Distributed Solar’s Continued Growth Requires Aligning Interests of Utilities, Solar Companies
Download the report
“Every four minutes, another American home or business goes solar” is perhaps the most widely cited solar market statistic today. But while that number is impressive, it doesn’t give a sense for just how quickly distributed solar PV has scaled in the U.S. In 2006, one new PV project was installed every 80 minutes. Ten years later in 2016, industry analysts forecast this rate will approach a new installation every 80 seconds.
This market growth is driving a fundamental shift in distributed photovoltaic (DPV) economics and operations, with rippling effects across the electricity sector’s value chain more broadly, including high-profile conflicts between stakeholders whose alignment and cooperation will be necessary to support DPV’s continued growth into the future.
For example, solar policy frameworks to date have typically focused on customer-centric DPV value accruing primarily to the individual customer and/or third-party solar companies who install DPV systems. Meanwhile, under existing business models, utilities have negatively associated DPV with transaction costs, grid operation challenges, and revenue loss. To wit, heated policy debates in solar-resource-rich Arizona have become a focus of national attention, with nearly $5 million spent on communications efforts in 2013 alone, while similar debates are playing out in states as diverse as Massachusetts, Wisconsin, and California.
Creating a sustainable long-term DPV market will require aligning the interests of utilities, solar companies, technology providers, and customers. With support from the U.S. Department of Energy’s SunShot Initiative, a new Rocky Mountain Institute report—Bridges to New Solar Business Models: Opportunities to Increase and Capture the Value of Distributed Solar Photovoltaics—looks at enhancing legacy solar business models or building new ones by creating an expanded value pool, one that makes DPV affordable and accessible to far more customers, bridges beyond individual customer-centric DPV value to include value delivered to the grid and society, and allows the electricity grid’s myriad stakeholders to share in that value.
Barriers to Increasing and Capturing Value
To date, a series of misalignments and market failures—including pricing structures and lack of performance-based incentives—have prevented electricity system stakeholders from taking a holistic approach to the deployment of distributed PV. Solar companies and utilities have focused on low-cost deployment onto the grid without accounting for the operational benefits and costs of integration into the grid. As a result, significant value potential is being left on the table.
For example, solar companies have worked in isolation to reduce the pre-interconnection components of distributed PV cost, such as installation labor efficiency. Further cost reductions are possible, but the most significant of them will require involvement from both solar companies and utilities together to achieve, such as with streamlined site identification, PII, and customer acquisition. Similarly, post-interconnection monetization of currently untapped operational benefits can create additional value streams for customers, solar companies, and utilities that evolve from maximizing value for individual customers with distributed PV to optimizing value more broadly across such customers and the grid/society. However, defining, valuing, and capturing those value streams will require cooperation among stakeholders.
Aligning the interests of these stakeholders will involve two major threads:
- Maximize the delivered value of DPV to customers and the electricity system by further decreasing costs and increasing benefits, and
- Create new business models that enable and incent solar companies, utilities, and customers to optimize and capture that expanded pool of DPV value through win-win-win opportunities.
Promising Building Blocks for Bridge Business Model Strategies
While addressing some of these issues will require both pricing realignment and regulatory model reform, reform will take significant time and resources to unfold. The ill-fated electricity restructuring process in California, for instance, took roughly six years to go from concept to implementation. Meanwhile, utilities, solar companies, and regulators can design and implement components of solar business model strategies today that provide a bridge to the future. These complementary “bridge” business model strategies can start to create and capture value, while also providing best practices and lessons learned to inform broader reform efforts.
Building Block A: Increased Access to Distributed Solar
Objective: Make DPV accessible to a much broader customer base, including the large portion of customers for whom on-site solar is not an option by providing new options for procurement. These options include subscription models where the utility connects solar companies’ off-site DPV projects to customers, such as current community solar programs and utility tariff models for large commercial and industrial customers that provide renewable energy for new load.
Utility Role: The utility’s value proposition expands, better meeting its societal obligations by giving simple and convenient solar access to all its customers. The utility could become an important part of program marketing, leading customer acquisition efforts, and procuring DPV projects through competitive bidding. The costs and credits on participating customers’ bills would reflect the real benefits and costs that the DPV projects create.
Solar Company Role: Solar companies benefit by partnering with a utility to expand customer access to solar, increasing the potential market size. By leveraging the utility’s brand and existing customer relationships, the solar company can reduce customer acquisition costs, design and install projects, and perform ongoing operations and maintenance.
Building Block B: Distributed Solar as a Grid Resource
Objective: Optimize deployment to capture potential operational value that is currently being missed. DPV can support the grid and provide energy services to customers, but project design choices largely determine DPV’s potential to deliver such operational benefits to the customer and the larger system. Major opportunities to enhance project design include:
- Optimizing for capacity value by designing DPV projects to better correlate production timing with load and targeting locations where the system is constrained (e.g., shifting the orientation of panels to better align with peak load or locating projects on substations with high forecasted demand).
- Integrating complementary technologies to strengthen capabilities or provide additional grid services while balancing added costs (e.g., incorporating advanced inverters or storage to ensure that the project can reliably provide grid services when most needed).
Utility Role: The utility takes a more proactive role in DPV deployment, using DPV as a resource to reduce cost to serve and improve service for all customers. The utility identifies optimal system locations for DPV integration and facilitates DPV deployment by engaging solar industry partners.
Solar Company Role: Solar companies coordinate site selection with utilities and design and install projects on the distribution system where they can provide high net value. The solar companies would work in a competitive market for projects, either responding to utilities’ RFPs or installing projects based on utility pricing mechanisms.
Building Block C: Distributed Solar PV in Technology Bundles
Objective: Leverage DPV adoption to increase uptake of other distributed energy resource (DER) technologies, creating greater net value that can be tapped only by leveraging complementary technologies. Technology packages could take different forms, such as a “resilience” package, which bundles solar with storage and advanced controls, keeping the customer’s lights on during a power outage.
Utility Role: The utility enables customers to access energy services through DPV—bundled with additional technologies that increase the net value of the project—and helps customers select the best services for their needs. By advising the customer in this process, the utility can speed adoption by making myriad DER choices more consumer friendly. Utilities would evaluate how the technology packages provide value to the grid as well as the economic implications for customers.
Solar Company Role: Solar companies sell broader energy services to customers via technology packages the utility has screened and approved. Revenues could come from the company’s ability to package DPV with complementary technologies, increasing revenue per customer and expanding the potential market to include customers who see less risk if the technology package has utility approval.
Moving forward, to refine and implement innovative solar business model solutions across the U.S. will require direct engagement from regulators, utilities, and solar companies. This will include assessing current abilities to identify value and customer needs and developing multi-stakeholder processes for assessing value. To develop new approaches, policymakers may provide the driving force behind development of solutions and regulators can proactively clarify existing business and regulatory rules, as the New York Department of Public Service is doing with its Reforming the Energy Vision initiative. In other cases where that top-down push for change does not exist, solar companies, utilities, and other stakeholders should explore opportunities to collaboratively develop solutions, like the e21 Initiative has done in Minnesota.
While broader reform may ultimately be necessary, these bridge business models will be essential to ensure a robust and sustainable market for distributed PV over the next decade. By creating win-win-win outcomes, these models will not only benefit utilities, solar companies, and customers, but society as well—providing communities with economic development opportunities, cleaner air, and enhanced resiliency.
Download the report