The Grid Defection Battle: Final Battleground Of The Solar Wars

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Includes: KWT, SEDG, TAN, TSLA
by: Energy Solutions Partners

Summary

The grid defection battle has begun as companies in some parts of the USA are finding the cost of solar to be cheaper then their respective utility rates.

This battle is just beginning, and will be the final battle in the solar wars.

The implications of this final battle are dramatic and we will explore how this effects the utility and solar sectors in the USA. Tesla(TSLA) will be a winner in these.

This is the final of a three-part series where I plan to discuss the current and upcoming battles of the "solar wars." The three battles are: net-metering, tariff reform, and grid defection. This is the grid defection discussion.

The solar wars have two main combatants - the monopoly utilities and the solar industry involved with consumers whom wish to own or buy solar power directly. Utilities are not against solar as this new technology gives them another method to generate electricity.

What utilities dislike is their customers producing their own electricity by any means - such as solar, wind, on-site generators, etc. This is called load defection. Some commercial customers are finding out - it may be cheaper to leave the grid entirely as discussed in this 2016 article about Las Vegas casinos separating from NV Energy. This is called grid defection and will result in lower revenues for the utilities. This lowered revenue will lead to increased electric rates, incentivizing other customers to load or grid defect.

Grid Defection

As seen above, grid defection is already occurring for commercial customers. For residential customers we will not see this happening soon. The need for continuous and back up power generation is just not economically feasible for residential size electrical loads.

For utilities, grid defection has always been an issue for their largest industrial customers. These large entities such as steel mills, or cement plants have traditionally used coal or natural gas for on-site generated power for their operations. Also these large firms have employees such as electricians to maintain a microgrid if needed.

Since these large customers have the ability to create and manage their own electricity, utilities have negotiated directly with them on really low electric rates to keep them as customers. In some states, residential customers can pay 80% more for their electricty. We will now explore the three main trends that will encourage further grid defection.

Power Purchase Agreements - PPA's

Lawrence Berkeley National Laboratory (Berkeley Lab) 2015

As seen in this above graphic from 2015, the average PPA price fell 70% in just 5 years to below 5 cents per kilowatt hour. More recently, solar prices have fallen even more dramatically to a new record low of 2.42 per kilowatt hour. Also important to note, this record low pricing is unsubsidized.

These low solar power contracts caught the attention of some of the casinos in Las Vegas such as the MGM as mentioned above. The pricing for these solar power contracts were low enough for MGM to leave their utility and pay a $87 million exit fee!

Looking into 2017 we will see even lower pricing due to another 20%+ drop in the average selling price for solar modules as shown in a prior article.

Demand Charges

Typically, demand charges are used for commercial and industrial customers only. This charge is based on the highest 15 minutes interval of power during the month's billing period. These charges can be up to 70% of a customer bill. The demand charge is like another facility fee and solar alone will not reduce this charge. This is one reason why commercial and industrial firms have not installed solar.

So installing a rooftop solar array on your business will only reduce your volumetric charges for electricity, and not reduce your demand charge. The other option a business has is grid defection. So now the economics may work with solar, combined heat and power generation, and some amount of storage. This could involve either full grid defection or load defection.

Battery pricing trends

Similar to the dramatic decline in solar module prices, we are seeing the same large decline in energy storage costs. In 2016 STEM's CTO described a 70% reduction in lithium ion battery prices in just 18 months.

Tesla(NASDAQ:TSLA) battery costs are now below $200 per kilowatt hour. Tesla has not even fully ramped up its manufacturing yet. These much lower storage prices for small to medium sized businesses will lead to more demand charge shaving, and grid defection options.

2017 trends and investment options

The combination of extremely low solar power pricing, falling battery pricing, and high demand charges will encourage more commercial entities to do what MGM did in Las Vegas - leave the grid, or load defect.

With this grid/load defection dynamics in mind, I see this as a positive for Tesla. Tesla is an obvious choice since its acquisition of solar city and its positioning into solar and energy. Innovation will be the key, with not just cheaper options, but more elegant and innovative options.

We may also see residential installations with smarter inverters that enable customers to eliminate the need for net-metering agreements from their utilities. Innovation in this area would include smart software for charge controlling and energy curtailment. Winners in this space would be Tesla and Solaredge Technologies(NASDAQ:SEDG). Here is a recent article on the positive case for Solaredge.

Solaredge also has over 70 patents and over 100 more patents pending. Solaredge would be an acquisition target with these patents, no debt, and over $150 million in cash on its balance sheet. Tesla may have an interest in Solaredge in order to acquire these patents and technologies.

Disclosure: I am/we are long SEDG.

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.