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Is the Future of Electricity Generation Really Distributed?

Renewable energy technologies have made outstanding progress in the last decade.  The cost of solar panels has plummeted.  Wind turbines have become massively more efficient.  In many places some forms of renewable energy are cost competitive.  And yet…just as these exciting changes are taking place, the renewables movement seems to be shifting its focus to something that has little or no connection to the fundamental environmental goals: distributed generation, particularly at the residential level.  In practice, this means rooftop solar PV.

Instead of seeking the most affordable way to scale up renewables, the loudest voices (though possibly not most of the voices) in the renewables movement are talking about “personal power”, “home energy independence”, “empowering the consumer”, and rejecting “government-created monopolies”.  In the not so distant future, residential PV may be augmented with onsite storage (as suggested by Tesla’s announcement this week of its Powerwall home battery system).

SolarInstallCapacity

Residential is now a growing share of U.S. PV installations. Source: GTM research

The new emphasis on distributed generation has created a very unusual coalition between some traditional environmentalists and some anti-government crusaders.  Parts of the tea party movement have joined the Sierra Club in advocating for “DG-friendly” residential electricity tariffs, which mean high volumetric electricity charges in order to make rooftop solar economic.

I’m sorry, but count me among the people who get no special thrill from making our own shoes, roasting our own coffee, or generating our own electricity.  I don’t think my house should be energy independent any more than it should be food independent or clothing independent.   Advanced economies around the world have gotten to be advanced economies by taking advantage of economies of scale, not by encouraging every household to be self-sufficient.

That’s not to say that distributed generation couldn’t be the best way for some people at some locations to adopt renewables, but simply that DG should not be the goal in itself.  We desperately need to reduce greenhouse gases from the electricity sector, not just in the U.S., but around the world, including some very poor countries where affordability is a real barrier and electricity access is life-changing.  If DG is the least costly way to get that done, I’m in, but the choice should be driven by real cost-benefit analysis, not slogans about energy freedom.  TopazSolarFarm The 550 MW Topaz Solar Farm in San Luis Obispo County, California

The Pros and Cons

Compared to grid-scale renewables, DG solar has many advantages.  Generating and consuming power onsite means no line losses, which typically dissipate 7%-9% of grid-generated electricity before the power gets to your house. In addition, DG solar occupies your rooftop, a space that doesn’t have a lot of alternative uses, so the real estate cost is essentially zero.[1]  And as an extra bonus those solar panels also shade part of your roof, reducing the heat gain on hot sunny days.

In certain cases, distributed generation delays distribution system upgrades as demand on a circuit grows, because less power has to be shipped into the circuit on sunny days.  It also can reduce the need to build new transmission lines to carry power from distant grid-scale generation.

Having many small DG solar installations also spreads them around – spatial diversification – reducing the overall volatility of generation when clouds roll through.  Plus, spatial diversification and onsite generation can make the system more resilient to natural or man-made disasters, such as storms or sabotage.

Solar_panels_on_house_roof_winter_view

The obligatory residential PV photo  (Source:http://256.com/solar/images/)

But distributed generation also has some serious drawbacks.  The first and foremost is that design, installation and maintenance of solar PV small rooftop by small rooftop costs a lot more per kilowatt-hour generated than grid-scale solar, probably about twice as much these days.  The scale economies that are lost with small systems on roofs of different size, shape, and orientation is a big disadvantage compared to grid-scale solar plants that are 10,000 to 100,000 times larger than a typical residential installation.  The size of grid-scale plants also makes tracking devices practical, which allows the panels to move throughout the day to continually face the sun and generate more electricity.

While small scale spatially-diversified generation could in theory reduce distribution upgrades and improve resiliency if the location and types of installations were optimized for those benefits, that’s not how DG solar is actually getting installed.  Systems are put in where homeowners choose to install for their private benefits regardless of the impact on the grid, and they can actually destabilize distribution circuits when they pump too much power back into the grid.  In Hawai’i, where 12% of houses now have rooftop solar, that’s already a serious concern.

