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Is Residential Solar Sticking it to the Man (your utility)?

The renewable energy industry has many cultural roots. One branch that pops up in a recent NY Times Magazine article on the Solar Industry is that of the energy rebel sticking it to the man (e.g. your utility).

Imagine a world in which homeowners and business owners are miniature power plants, with the full ability to sell power back to the grid at retail prices — power, literal and figurative, would be wrested from the hands of monopolistic, polluting utilities and their ancillary industries: mining, fracking and the like.

What is striking to me is that, almost two decades ago,  very similar rhetoric once contributed to the movement to deregulate the power industry. Much of the focus in the early years of electricity restructuring was on retail “choice”. Just like owning your own source of power, retail choice could free you from the tyranny (and high rates) of your local utility.

Indeed, under the financing mechanism touted in the article, customers essentially buy power directly from a solar installer (rather than equipment) for a fixed monthly payment.  This is getting really close to retail choice (now suspended for most  Californians), except that the retailer has to have a generator on your roof.

But who are we really sticking it to with these policies?

The problem with the “stick the utility” kind of reasoning, then and now, is that so much of utility costs are sunk. Much of the cost “savings” for an individual when they switch away from PG&E or any other utility – be it for their own rooftop solar array or a non-utility retailer – are in fact capital costs for wires, old nuclear plants, and other infrastructure. Those costs don’t go away when customers leave, they are either shifted to the utility’s shareholders or, usually, to other customers.

This fact was really starkly illustrated during the early phases of restructuring. When the California Public Utilities Commission first released its plans for retail choice – known as the “bluebook” – utility stocks plummeted on shareholder fears of being stuck with these sunk costs. The response was a year of political wrangling to eventually establish “competition transition charges” that had to be paid to the local utility even when customers departed for other suppliers. Neither shareholders nor customers who didn’t switch were left on their own to pay the bill.

Right or wrong, the dialog with regards to distributed renewables is starkly different. Economists repeatedly hem and haw about `sunk’ costs and the instability of the net-metering financing model. But these complaints have for the most part fallen on deaf ears. Why is it so different this time around? It could be because the expansion of residential solar is a gradual process – playing out over decades –  rather than the overnight shock that was the bluebook. It could be that residential solar pioneers, many of whom truly care about the environment and are willing to put up their own money to do something about it, are a much more sympathetic group than commercial and industrial retail switchers.

Nonetheless economists continue to predict an eventual reckoning to the cost shifting that underlies the economics of residential solar. As the number of installations rises, infrastructure costs are spread amongst a smaller and smaller base of conventional customers, thereby driving up their rates.

The natural response is already playing out in some utility systems. The Sacramento Municipal Utility District (SMUD) has a rate structure where many of these fixed costs are recovered through a monthly fee, rather than in a per-KWh charge. Residential solar, increased efficiency, or other changes to consumption would not yield savings on the fixed fee – unless a customer wants to go off the grid completely. While relatively rare in California, such “two-part” rate structures can be found throughout the country.

Widespread adoption of such tariffs would present a major challenge to the financial model that is heralded in the Times Magazine piece, but the alternative is to continue to have the solar haves subsidized by the solar have nots, not by the “man”.

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