Rooftop Solar Will Prevail Against Utility Obstruction Efforts

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Includes: DUK, GUA, TE, TSLA, VSLR
by: Simple Investment Ideas

Summary

With the threat that distributed generation poses to centralized generation, utilities are fighting tooth and nail against the burgeoning rooftop solar industry.

Energy regulators will more easily discern the flaws of the utilities' arguments against rooftop solar as rooftop solar industry data becomes more prevalent.

While utilities have enormous financial clout/lobbying power, the rooftop solar industry has overwhelming public support and increasing political support.

Centralized utilities across the nation are starting to become more aware of the rooftop solar threat, prompting the utilities to fight back against rooftop solar. Utilities' attempts at curtailing distributed solar growth has accelerated over the past few quarters, with them charging/proposing higher rooftop solar surcharges, ferociously battling net metering policies, and even attempting to enter the rooftop solar industry themselves. Given the very real threat that rooftop solar poses to the utilities, which was recently highlighted in a Rocky Mountain Institute report, the battle between rooftop solar companies and centralized utilities is likely just starting to heat up.

Recent headlines in this space have been dominated by Salt River Project's (SRP) $50 surcharge on rooftop solar companies, and Arizona Public Service Company's (APS) proposal to implement a $21 surcharge on rooftop solar customers. As these two utilities have been the face of the utility campaign against rooftop solar, the near-term outcome of their efforts against rooftop solar will give an indication on how the eventual battle plays out. While the utility obstruction efforts are definitely becoming more concerted, the outcome of this battle will likely vary wildly from region to region.

Exactly what methods centralized utilities decide to use in their fight for survival will have a huge impact on both themselves and the rooftop solar industry. With that being said, it is very likely that the utilities are generally using the wrong approach in their attempts to wade through the changing energy landscape. There are reasons to believe that rooftop solar companies will increasingly get the upper hand in the battle against the centralized utilities. The utilities will likely have to start adapting to rooftop solar, as opposed to battling the growing industry.

Utilities' Arguments Do Not Hold Up

Utilities have long used the argument that rooftop solar customers of companies like SolarCity (SCTY) or Vivint Solar (NYSE:VSLR) are not paying for their fair share of grid usage. This argument is flawed in many ways, primarily due to the fact that rooftop solar customers get the vast majority of their electricity from their solar panels rather than the grid. Even when factoring in grid usage from net metering, rooftop solar customers are still using the grid a fraction of the time compared to a normal utility customer. Any grid maintenance charge for rooftop solar customers should be minimal if based upon actual grid usage.

Utilities often proclaim that rooftop solar customers are shifting grid cost burdens to non-solar customers. While this may be true to some degree, the burden should not fall on the rooftop solar customers to cover this cost. A simple example of this argument goes that if there are two customers originally paying 10 dollars for grid maintenance, but then one customer decides to go solar (resulting in a negligible amount of grid usage), then one customer will have to pay approximately 20 dollars for grid maintenance (grid maintenance costs are bundled in the utility electric bill). Because the grid infrastructure was originally built for two individuals, grid maintenance costs do not decrease by a factor two when one person essentially defects from the grid. The utilities still have to maintain a grid built for two people. As such, maintenance costs for the grid gets shifted to the remaining customer, forcing the customer still using the grid to pay more.

The utilities are basically making the argument that because is not fair for the remaining customers to have to pay more for grid maintenance, the grid defectors should now pay for a disproportionate amount of grid maintenance relative to their use in order to cover these costs. Essentially, the same argument could be made for someone who does not go solar, but decides to stop using electricity altogether. In this scenario, grid maintenance costs will also be concentrated on the one individual still using the grid. Of course, no one in their right minds would say that the person not using any electricity should have to pay for grid maintenance, but this is essentially the argument that the utilities are making.

The burden is on the utilities to find a way to adapt to grid defectors. In the same way that someone who stops using electricity should not have to pay for grid maintenance, rooftop solar customers should not have to either. They should not be forced to pay an amount disproportionate to their actual grid usage, only to how much they are actually using the grid. Asking rooftop solar customers to bear the burden of the cost shift is the equivalent of asking non-electricity users to do the same.

When the utilities were initially building out their grids, they were taking an implicit risk that some customers could stop using the grid in the future, and therefore, shift grid maintenance costs to the remaining electricity users. It is ridiculous to imply that the customers that stopped using the grid should be responsible for such a cost shift. The burden should fall on the utilities to find ways to adapt. The only time when solar customers are using the grid for free is when they are selling electricity back to the grid. In this case, a small fee may be warranted. With that being said, the current utility fees/fee proposals have no basis in economic reality.