Though it’s great that DG solar can contribute energy to the grid when the household doesn’t consume it all onsite, exporting power from the house reduces the DG advantage in line losses and distribution capacity upgrades.  For a typical residential system, at least one-third of the electricity generated is injected into the grid, though that may change with cheaper small-scale storage, one of the many technological factors in flux.

The technology installed with DG solar also is not optimized for the grid, so current systems aren’t contributing to resilience.  Solar PV installed today doesn’t have the smart inverters or the onsite storage that would be necessary for the systems to remain operational when the grid goes down.  Closely related, DG solar systems aren’t communicating with – or controllable by — the grid operator, so the system operator has to just guess when they might start and stop pumping power into the grid.

How do these pros and cons sort out?  Right now, I believe that residential solar loses to grid scale.  But I’m not convinced that will always be true.  And I don’t think that means households should be impeded from adopting DG solar today, just that we shouldn’t be giving it special incentives.   We need to recognize that DG’s role in the electricity future is uncertain and locking in on this (or any other) technology is unwise.  

An economically resilient system for renewables adoption

Well, then, how should we decided whether to go with DG renewables or grid-scale technologies?  We shouldn’t decide.  Instead we should design incentives that reflect the real benefits and costs of each type of system and then let them battle it out.  This has two big advantages.  First, it reduces the political fighting that comes with policymakers choosing one technology over another, or even the share that each technology should get.  Second, it pushes all alternative technologies to keep innovating and lowering their costs.

Designing such science-based incentives isn’t easy.  It requires detailed examination of each of the costs and benefits I’ve listed (and probably others that commenters will suggest).  It will not be possible to nail down each of these factors exactly, but we can’t make good electricity policy if we don’t carefully study what benefits and costs each technology brings to the table.  Tying renewables incentives to the best engineering and economic analyses of their net benefits will involve some heated debates about those analyses, but at least we will then be arguing about the right issues.

Then we should craft incentives that accurately reflect the net benefits each alternative technology offers.  I’m not sure exactly how those incentives should be structured.  But I can tell you that they don’t involve paying households retail rates for power injected into the system, as net metering policies currently do.  And they don’t involve maintaining retail rates that are many times higher than avoided costs — even including pollution costs — in order to create artificially high savings for PV adopters, as the current tiered electricity rates do in many states, especially in California.

They do include much greater use of time-varying pricing and, probably, location-varying pricing to reflect the real value of power on the grid.

Smart incentives based on careful analyses can reflect the dynamic value of distributed solar and distributed storage.  Curtailing net metering would boost the value of battery storage.  A lower cost of storage would smooth out prices over time and location, which would reduce the production timing advantage solar has, but would also reduce the problems of load balancing on individual circuits as DG solar ramps up.  Lowering volumetric residential rates would make end-user storage less valuable by closing the gap between retail and wholesale prices.

If DG solar with incentives that reflect its true benefits wins, that will be great, because we will know we’ve got the least-cost approach to reducing the externalities of electricity generation.  If it sputters, that will be fine too, because it will indicate that there are other less-expensive ways to achieve our environmental goals.  Either way, it’s time for incentives that are truly calibrated to costs and benefits, not to achieving penetration of one low-carbon technology over another.

[1] Though many people don’t have a roof for solar, either because they live in multi-family housing or, in the developing world, because the roof can’t hold the weight of solar panels.

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Severin Borenstein View All

Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.

70 thoughts on “Is the Future of Electricity Generation Really Distributed? Leave a comment

  1. I am going to reiterate a point that may have been too buried in my earlier comment:

    Community scale DG, such as solar, is nearly as cost effective as utility scale solar generation. This is another challenge to the utility monopoly. It also allows communities to consider taking over smaller portions of the utility grid while leaving higher level components to the incumbent utility. Thus the center of decision making can be further distributed. This fits with the independent distribution operator that several are advocating.

    The other important aspect attractive for DG is the greater variety of contractual terms available. Right now utilities force ratepayers to pay short term prices that vary each year. Solar providers offer both outright ownership and different types of lease arrangements, and even purchase through a utility. Maybe if the utilities started acting like businesses that truly care about keeping their customers we wouldn’t be having this discussion.

