utilize lithium ion batteries, which have experienced a sharp drop in costs over the past decade. Until recently, energy storage has been an uneconomic endeavor for a homeowner; battery arrays were either too costly or too bulky (or both) to provide any benefit for the average household. But the investment case for home energy storage is rapidly improving as lithium ion battery costs have declined by 85% over the past decade, per Bloomberg New Energy Finance.
This rapid cost reduction is due to scale, changes in battery chemistry and materials, and improvements in manufacturing equipment and techniques. Trends suggest that this will continue for the foreseeable future. In short, the home energy storage industry is benefitting from the auto industry’s massive investment in lithium ion battery technology. Additionally, changes in the method of financing have recently enabled home energy storage systems to qualify for meaningful government incentives, particularly the 30% Investment Tax Credit that is available for installations of renewable energy systems.
As a result of these two trends, home solar systems increasingly include an energy storage component, a trend that was not expected to be happening so soon. Indeed, on its most recent earnings conference call, Sunrun Inc., the leading installer of rooftop solar systems in the U.S., indicated that more than 10% of installations in the first quarter of this year included battery storage systems, with attach rates climbing to 25% in California.
Although this penetration rate will further increase as batteries continue to get cheaper, it is unlikely that we will see wide-scale grid defection since required battery size for full off-grid functionality will remain prohibitively expensive for the next few years. Nevertheless, distributed energy storage is an increasing challenge to already pressured incumbent utilities for a number of reasons: reduced energy demand, greater unpredictability of grid loads, and customer avoidance of net metering regimes and time-of-use charges. In short, behind the meter energy storage systems empower the customer while increasing costs and limiting the flexibility and revenue opportunities for the utilities. When coupled with the overall lack of growth in energy demand and the adverse effects of rapid buildout of residential rooftop solar installations, the utility industry is under considerable threat. The shift to renewable power and a greater emphasis on distributed energy is happening far too fast for many industry participants to adapt.
So who will survive in this new landscape? We see opportunity among the utilities, equipment providers and renewable energy companies. NextEra Energy, based in Florida, is one of the better positioned utility companies. NextEra is located in a region where electricity demand is still growing, it has a history of successful renewable energy project development and owns a large renewable energy portfolio, and until recently, it has benefitted from very slow residential rooftop installation growth in its footprint due to utility-friendly state regulations.
On the equipment side, Itron, a provider of smart meters and related energy management software, should benefit from the need to upgrade the grid’s equipment. Itron’s smart meters allow accurate measurement and management of energy generation and usage while its software offerings allow the utility to better predict and manage grid loads and two-way flow of energy.
Sunrun, the market leader in sales and leasing of U.S. solar rooftop systems, is positioned for the continued growth in residential rooftop solar installations. We project that solar rooftop installations will continue to grow at a double-digit percentage for the foreseeable future, driven by declining technology costs, affordable financing and customer desire for a cleaner environment. Additionally, Sunrun will benefit from the growth of sales of Brightbox, its home energy storage solution.
The triple whammy of lack of growth in energy demand, rapid adoption of residential rooftop solar installations and accelerating penetration of home energy storage systems is disrupting the decades-old structure of the electric utility industry. Successful utilities of the future will have smart electric grids that are capable of harnessing distributed energy generation and can leverage BTM energy storage to create a more efficient, flexible, resilient and stable electric system. Unsuccessful utilities will not survive.