Rooftop Solar - Creating a Leaner, Cleaner Grid

There is no question that our 100-year old model of offering electricity is ripe for innovation. The U.S. is on a path to replace an estimated 70% of grid infrastructure that is nearing the end of its useful life. We can continue to approach this investment as if upgrading a mainframe computer. But what consumers want are PCs. PCs enabled by an interconnected system with a two-way exchange. In computing, market forces drove the latter to great benefit. We believe the shift to distributed energy and a smarter network will appear in hindsight just as beneficial and inevitable as the one we have seen in computing. The future includes clean electricity created right where it is used, batteries to store it, and software to manage and control peak loads. Today's solar customers are replacing poles and wires with localized, smart technology. Efficiency is one of my life passions, and in this post, I’ll demonstrate that distributed solar energy is a benefit to the aging infrastructure that many utilities struggle to manage cost-effectively.

Utilities are spending billions of dollars to add capacity to our grid, while our actual electricity demand is flat. A recent study by the Lawrence Berkeley National Lab decisively concludes that consumers will pay for this spending through increased electricity rates (right bar on the chart below). In contrast, the study shows that at varying levels of solar penetration going all the way out to 2030, rooftop solar has the potential to lower power rates for all consumers (left and middle bars). This calls into question the common cry from certain utilities that homeowners who are driving this clean energy future are “freeloading” on the grid. 

In this blog, I will explain the research and real-world examples from Arizona and other leading home solar markets that demonstrate how an individual home solar system can deliver tens of thousands of dollars in grid infrastructure savings over its lifetime - realizing that potential to lower rates for all. Rooftop solar is one of the best opportunities we have to create a lower cost, more reliable modern infrastructure. Thankfully, some utilities, like National Grid, and regulators are putting this into practice. Our country as a whole can benefit from a more welcoming stance toward this new technology and change.

Source: Putting the Potential Rate Impacts of Distributed Solar into Context. Galen Barbose, Lawrence Berkeley National Lab. January 2017. Estimates reflect U.S. averages, based on U.S. average retail electricity prices. Values for net-metered PV assume flat volumetric rates with no fixed customer charges or demand charges. Penetration reflects solar homes as percent of all utility connections.

The Costs of our Current Grid

Our electricity grid is one of the largest pieces of infrastructure serving the public. There is nearly $900 billion in power plants, transmission lines, and other equipment in service with utilities – collectively known as Property, Plant and Equipment. Because utilities are compensated for and earn a profit on the infrastructure they build, there is an annual “carrying cost”, with added utility profit, for this equipment. We pay for this constant upgrading through our electricity bills, on top of the cost of the actual electricity we consume.     

Here’s why this is important: in 2015, according to their own trade association, investor-owned utilities added $58 billion in net new property, plant, and equipment to the U.S. electric grid. That’s a 7% increase over the pre-existing grid in 2014. But the amount of electricity they delivered only grew 0.02%, or 4,000 additional gigawatt-hours (GWh), from 215,000 GWh in 2014. In fact, since 2010, utilities have invested $233 billion and increased the aggregate infrastructure by 35 percent.¹ Approximately 40% of this went into power plant capacity, 20% went into transmission lines and 40% went into local distribution lines – the poles and wires we see every day.  

You can see clearly in the chart below that the trend is not sustainable. If we stay on our current path, the cost of new equipment for every additional unit of electricity will be astronomical. In contrast, in residential solar, innovation has allowed us to reduce our cost to deliver each kilowatt hour of energy by 50% since 2010 and we expect continued reductions. What would you rather invest in: The infrastructure that continues to march down a cost curve? Or the one that marches up?

 

The Impact on Grid Users

How does this investment impact the electricity customer? Let’s take the example of Arizona’s largest utility, APS, to illustrate how this trickles down to a bill for an individual customer.   

A portion of each electricity consumer’s retail rate goes to maintain these assets once constructed, and to cover the utility’s guaranteed return on the infrastructure it has deployed. According to APS’ own research (performed by SAIC), in Arizona, this average annual cost is in the range of 11% of total capex, across generation, transmission, distribution. In other words, for every billion dollars of infrastructure added to the grid, consumers pay approximately $110 million each year for the duration of that asset’s lifetime.  