  2. I really appreciate articles like this, that refocus people on the fundamental values of the competing technologies/approaches. That said, I think to understand the popularity / noise level of the push for DG, you have to look at political economy, consumer preferences (a new thing in this business, I guess), and the marketing needs of the residential PV industry.

    I know many dispute this, but in high-solar penetration places, the value of a marginal kWh during solar hours is low. Moreover, the capacity value of the installed solar during peak demand hours is also be low. Whether you believe the operational scenario depicted in the “curve whose name shall not be spoken” is coming to CA this year or in 10, PV without storage does lead to such a scenario. Which is just a long way of saying that the rates for residential PV are going to have to change to reflect its value – that is, unless you somehow manage to unlock some special value in distributed resources itself. And that is the task to which the residential PV industry has rightly set itself.

    In this perspective we see, for example, the labor-inefficiency of installing residential solar portrayed as a virtue. We see the rejection of new transmission and solar plant siting on aesthetic and ideological grounds. (And indeed, the difficulty of siting solar plants is treated in most comments here as if it were some exogenous fact, when … come on.) We also see an industry tapping into the deep affinity among Americans for autonomy and self-reliance, even when they may be illusory.

    All that said, I’m as red-blooded a the next American, and I must admit that I find the idea of a single decision that will meet my energy needs for a decade or more, made privately and bilaterally, and no more complex than choosing a new washer/dryer, rather appealing, particularly if it contributes to the unraveling of an entire unlovable industry and its attendant regulatory apparatus. It’s not hard to understand the greenie / conservative coalition there. Can we all agree that it’s a very compelling story, even if we can’t agree on its truth?

    Utility scale solar costs are lower than DG solar, and one might expect that storage costs will follow a similar pattern. The real question is whether they will be enough so to overcome the real, imagined, and preferential benefits of DG among those whose opinion matters. It’s not looking likely right now, but these pendulums swing.

    • I’m among those who “find the idea of a single decision that will meet my energy needs for a decade or more, made privately and bilaterally, and no more complex than choosing a new washer/dryer, rather appealing, particularly if it contributes to the unraveling of an entire unlovable industry and its attendant regulatory apparatus”. On the other hand, a little math – perhaps oversimplified – shows why this is an expensive indulgence. At $3500/kW installed for a residential system, the price per kWh works out to around 15 cents (30 year mortgage amortization), which is competitive in most parts of the country and at or near retail rate parity in California based on average prices. However when you add enough storage to carry a household through the night but not necessarily across several days of adverse weather, the installed cost of a system roughly doubles, making PV plus storage substantially more expensive than grid power. These are all back-of-the-envelope numbers but they’re close enough to be valid.

      Interestingly enough California has adopted a policy that will force owners of newly built homes to embrace DG whether it makes sense or not through the state’s Zero Net Energy Buildings policy. I’ve just begun digging into this but on the surface at least, it appears to be almost punitive in the costs it will impose on homeowners, including the cost of enough renewable energy production to offset electric and gas usage. Even with Net Energy Metering, homeowners will find themselves buying gas at the retail rate and selling surplus solar at something approximating the wholesale rate, which is unlikely to sit well once people discover what’s really going on.

      • You’ll get no disagreement here; it is true that getting utility-level reliability out of DG PV+battery is going to be much more expensive then simply adding a battery to better time-arbitrage one’s PV generation. However, prices for PV and batteries fall, and who knows where they may end up. Others have pointed out path dependence and the influence (and long term problems) of subsidies for early adopters.

        ZNE is interesting. At least it is cheaper to add PV to a new house than to retrofit. Same goes for making a house more efficient overall, so its energy use, including gas, is much lower. (Should be interesting to see if ZNE encourages a switch back to all-electric homes.)

        I have heard folks from the building industry complain that they are compelled to pursue increasingly low marginal-value efficiency improvements when there are so many cheaper untapped alternatives around. I haven’t studied the issue, but I think it’s fair to say that’s just about always the case when you have technical regulation by sector rather than performance regulation that applies uniformly.

