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Distributed solar- a threat to the existing business model or a chance for utilities

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Christoph Riekert's picture
Project manager PV& Battery E.ON Energie Deutschland

I have worked 30 years in the energy industry in wind, cogeneration and solar, and the development of customer solutions. I have a degree in Mechanical Engineering from the University of...

  • Member since 2019
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  • Jan 22, 2019 7:45 pm GMT

This item is part of the Special Issue - 2019-01 - Predictions & Trends, click here for more

All around the world, solar power is on the rise. Not only in sunny places like California or Arizona, but in the UK as well, And Germany, not known for its sunshine, is still the biggest solar market outside China.

While much of this growth now comes from big utility style solar projects, retail solar is an equally important growth driver – and the most disruptive force in the utility industry.

For about 100 years, the power industry has relied on the business model of centralized generation and distribution to retail clients. Rates have been based on so-called standardized load profiles (SLP), i.e. statistical models about the demand curve of households over the day and year. The SLPs also were the basis for purchasing of energy in the forward market, with only the balancing being left to the intra-day market.

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With distributed solar, this entire model is under threat- not only the business case, but also the base for load prediction and forward buying. New statistical assumptions are needed.

In many places, residential solar has become price competitive to power from the grid. Germany is one of the countries where home-owners can produce power more cheaply by solar than if they buy from the grid. The same holds true for the US. Greentech Media reported that “20 U.S. states are currently at grid parity, and 42 states are expected to reach that milestone by 2020 under business-as-usual conditions.”1)

Most recently, the same has become true for commercial clients, where solar power costs have started to fall below power prices from the grid.

What does this mean for the utility?

  1. Costs for power from solar, or even solar + battery will continue to fall, while feed in tariffs for power sold to the grid will also fall. This means, consumers will try to optimize their own consumption.
    Sales volume will be going to decline, which means income will be down, and profit as well
  2. The cost base will not go down proportionally, as most residential clients with solar will not disconnect from the grid. This will drive up power prices, which will accelerate the process.

    In order to recover the grid connection costs for customers with residential solar, a new rate system will eventually be needed.

    Similar to fixed line phones, there might come a time when the main cost driver for power supply to residential clients is the cost of the line, resulting in a flat fee for most of the consumption.

    This is already happening in Chile, where the price of electricity for the commercial segment, has been increased as a result of the application of Law 20,936, which has transferred the entire cost of the transmission system to the consumer. Similar changes have been introduced in Mexico.

    So consumers will have to decide whether to go completely off grid, or pay the flat fee for the grid on top of the costs for their solar system.
  3. Customers will keep adding battery systems and new challengers such as Tesla Powerwall will arise. There will be a business model in virtual storage of excess solar power, i.e. companies that take the solar power in times of excess production and sell it back to clients at night. We at E.ON have adopted this model and offer our clients a product called “E.ON Solar Cloud”, i.e. a virtual storage which is based on yearly consumption rather than daily. This product allows clients to store excess energy without investing in their own battery and helps E.ON to maintain a close customer relationship.

These business models require a much better understanding of your clients, as there will be more than one standard load profile. For a single home, there are at least 3 types of load profiles:

  • homes with no solar
  • homes with solar and excess energy to feed back to the grid
  • homes with solar yet no energy to feed back due to storage

This is especially important in areas like California with the load peak in the early afternoon (due to high AC demand) or South Africa with the load peak even after sunset due to heating and cooking. Utilities need to gather more data from clients, become service partners and trading partners.

On one side, residential solar is threatening the sales side of the traditional utility business, yet at the same time opening up new business models. New players will try to enter the business, while incumbent players can use the advantage of being already a business partner while offering new services. At E.ON, we have taken up the challenge and are offering our clients new services, such as E.ON Solar Cloud or array diagnostics. We see ourselves not as a pure commodity supplier yet rather as partner in production, off-take and delivery.

The utility of the future will have to be trading partner for excess and back-up power, EPC and service partner for the solar + battery system. This means, utilities have to think of virtual storage (what to do with excess power in summer days, and how to secure enough power for winter nights), become data aggregators and data analyst as well as service partners and installers.

This does not apply to big utilities like E.ON only, yet also opens the way for small municipal utilities like German “Stadtwerke” or the US coops. While the big guys have the purchasing and data mining power, small utilities can use the local presence to their advantage – and buy data services in the market, find trading partners and buy white label products. Even properties that have gone off grid might use their services in services, back-up power and data management for smart home applications.

