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A Solar Battery Knockout?

Feb. 20, 2015
Has solar-plus-storage become the long-feared one-two knockout blow for electric utilities?

Have we reached the cusp where distributed solar photovoltaic (PV) and battery storage are about to become a “utility in a box,” allowing customers the option to completely defect from the grid? Has solar-plus-storage become the long-feared one-two knockout blow for electric utilities? Some observers feel that the time is upon us.

Last May, Barclays made news when it downgraded electric utility bonds citing a “confluence of declining cost trends in distributed solar PV power generation and residential-scale power storage is likely to disrupt the status quo.” Barclays went on to say that Hawaii was already at that point today, and California could follow in 2017 with Arizona and New York possibly seeing these conditions in 2018.

What’s happened since May? The costs of PV and storage are individually continuing to fall and in combination there may be further complementary cost reductions available. A recent Deutsche Bank report echoed this trend stating that “solar electricity is on track to be as cheap or cheaper than the average electricity-bill prices in 47 U.S. states — in 2016.”

A study by the North Carolina Clean Energy Technology Center reported “a fully financed solar PV system costs less than the energy purchased from a residential customer’s local utility in 42 of the 50 largest cities in the United States.” The report also stated that while “hardware” costs have been mostly responsible for recent cost reductions, opportunities also exist to reduce the “non-hardware” or “soft” costs such as customer acquisition, installation labor, financing, permitting and inspection. These costs reportedly account for 64% of total costs.

Battery costs are also following a downward trend. Currently, lithium-ion battery systems run about US$600 per kWh. A collaboration of the big three American automakers is striving to get that cost down to $125 per kWh by 2020. In its analysis, Rocky Mountain Institute is assuming that battery system costs will decline at a rate of 5.8% annually. Greentech Media Research thinks the decline could be greater.

Additionally, the cost of solar-plus-storage in combination may be less because of the ability to share components such as inverters and power converters. SolarCity CTO Peter Rive recently observed, “One of the cool things about storage is that if you’re already installing a solar system, the incremental cost of getting a storage system is low.”

It doesn’t sound good for utilities. While competitive technologies seem to be improving monthly and declining in cost, utility costs will almost certainly increase over time. So, are utilities toast? Should they start rolling up their conductors and begin selling their poles to cable TV and telephone companies? Not so fast.

Not all analysts expect electric utilities to be going over the cliff right away, according to a new Moody’s Investors Service report, “Batteries are coming but utilities are not going away.” In the report, Toby Shea, a Moody’s vice president and senior analyst, said “We believe the cost of batteries in a solar battery system is still an order of magnitude too expensive to substitute for grid power.”

The Moody’s report cited current battery costs in the range of $500 to $600 per kWh and said they need to be in the range of $10 to $30 per kWh for solar-plus-battery systems to compete with the grid. Further, Moody’s analysts also believe that most people are too accustomed to the convenience and reliability of grid power and that they will be unwilling to monitor energy storage levels and adjust their power usage based upon the energy remaining in storage.

Why the big difference of opinions concerning the solar-plus-battery threat level? According to Moody’s, the key difference is that its study used actual consumer usage to calculate the size of the battery system needed to support off-grid operation and previous studies have not. Moody’s report noted that actual daily consumption patterns for consumers vary significantly from solar PV production profiles. The result is that off-grid battery systems would need to be much larger than previously believed in order to provide power as reliably as the grid. According to Moody’s, the risk of customers exiting the grid in any appreciable numbers will be “negligible for the foreseeable future.”

Utilities may have more time before the solar-plus-storage apocalypse descends upon them, but they should not relax. Utilities should bear in mind that solar PV is an existing revenue threat that is growing daily, and it is a threat that will not go away even if solar tax incentives do. Recently, one solar industry executive even called for the removal of solar tax incentives, saying they should be phased out by 2018 so that the solar industry would not suffer the same tumultuous conditions that have plagued the wind industry.

Utilities wishing to avoid future wholesale customer defections should be putting in place a storage strategy today. At a minimum, this strategy should define the role of storage in system support as well as customer retention and specify how storage will fit into their future business model.

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