        On the other hand, if it sounds like I am against ZNE, I’m not necessarily. I can think of good reasons for a program like that, not the least of which is the principal/agent problem between builders and owners, and questions about whether those making decisions do a good job given the exceedingly long life of housing.

        A uniform carbon- or non-green- energy tax would be a better foundation for sure, but we have to make policy with the politics we have, not the ones we wish we had. 🙂

  3. I love the post, but I am still left a little confused about the quickest and most effective (cheapest and fast) way to cut carbon out the power system and role of roof top solar in that. Seems like that thread was lost. If it is cheaper and faster for utility scale clean power to do this versus distributed (driven for non-economic reasons), then this is an important point. When issues of reliability are added in (for which we still need a transmission grid, extra capacity and the like) is this essentially a strong case for making sure distributed generation pays its full costs?

    • ” am still left a little confused about the quickest and most effective (cheapest and fast) way to cut carbon out the power system and role of roof top solar in that”

      I don’t think you’re alone. No one really knows, although politicians and certain interest groups seem to think they have the answers. In the context of this discussion, I think customers who remain connected should be expected to pay for a share of the cost of building and maintaining the wires. They can avoid paying for the wires by disconnecting, but they incur other costs (value of lost service or the cost of an alternative to the wires, such as storage). The tough part of the conversation is determining how to price an inidividual costomer’s share of the costs.

      Trying to arrive at an “optimal” solution that trades off distributed vs central station generation in order to quickly minimize carbon emissions is an exercise in futility. There are too many variables, too many competing economic and political interests, and there’s too much uncertainty about how various technologies will unfold. Central station PV may be cheaper to build due to its scale, but the transmission required to move it to load is expensive, politically contentious, enormously difficult to site and build, and not as robust as we might think

      If the reason for building renewables is to reduce CO2 emissions, then I’d like to see California policymakers set emissions reductions goals and then stop trying to micromanage the process. However I suspect the more important but unstated goal has less to do with CO2 reductions and more to do with economic development.

  4. Today we enjoy distributed dishwashing and distributed cooking (as opposed to dining out in a restaurant or food hall), distributed television watching (as opposed to getting our media from a public theater), distributed transportation (in our own personal automobiles as opposed to taking the bus). Although each of these activities might be cheaper to do collectively, doing them at home is a fixture of modern society. Why not also then have distributed generation from solar?

    • Distributed cooking & dishwashing is popular because people value many attributes of being able to prepare a meal to their exact specifications, in the company that they so chose, at the time they so desire, and without having to travel any farther than their kitchen and dinning room to do it. It also happens to be supported by gratuitous tax subsidies (no sales tax on groceries, no payroll or income tax on in-home labor).

      The above could also largely be said of distributed television watching (when you want, where you want, with whom you want). Plus, televisions can provide not only passive media consumption, but they can also be hooked up to video games consoles for interactive entertainment with multitudes of choice. In this sense, TVs + videogame consoles compete with arcades, which are frequently limited in their selection of games and hours of operation.

      I think most people agree that there is too much distributed transportation for a variety of policy failures and historical accidents, but even in a perfect world, distributed transportation offers locational and temporal flexibility that centralization transportation never will.

      Distributed generation from solar, however, ultimately provides a product that is 100% undistinguishable from the centralized alternative (unlike all the examples above): electrons. Sure, the production methods, environmental impacts, and cost might be different, but the end product is exactly the same, which is why it gives Severin “no special thrill.”

      • Your argument is that the end justifies the means.’ No difference in the electrons’ but you might say that about transportation there is no difference between position A or final Position B people and goods were at A and after transportation at B, or Entertainment a person requires some distraction to pass the time and he or she ultimately satisfies tha
        t goal either at home watching TV or at a movie theatre. The endorphins produced would be equivalent to electrons. If you can’t enjoy the journey because you are so focused on the destination Zen there is no thrill.