While even 2 years ago many analysts predicted the end of the utility business, I think the opposite will be true – the role of the utility will be stronger and more important.




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Matt Chester's picture
Matt Chester on Jan 23, 2019

Great article and some really interesting insights, Christoph. One question I wanted to ask-- how do you see regulations affecting this opportunity for utilities? It seems like a lot of lobbying that is done by utilities surrounding issues like DER and net metering inherently keep these markets down, so do you think utilities should/will begin to change where their regulatory views lay?

Christoph Riekert's picture
Christoph Riekert on Jan 23, 2019

I will look deeper into this this summer.
I am from Germay, and where utilitie have the opportunity to enter this business, as the retail market is already deregulated.

I see this as a huge chance for US utilities to enter the DER market, yet current regulation which puts the cost of this on the rate base might be prohibitive.
I would appreciate the opportunity to work more on this and will keep you posted.

Brian  West's picture
Brian West on Jan 23, 2019

Hi, I'm coming from Reddit and I made a comment about how utilties are looking at this the wrong way, If a utility would invest in battery behind the meter in solar installs they could install 1000-2000 batteries in their service area, control the output and load and allow the utility to avoid expensive peaker plant installs.  I'm sure if the power company ordered 2000 units the vendor would modify the software to their needs and install as an incentive at solar sites or any site that would help the utility manage the peak demands better.  

Edit: Even if they don't have 1000-2000 solar installs, then they could review customer usage patterns and install in non-solar locations too, then shift customers loads around for them.

Edit2: 2000 power walls @5kW of output each gives the utility about 10MW of idle capacity they could call on if needed.

Christoph Riekert's picture
Christoph Riekert on Jan 23, 2019

Brian, thank you for your thoughts and comment.

Using consumer owned batteries (or batteries owned by a utility on the customers premises) as a virtual power is already offered in Germany.
The big challenges are

- software and cost of building up the control system (e.g. monitoring each batteries status, assigning costs and income on a cent or single digit dollar base per each activation) and

- regulation.
I assume US regulations do not allow this in most States, as you need an uregulated market.

My "home" State of Arizona does not have the regulation in place to allow for such offers - which would be great.

It's actually rather consumer groups concerned about regulated rates than utilites that work hard to keep the regulations.

Ned Ford's picture
Ned Ford on Jan 24, 2019

About twenty U.S. states are deregulated.  Since I live in one, and we are presently holding hearings on whether a utility can take advantage of cheap solar prices, this issue seems pretty live to me.  Even in states where utilities are still verticially integrated there are legal issues to be resolved about ownership, service access and revenues. 

State government will have to get involved in most cases.  Once this is seen as an important economic opportunity for everyone, it will move ahead, but at the moment it is seen as a threat to the entrenched fossil and nuclear industries. 

The driver, as I see it, is abundant cheap wind and solar and abundant cheap efficiency savings, which need only gain regulatory support to cause a wave of economic growth and modernization not seen since the 1950's.  This is easily enough to put the U.S. economy back on solid ground.  We can expect roughly three times the current level of wind and solar manufacturing and if we are smart we will double U.S. efficiency, by raising efficiency rates in 44 states to the level of the best six states. 

Storage, like electric vehicle chargers, follows, rather than leads the low cost electricity.  It is presently cheaper to charge an EV (and lower carbon everywhere, in spite of some false articles in respected publications).  The market for storage won't explode for a few more years, until total wind and solar are exceeding regional peak grid consumption, but we will move steadily toward that explosion from here. 

Until then it will be individuals with unique needs, companies which need storage for power quality, and people who really, seriously hate their utility that want or need storage.   I need storage because there is no natural gas where I live and we have blackouts, but I'm in an unusual home.


Christoph Riekert's picture
Christoph Riekert on Jan 24, 2019

tell me more.
In your home state, can the utility sell solar systems to retail customers, and do the O&M later?
Can they sell PC+battery systems and act as installers? Would the current regulation allow such side business?

And for home - would the blackout affect only your home, e.g. as you are at an overhead line in forest area? or does it affect the entire area, so that your utility might want to look into building a micro-grid structure that can be run independently of the other grid in case of storms or other issues?

Christoph Riekert's picture
Christoph Riekert on Jan 28, 2019

just proving my point


Consumers energy is just installing PV + battery for its own use


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