The Utilities' Campaign Against Distributed Generation Ratchets Up

by: Simple Investment Ideas


The electric utilities are starting to put significantly more effort in trying to impose DG fees and in attempting to eliminate the current net metering policy.

While the electric utilities represent an increasingly daunting challenge for less well-resourced DG companies, there is little they can do to stop DG's spread.

It is becoming increasingly clear that the electric utilities are far exaggerating the grid burdens imposed by DG systems, which may in fact be a net benefit to the grid.

The electric utilities have started to ramp up their campaign against distributed generation(NYSE:DG) in the United States. While battles between the utilities and distributed generation companies have been heating up for years now, such battles are now becoming markedly more intense. Most recently, San Diego Gas & Electric, Pacific Gas & Electric (NYSE:PCG), and Southern California Edison (NYSE:EIX), have proposed lowering net metering rates and adding high fixed charges for DG. Given that this proposal is coming from the three largest California electric utilities, it is shaping up to be a huge headache for the DG industry.

Rooftop solar companies, in particular, will be hard hit should this proposal go through. Companies like SolarCity (SCTY), Vivint Solar (NYSE:VSLR), Sunrun (NASDAQ:RUN), etc, have an enormous amount at stake, which only makes sense given their dependence on favorable DG policies. California is the most important state for DG by a wide margin, which makes this upcoming battle all the more important. While the recent push back from utilities is becoming much more serious, the DG industry has shown itself to be highly capable in fighting these battles. While DG companies are facing an increasingly daunting challenge on the policy front, these companies will likely prevail in the long-term.

A Solid Policy Record For DG

Despite the fact that the electric utilities have far more financial and political clout than DG companies, these utilities have been surprisingly ineffective at making any significant dents in DG's growth path. For instance, rooftop solar interests have won 23 out of 24 major net metering battles over the past few years, which is extremely significant given net metering's importance for DG. With companies like SolarCity and Sunrun gaining more financial and political clout in their own right, it seems unlikely that the tide will shift towards the utilities anytime soon.

As electric utilities have generally banded together against DG, DG companies have returned the favor by forming alliances such as The Alliance for Solar Choice(TASC). TASC, which is composed of leading distributed generation companies like SolarCity, Sunrun, Verengo, etc, has been surprisingly effective in battling against the utilities on the policy front. While utilities have far superior resources, distributed generation companies have been able to more than hold their own, likely due to a combination of public and governmental support.

With these DG companies growing at breakneck speeds, they will likely be able to much more effectively counter the utilities growing anti-DG campaign. While many DG bears point to the utility push back in order to bolster their arguments, this push back threat is likely overstated. Although utility roadblocks for DG growth are inevitable, such as Salt River Project enacting an enormous rooftop solar fee, DG companies will likely continue eating into the profits of utilities at record paces. Whereas utilities like Southern California Edison will likely be facing a long-term downturn, DG companies like Sunrun have much more room to grow.

Utility Argument Will Not Hold Up in the Long-Run

One of the core arguments for electric utilities in their battle against DG is that a cost shift takes place from DG customers to normal utility customers. The argument is that since infrastructure maintenance costs are bundled into electricity rates, DG customers will no longer be paying for their fair share of maintenance costs(as they will be using less energy from the utilities). As a result, the utility has to raise their electricity rates in order to cover these costs, thus raising the costs on normal customers. Using this logic, the utilities are attempting to levy enormous fees on DG customers under the guise of fixing this supposed cost shift.

Ignoring the fact that the same argument could be made for an individual who lowers their electricity use for other reasons, the utilities largely ignore the benefits DG. In fact, a study done by the Maine Public Utilities Commission valued distributed solar at three times the price of grid power. While this may be shocking at first, it may not be so surprising upon closer inspection. After all, DG offers a plethora of benefits, including avoided transmission costs, peaker plant costs, generation capacity costs, and so forth. In addition, DG reduces externalities, which are notoriously difficult to put a monetary value on.

Utilities blatantly leave out such benefits of DG when making their arguments to raise/impose fees on DG customers, which should become increasingly obvious to policy makers and regulators. As more third-party studies on the costs-benefits of DG emerge, it will become clear that utilities are overestimating DG's costs to the grid. Unless rampant corruption exists among policy makers and regulators, which does not seem likely, DG companies like SolarCity and Sunrun should gain an edge over the utilities.

Here is the long-term value of DG as calculated by the Maine Public Utilities Commission.

Source: Maine Public Utilities Commission


Despite the growing efforts of utilities to suppress DG growth, DG industries like rooftop solar will likely continue to outperform. Companies on the forefront of the DG movement, such as SolarCity and Sunrun, have an immense amount of upside in the long-term. Electric utilities like Southern California Edison and Pacific Gas & Electric are fighting a losing battle, and will likely face increasing downward pressures moving forward. As it is becoming clear that DG is more of an asset to the grid as opposed to a burden, regulators will likely increasingly side with DG companies.

Disclosure: I am/we are long SCTY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.