    • Distributed transportation does not “work” except in cities where many of the middle class use public transportation. Even in one car per capita California, 1/3 of adults don’t drive. Although perhaps half of CA cars are SUVs, voters find the cost of paying for road repairs onerous, and road infrastructure is only poorly maintained. Given that there is no extra benefit to distributed generation, and so many extra costs, including greenhouse gas costs, I don’t see the attraction. I don’t have much interest in shelling out huge sums of money for my own solar power or my own car.

  5. I’m not sure it’s possible to get the prices exactly right, but neither does it make sense to pick favorites at this point in time. Small scale PV with or without storage is still a pretty expensive proposition, so the only ones who will cut the cord are those with plenty of spare cash who want to poke their local utility in the eye.

    I agree that utilities should have more skin in the game. It’s absurd that they earn the generous returns on equity they’re allowed to while taking none of the ordinary business risks faced by most firms. Moreover, because they’re made whole no matter what, the notion that customers can save money via conservation is tantamount to false advertising.

  6. OK, I’m going to run counter to affirmations post here. ;^)

    I agree that getting the rate/price signals right is the preferred solution, but I’m afraid based on my experience with the sausage making of utility rates that arriving at the “right” answer can be very difficult. As one example in SCE’s general rate case, SCE is proposing that agricultural rates increase by 6%, while we’re proposing that they decrease by more than 15%. Which one of is “right”?

    Too often I see estimates based on engineers’ economic perspectives on the current system. That usually doesn’t include how technologies might change and makes simplistic assumptions about cost responsibility. Economists usually take a more holistic view that sees many more costs as avoidable and consideration of differences in timing.

    If in the 1990s we had relied on AT&T’s claims about cost causation for cell phones, we may have delayed or never seen the telecommunications decentralization that we’ve seen. We’re in much the same situation now. Who are we to believe about projected costs and benefits?

    And with regards to leading edge technology adoption, we often have to “subsidize” early use so that we can generate large benefits later. That certainly happened with cell phones. I don’t think we’re at a tipping point either in a stability threat to the grid from solar DG or on our way to universal rooftop installation.

    On the issue of scale for solar, costs drop remarkably over a relatively small range. Projects in the 300-1,000 kW range are only about 1/3 more expensive than utility scale plants. (We looked at this for the CEC.) While single rooftops may not be as cost effective, community solar gardens are. The utilities should be required to fully implement SB 43 to the maximum extent to take advantage of all local resources, and to allow tenants and others who can’t install solar rooftops to get similar benefits.

    One big advantage of solar not discussed here is the contractual term–it delivers power at a fixed price for 20 or more years. A ratepayer will not be offered that deal by a utility. Rate assurance, as Severin has written before, has a premium value. Given the prospect for large rate increases, this is an important element in the cost-benefit analysis.

    Finally, why do assume that utility is guaranteed to recover all grid costs? If instead we recognize that the utility may no longer be a monopoly and that it should have to compete with other alternatives, then we should put utility investments at risk just as they are for most businesses. Facing that risk, utilities should make more prudent investments in their grids (and I assure you looking at PG&E and SCE plans, they are not currently prudent.) Grid costs should come down and they should be more flexible in response to the ability of load to exit. Right now the utilities have little incentive to change their grids to accommodate DG; let’s change that. Then we might get the right price signals.

    • One other point I forgot: There is a potential for legacy stranded costs if we focus solely on developing utility scale renewables that look cost-effective now, but may lose their advantage in just a few years. The rapid fall of solar panels since 2008 should be a harbinger of what we might face. Once large scale utility plants are built, we continue to pay for them for 20-30 years even if we don’t need them. Currently we don’t have a means in the utility industry (unlike other industries) of telling some investors that they lost their money and to go away. So those potential legacy costs need to be considered, which differs from a typical cost-benefit analysis.

    • “And with regards to leading edge technology adoption, we often have to “subsidize” early use so that we can generate large benefits later.”