This graph essentially summarized the utility cost shift that will occur as more individuals decide to go solar. The utilities are suggesting that solar customers should pay a disproportionate amount of grid maintenance costs (relative to their actual grid usage) in order to cover this cost shift.

(Source: torroholdings)

Industry Data Should Increasingly Favor Rooftop Solar

Moving forward, such arguments will likely hold increasingly less weight as regulators start to understand the rooftop solar dynamic better. Due to the general scarcity of rooftop solar industry data, regulators currently have very little knowledge about the cost dynamics of rooftop solar, and therefore, often overestimate actual grid costs that rooftop solar customers incur. There have already been studies done showing how regulators often underestimate, or even ignore, the benefits of rooftop solar (i.e., reducing peak demand issues, adding security/resilience to the grid, etc).

As commissioners and regulators become more knowledgeable about the cost dynamics of rooftop solar, they will likely increasingly side with rooftop solar companies on surcharge, net metering, and other rooftop solar-related issues. This will undoubtedly have a positive effect on rooftop solar companies like SolarCity, Vivint Solar, SunRun, etc., making them more economically viable in a larger number of areas. With the explosion of rooftop solar, there should soon be enough industry data to get a much deeper understanding about the true grid costs for rooftop solar customers.

Counterproductive Utility Efforts

Given the time and resources that centralized utilities are using in their attempts to squash rooftop solar, it would be a huge loss to these utilities if these efforts ultimately fail. Not only would these efforts be time/resource-wasting, but these efforts would also distract the utilities from the truly productive task of integrating with rooftop solar. Given the inherent theoretical advantages of distributed generation and the downward-spiraling cost curve of solar PV technology, the utilities are likely fighting a losing battle.

Rather than fighting the progress of distributed solar PV, the utilities would likely be much better off adapting to the changing energy landscape. One idea gaining popularity is that the centralized utilities transform into pure grid service companies. Rather than losing their entire businesses to distributed forms of generation, they will still be able to serve an integral function in the electricity industry. If the centralized utilities persist in fighting against rooftop solar, this may very well incentivize rooftop solar companies to come up with their own solutions at an accelerated faster rate. This would only make the long-term prospects of centralized utilities worse.

Utilities like Duke Energy (NYSE:DUK), TECO Electric (NYSE:TE), and Gulf Power Company (NYSE:GUA) have lobbied ferociously against rooftop solar. In fact, these lobbying efforts have been the prime reason why states with great rates of solar insolation, such as Florida, are still extremely anti-solar. While such tactics may have an effect in the near term, they will eventually prove to be counterproductive to the utilities implementing them. The utilities that are the most adaptable to rooftop solar companies will likely benefit the most in the long run.

Shifting Tides

The driving force behind the utility industry's huge influence on energy policies is its financial clout, which gives the industry comparatively limitless lobbying power over solar rooftop companies. Fortunately, the solar rooftop companies have overwhelming public support and growth momentum on their side. Even their lobbying power is starting to grow enormously, which is no surprise given the breakneck growth pace of the industry. With such high public approval, growth momentum, and job growth, even conservative politicians are starting to align themselves with the solar industry.

Despite the utilities' clearly superior lobbying abilities, utilities are still somewhat evenly matched in their increasingly fierce battle with rooftop solar companies. In fact, some may even argue that rooftop solar companies are gaining the upper hand, especially in light of all the failed attempts by utilities to remove net metering policies or increase rooftop solar surcharges. SRP's $50 surcharge was a unique case, as it is a municipal utility that does not need regulatory approval from a third-party. Once rooftop solar companies start to gain more ground in terms of financial prowess (and therefore lobbying power), the battle will almost certainly shift in the rooftop solar industry's favor.

Conclusion

With the rooftop solar industry gaining momentum in terms of economics and political support, many are overestimating the utilities' chances in their campaign against rooftop solar companies. As such, rooftop solar companies like SolarCity and Vivint Solar have an immense amount of upside, as the threat of the utility push back is overblown. On the other hand, the utility industry as a whole should only experience downside from this point, as even the utilities who do adapt to the changing energy landscape will have nowhere near the economics they currently enjoy moving forward. Despite the rooftop solar industry's potential to displace the massive centralized utility industry as the predominant electricity generator, the largest rooftop solar companies are still valued in the low-single digit billions. This suggests that rooftop solar companies are generally extremely undervalued at current market valuations.

Disclosure: The author is long SCTY.

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.