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Utilities fighting against rooftop solar are only hastening their own doom

Batteries are going to make rooftop solar invulnerable.

rooftop solar (Shutterstock)

Several of the big trends in clean electricity depend, in one way or another, on batteries. How fast batteries get better and cheaper will help determine how fast renewable energy grows, how fast fossil fuel power plants get shut down, and how fast the vehicle fleet electrifies.

The consulting firm McKinsey & Company recently released an analysis noting that batteries, like solar panels before them, are getting cheaper much faster than anyone expected — and the consequences for the power sector are going to be immense.

Batteries have entered a virtuous, self-reinforcing cycle. This graphic, adapted from a Ramez Naam post, captures it:

battery cycle (Javier Zaraccina)

As they get cheaper, batteries make sense for more commercial applications. As new markets for storage grow, demand for batteries increases. As demand increases, economies of scale kick in and batteries get cheaper. Rinse, repeat.

The McKinsey analysis shows this dynamic playing out within the power sector, both “behind the meter” (batteries inside a customer’s home or building) and “in front of the meter” (batteries assembled into large-scale storage installations). Batteries are soon going to disrupt power markets at all scales.

The whole analysis is interesting, but I want to focus in on the way batteries will affect rooftop solar. Across the country, intense battles are being waged as utilities push back against the rapid spread of rooftop solar. (See, as the latest example, Nevada.) Batteries, McKinsey reveals, are going to scramble those battles, making them effectively unwinnable for utilities. The existential crisis they hoped to avoid by slowing rooftop solar is going to slam into them twice as hard once batteries enter the picture.

To begin, let’s back up a bit. To understand the role of batteries, first you have to understand why utilities don’t like rooftop solar in the first place — and what they’re doing to stop it.

Utilities’ problem with rooftop solar power, in 250 words or less

Utilities don’t make money selling electricity — for that, they can only recover costs. They are, after all, monopolies.

Investor-owned utilities make money by investing in grid infrastructure and then charging ratepayers the cost of that infrastructure plus a “reasonable rate of return,” as defined by the state public utility commission (PUC). They make money, in other words, by building stuff.

Utilities generally recover their costs-plus-returns from ratepayers through flat volumetric rates — “flat” means the rate is the same for everyone, at all times of day, and “volumetric” means that the more a customer uses, the more she pays.

When a customer installs solar panels, it hurts the utility in two ways.

One, it reduces demand for utility power. Utilities generally don’t want lower demand. To justify building stuff, they need to be able to project higher demand.

Two, the more solar customers reduce their utility bills by generating their own power, the more utilities have to charge other, non-solar customers more, to cover their costs-plus-returns. This pisses the other customers off. And it incentivizes them to install solar themselves!

Utilities are terrified of the “death spiral” that could ensue as more customers are driven to generate their own power. So they are increasingly fighting back.

“The utilities’ response,” McKinsey writes, “has been to design rates that reduce the incentive to install solar by moving to time-of-use pricing structures, implementing demand charges, or trying to reduce how much they pay customers for the electricity they produce that is exported to the grid.”

Those battles are ongoing across the country.

Enter batteries.

Three wall batteries on a wall, each with the computer power symbol and the word “battery.” Shutterstock

Cheap batteries neuter utility attacks on rooftop solar

“In a low-cost storage environment,” McKinsey writes, the rate structures utilities are monkeying around with “are unlikely to be effective at mitigating load losses.” In other words, customers are still going to keep generating more of their own power.

That’s because batteries allow customers to circumvent utilities’ two primary tools for slowing the spread of solar.

If utilities alter rate structures to reflect time of day and location (as they should!), batteries allow solar customers to arbitrage, storing power when it is cheap, selling it back to the grid when it’s worth more.

If utilities reduce the amount they pay for rooftop solar-generated power, batteries allow customers to increase their “self-consumption” — that is, to consume more of the solar power they generate, by storing it and spreading it out across the day. McKinsey calls this “partial grid defection, in which customers choose to stay connected to the grid in order to have access to 24/7 reliability, but generate 80 to 90 percent of their own energy and use storage to optimize their solar for their own consumption.”

That’s a nightmare for utilities: customers who use their grid but pay them nothing for it, forcing them to charge other customers more.

Utilities can charge fixed grid-connection fees to all customers, but if those get too high, they start to push customers toward full grid defection — ditching the utility entirely.

Full grid defection generally involves solar panels, lots of batteries, and a couple of small diesel generators for emergency backup. That’s an expensive setup now, not economic in most markets, but “at current rates of cost declines,” McKinsey writes, full grid defection “may make sense in some markets earlier than anyone now expects.” (Think about a market like Hawaii, where power is at a premium and grid extensions are difficult.)

Here’s a representative example — an Arizona residential customer:

mckinsey on grid defection (McKinsey)

According to McKinsey’s projections, partial grid defection will become economic — will outperform grid power — around 2020. That’s not very far away. Nor, in terms of the time horizons of utility investments, is 2030, when full grid defection will become a live option.

The timing will differ in different markets, but partial grid defection enabled by solar+storage will spread like a virus, starting in sunnier and more expensive areas and spreading from there. And it’s likely to happen within a decade.

Utilities cannot avoid radical reform

What should utilities do about it? McKinsey’s treatment of that question is fairly cursory. See this post for a more in-depth discussion and links to other reports. The debate over “grid 2.0” and power utilities of the future — playing out on the ground in New York, California, Massachusetts, and elsewhere — is the most important thing going on in the energy world right now. It will only heat up in years to come.

What McKinsey does make clear is that for power utilities, unlike for so many other decrepit American institutions, simply clinging to the status quo is not an option. Rooftop solar can be staved off temporarily with fees and rate tweaks, but as batteries get cheaper, those strategies will stop working. More and customers are going to generate, store, and manage more and more of their own power.

Utilities have got to find other ways to make money, other services to provide, other roles to play in the power system of the future. They have no other choice.

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