      Yes, nearly, everyone agrees with this in principle. The debate is primarily around how long should that subsidization last. If the solar industry’s public relations hype is to be believed, solar is already radically successful and saving ratepayers boatloads of money. That would imply that it is now time to start ratcheting back the subsidies. However, if the solar industry’s lobbying is to be believed, solar’s future remains precarious and is threatened at every turn by evil fossil fuel and utility lobbyists desperate to deny solar the chance to gain a firm foothold in the marketplace. All current “policies to encourage solar energy” (i.e. subsidies) must be maintained or else you hate solar energy.

      Whichever story is actually correct, it’s hard for me not to find the solar industry’s messaging around subsidies highly duplicitous. It should be interesting to watch them fight to preserve the investment tax credit in 2016. I’m hoping they lose, so we can finally have a semi-controlled policy experiment for the sensitivity of solar investment to tax credits, like we saw repeatedly with the wind production tax credit in the previous decade. It would give us a better sense of how close solar is to genuine market competitiveness, and hopefully provide a guide to better future policies.

    • “Finally, why do assume that utility is guaranteed to recover all grid costs? If instead we recognize that the utility may no longer be a monopoly and that it should have to compete with other alternatives, then we should put utility investments at risk just as they are for most businesses.”

      Utilities are no longer a monopoly in the *generation* of electricity. They are still monopolies in the *delivery* of electricity. Grid-related cost-recovery should be guaranteed for the same reason it always has: the regulatory compact. The utility is given monopoly business model, but must serve all customers at reasonable rates and offer grid connections in an undiscriminatory fashion to both generators and load. Just because one person has both generation AND load co-located doesn’t make their desire for access to the grid disappear. Many DG owners find that their generation and load do not temporarily coincide. A grid connection offers them an opportunity to sell surplus energy to other people and buy energy from other people to meet shortfalls, rather than paying up the wazoo for sufficient energy storage to meet their reliability needs. DG owners should be guaranteed access to the grid at reasonable rates. I would argue that it’s perfectly reasonable for utilities to be guaranteed cost recovery for providing guaranteed grid access.

      Also, aren’t you effectively arguing that utility revenue should be re-coupled with the volume of electricity sales? Didn’t California decide that those two things should be decoupled in 1983 because it’s evil and immoral for a business to have any incentive to promote consumption of its product?

      • “Utilities are no longer a monopoly in the *generation* of electricity. They are still monopolies in the *delivery* of electricity. Grid-related cost-recovery should be guaranteed for the same reason it always has: the regulatory compact.”

        I made this statement explicitly to raise the flag that ALL utility functions are now being challenged. And it’s not only from DG. Aggressive energy efficiency, such as ZNE homes, undermine the utility monopoly. The momentary delivery of electricity may be a monopoly service, just as land-line telephone service is still a monopoly, but from a long-term perspective, investment in the grid around a house is in fact dependent on the forecasted load in the area. Up to now the utilities have used unchallenged forecasts, overinvested in distribution because they face no risk, and now we’re stuck overpaying for distribution services. We must end the regulatory compact because utility investors are abusing it and ratepayers are not getting real benefits from it. The utilities see the obvious challenge and are trying to convince us otherwise. Don’t believe them.

    • “And with regards to leading edge technology adoption, we often have to “subsidize” early use so that we can generate large benefits later.”

      This is a convenient rationale I hear all the time but I’m not convinced the many problems with subsidies justify their use in other than very exceptional circumstances. For one thing, like cockroaches subsidies are almost impossible to get rid of once they’re in place (see for example, the motor fuel ethanol standard). For another, the presence of subsidies encourages developers to focus on capturing the subsidies at the expense of economic merit (see, for example, Bloom Energy). The can also take focus away from furthering cost reductions and performance improvements (see for example http://www.reuters.com/article/2015/05/05/us-usa-solar-idUSKBN0NQ08320150505).

      Subsidies are easy because they don’t require much careful thought and they rely on the ability to use other people’s money without asking. Moreover, they often assume the activity being subsidized is an end unto itself and that a small group of policymakers are smarter than everyone else. If the reason for subsidizing solar is to reduce GHG emissions, they why aren’t policymakers setting GHG reduction targets and getting out of the way?

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