How Real Is The Off-Grid Solar Threat To Utilities? (Part II)

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Includes: FSLR, JKS, RGSE, SPWR, SUNEQ, TSL, TSLA, VSLR
by: EnerTuition

Summary

Commercial off-grid solar market is being driven by economics and factors that are vastly different from that of residential off-grid.

Utilities are under imminent threat from commercial entities and given the size of commercial customers, this development is going to hurt utilities.

The beneficiaries from this development are not likely to be residential installers but low cost panel manufacturers and installers specializing in the commercial sector.

In our last article about off-grid solar, we discussed the threat of residential off-grid solar to utilities. In this article, we discuss the much more real and imminent threat of commercial off-grid solar (includes industrial, government, and agricultural applications).

While all of the fundamentals of solar's intermittent nature discussed in our last article apply equally to commercial applications, there are several significant differences between the residential and commercial applications including:

- Size - compared to residential systems which tend to be less than 10KW, commercial systems can be several hundreds of KW or several MW.

- Space availability - unlike residences, commercial environments tend to have more space for solar panels as well as space for auxiliary systems like NG generators.

- Zoning - commercial environments tend to be zoned differently than residential and tend to have fewer restrictions in terms of noise, appearance, neighborhood codes, etc.

- Net metering - net metering, to the extent available, is typically more restrictive to commercial customers. This creates a disproportional incentive, compared to residential customers, to move off the grid.

- Demand charges - demand charges can be a large component of commercial energy bills and create a disproportional incentive for this class of customers to introduce storage and to move off the grid.

- Energy usage timing - commercial power consumption tends to have better correlation with solar output compared to residential applications. The amount of load shifting necessary is typically smaller than that would be needed in residential context reducing the need for and the cost of storage and auxiliary generation.

- Load shifting capability - some commercial applications have meaningful load shifting options that can help better match energy production with consumption and reduce the need for storage.

- Utilization factor - commercial energy systems are likely to have higher utilization factors and thus increase the economics of the system.

- Installation flexibility - commercial applications, unlike most residential applications, may have considerable flexibility in installation. Long term battery storage is highly uneconomical and having flexibility on installation can significantly simplify the system cost. For example, an east-west orientation may make more economic sense for some commercial applications while a residential customer is more likely to be limited by the orientation of the rooftop. Or, a commercial installation might more easily justify a large peaker or standby NG power plant as an alternative to increasing battery size.

- Maintenance cost and schedules - given the large use factor, commercial entities are in a better position than their residential counterparts in their ability to deal with maintenance costs and schedules.

- Wastage - commercial entities may also have better prospects of reducing wastage through load shifting and other flexible uses for energy. As such, given the size of the system and the predictability of the load profile, the waste component is more manageable.

- Tax shield - Solar energy solutions can be highly desirable tax shields for businesses looking to take advantage of the tax benefits of ITC and MACRS.

While all the above factors help the case for commercial installations moving off-grid, there are a few notable challenges. These include:

- Mission criticality - commercial systems need to have high reliability and availability. Losing productivity even for a few hours can wipe out any potential gains from going off the grid. Commercial customers are unlikely to change their energy architecture unless they have confidence that the new system offers a level of performance that meets their needs.

- Property ownership - this is a complicated aspect of many commercial systems. The owner of the commercial property where the system is to be installed may be a different entity than the owner of the operating business. This creates complexities in negotiations, service provisioning, risk management, and financing and delays adoption of this class of solutions.

- Physical environmental variability - commercial applications tend to have highly diverse set of physical structures that can result in higher installation costs (ex: single buildings, office complexes, hospitals, car parks, barns, wells, ground mount structures, etc.)

- Utility rate realignment - utilities in the recent past have been resorting to increased demand charges in the commercial sector to increase their revenues. To reduce battery driven arbitrage and reduce grid defection, utilities need to ensure that demand charges are reflective of the actual costs and understand the long term ramifications of high demand charges. While demand charges make some sense in terms of utility cost structure, over reliance on this revenue mechanism can cost utilities dearly in terms of customer defections and long term revenue losses. Utilities are increasingly understanding the impact of rate structures on competitive alternatives and are likely to take steps to make batteries and off-grid alternatives less attractive.

While the benefits of off-grid solar are nearly non-existent in the residential context, a confluence of factors discussed above coupled with ongoing reduction in solar system costs make off-grid commercial systems increasingly economical. Depending on the rate schedules of the local utility and the amount of solar resource in the region, these solutions may have a very short payback period.

The economics will continue to improve over time and payback times will reduce as the costs of solar and battery technologies drop. Given the current technology trends, we expect off-grid commercial economics to work in the US context imminently and their penetration to increase over time.

The adoption rate will be highly dependent on rate structures and rate structure changes at the local utility. As the defection of high volume customers rises, we expect utilities to start responding to this thread aggressively. However, given the economics of scale in this class of installations, we do not believe utilities will be able to stop the imminence of off-grid tide.

In spite of this likely adoption we do not believe battery providers like Tesla (NASDAQ:TSLA) or lease/PPA providers like SolarCity (SCTY), SunPower (NASDAQ:SPWR), Vivint Solar (NYSE:VSLR), RGS Energy (NASDAQ:RGSE) will benefit significantly for the following reasons:

- While batteries will have a role to play, much of the role of the battery can be subsumed by cost effective alternative energy generation schemes. A peaker NG system with a small battery is likely to be significantly more cost effective for commercial system owners than battery-driven solution. Where possible, we expect commercial solutions to resort to cost effective alternative power generation to address demand spikes instead of relying exclusively on battery technology.

- While it is easy to find gullible residential system owners to sign long 20/30 years leases and PPAs, commercial owners are unlikely to sign these long term leases. Commercial owners are far more likely to figure out the fleeting nature of utility rate models and will demand significantly faster payback periods. We expect the lease times to dramatically shrink as the industry comes to grips with the installed issues.

In summary, unlike residential solar, which is likely to be not economical for another decade, we believe off-grid commercial customer defections are likely to cause much consternation and heartburn to utilities by the turn of this decade. The beneficiaries of this emerging market are likely to be low cost solar panel makers like First Solar (NASDAQ:FSLR), JinkoSolar (NYSE:JKS), Trina Solar (NYSE:TSL) and commercial focused installers like SunEdison (SUNE).

Disclosure: The author is long FSLR, JKS, SUNE, TSL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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