By Ted Sullivan
Though the solar market has grown by leaps and bounds over the past few years, large utilities the world over have largely remained on the sidelines--typically only buying power from solar projects as a response to government Feed-in Tariff (FiT) or Renewable Portfolio Standard (RPS) mandates. The most forward-looking utilities are investing in solar generation capacity at the commercial and utility scales, and sometimes promoting it at the residential scale, but by and large, these remain mere pilot programs--far from the total potential that could be realized if these sleeping giants decided to move aggressively. Indeed, utilities at all levels of the generation, transmission, and distribution value chain could reshape the industry¡¯s demand curve and restructure the value chain if they were able to justify a commitment to building capacity. Looking at utility adoption of solar in major European and U.S. markets, Lux Research found that:
-The widespread adoption of FiTs in Europe mandates that utilities active in the retail market buy power from PV-IPPs, but enables them to pass along the higher cost to consumers. To get a piece of the action, most have established their own unregulated, renewable generation subsidiaries to invest in wind and biomass, with solar steadily gaining in importance. Those utilities building their own solar capacity predominantly invest in Centralized-Generation (CG) projects in Southern Europe--typically PV in Italy and CSP in Spain--due to high insolation rates.
-Due to various state and local subsidy programs, U.S. utilities are taking myriad approaches to adopting solar, though most procure solar electricity under PPAs to satisfy state-level RPSs. Where utilities are building and owning solar generation capacity, it is typically through unregulated, generation-focused subsidiaries, who then sell the power under PPAs to other utilities focused on retail T&D. However, an increasing number of exceptions--with regulated utilities owning and operating solar generation--indicates that the standard rules in the marketplace are changing as solar becomes better understood by utilities and regulators.
What Determines Utilities¡¯ Solar Adoption
Perhaps more important than understanding what utilities are doing to adopt the solar resource is understanding why and how they are doing so. Each utility is subject to a myriad of different regulatory, subsidy, and ownership pressures that ultimately dictate how they are best able to--or whether they even want to--invest in solar. In conversations with utilities and PV-IPPs, Lux Research uncovered the drivers behind the various major decisions they need to make on how to adopt solar (see Figure 1). Typically, once the decision to adopt solar is made, utilities must determine whether they want to build generation capacity or contract for solar energy; if they decide to build, they must determine whether to pursue centralized or distributed generation. Further, they must decide whether they want to build solar capacity on the regulated or unregulated side of their business, the latter of which often includes financing the technology by raising debt--which can often limit the range of viable technologies.
Ultimately, incentives in the form of subsidies and utilities¡¯ responsiveness to those incentives determine the high-level, strategic picture of solar adoption, while financing pressures decide more tactical concerns, such as technology choice. In examining how utilities are adopting solar, Lux Research found that:
-In the U.S., and increasingly in Europe, regulations have split the generation of electricity from its transmission and distribution. Whereas the T&D segment is regulated, generation is not, which has given rise to IPPs and, more recently, PV-IPPs. Indeed, regulated utilities may never need to own solar-generating capacity, as the system is already set up so they can procure it through PPAs.
-Both European and U.S. unregulated utilities are completely focused on centralized generation due to the ease of adding capacity in large chunks, rather than small bites, given the significant permitting and contracting overhead that both require. However, regulated utilities in the U.S. are promoting distributed solar options due to political pressure to meet RPS requirements and to prevent revenue loss due to consumer ownership of solar generation assets.
-Utilities are hesitant to embrace brand-new technology, but are optimistic about it. At the end of the day, utilities of all sorts only care about procuring the cheapest energy possible, given that it is reliable. This is the big caveat that makes utilities cautious about exploring emerging technologies, since they need to guarantee its performance in the field for 20 or more years. This theme crosses geographies and is universally valid, except in cases where regulations or subsidies favor or discourage specific technologies.
Ted Sullivan is a Senior Analyst who leads the Lux Research Solar Intelligence service (http://www.luxresearchinc.com/). Sullivan has evaluated the business models and technologies underlying hundreds of start-up companies developing solar and advanced materials technologies and has advised on a number of hundred million dollar investments in solar technology developers, polysilicon facilities, and solar system integrators. Sullivan has authored numerous Lux Research reports and has been an invited speaker at venues like Oak Ridge National Laboratory, Northwestern University, and a broad array of solar industry conferences.
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