The power sector research team at Goldman Sachs recently analyzed the cost structure for APS to identify how much of the retail rate is attributable to the return on capital for Property, Plant, and Equipment. Using publicly available data submitted by APS to regulators, the cost of infrastructure accounts for fully 46% of the retail cost of electricity.² This “capacity” cost is in addition to the actual cost of producing and delivering each unit of electricity. This is a key driver of how our electricity costs continue to go up, even as fuel costs have declined in recent years.  

The promise of technology and innovation for our grid

The energy sector is undergoing the largest leaps forward in innovative technology in its history. This advancement – led by rooftop solar and storage – is challenging the natural monopoly in power generation and enabling a move towards a more decentralized, flexible, and less expensive grid structure – featuring renewable energy generation, advanced batteries, and real-time communication across the grid. Common sense would suggest the introduction of competition and technological advancement should reduce costs, reduce pollution, increase reliability, and add flexibility in response to changes in demand in our dynamic society. We can all agree that we want only one electricity grid (Who wants ten extra wires running by their house?), and this means the grid itself will likely remain a natural monopoly. However, we also all know intuitively that monopolies don’t contain costs like competitive businesses do. So don’t we want to introduce as much competition as we can into the system, assuming we don’t end with multiple grids?

As we saw above, today utilities are spending billions of dollars on a centralized grid that is getting more expensive for each unit of energy delivered. With increased fixed costs, the grid becomes less flexible and responsive to fluctuations in demand. The centralized grid remains vulnerable to disruption. Sometimes this is from benign sources – like the ship’s anchor that accidentally hit a power line under the English Channel that took 2 gigawatts of transmission capacity offline (enough to power 1.6 million homes) – but the source could also be malicious.  

As we modernize our grid, we should expect technology to reduce costs. We should select an architecture for the grid that creates flexibility and security by putting capabilities at local nodes. We should empower consumers to make their own choices enabled by new technology. And we should utilize competition to push forward the best technology and get the best prices. Rooftop solar, especially when paired with energy storage in the form of home batteries, is exactly the kind of technology that can deliver on these promises of innovation.

The Rooftop Solar Opportunity

Electricity load on the grid produced by utilities is flat, but this does not tell the whole story. More and more Americans are “self-generating” electricity on their own homes (or “behind the meter” in the view of utilities). America now has well over 1 million solar homes, and we estimate that in powering themselves, they produce more than 7,000 GWH of clean electricity a year.³ That is almost twice the load growth that utilities saw in 2015 despite the fact that residential solar penetration accounts for just 2% of single-family homes.

These million-plus households have gone solar because it provides clean power with locked-in rates that are lower than those from the utility.⁴ But the cost savings are not theirs alone.

In contrast to the $58 billion that utilities spent in 2015 to deliver an incremental 4,000 GWh, the rooftop solar for these million homes was deployed at a fraction of the cost. It took approximately $13 billion in capex for 550,000 solar homes to produce the same amount of electricity (4,000 GWh).⁵ And this investment came from the private sector, homeowners themselves or clean energy investors. Grid users didn’t need to pay for it, can’t suffer single points of failure, and don’t bear the risks of operation. And, again, each year the investment required for rooftop solar declines.   

Electricity is a commodity, but not all electrons are created equal. When generated at the point of demand, local solar is a finished product, like a carton of pasteurized milk in a refrigerator ready to be consumed. In contrast, utility solar is an unprocessed input—like the raw milk at a farm awaiting pasteurization (i.e., voltage step-downs) plus packaging and delivery (transmission and distribution).  Both are vital to our clean energy future, but that doesn’t make them equal.

If you compare only the cost to generate electricity, it can appear that local rooftop solar is more expensive than distant, large-scale power plants. But while such analyses include the full cost stack for residential solar, they do not take account of the full cost of utility electricity.⁶  

Therefore, the analyses that suggest that rooftop solar is more expensive than centralized generation are incomplete. This can be misleading if used in isolation to make choices about how to achieve the greatest benefit at the lowest costs for all electricity users.   

To make the best choices, we also need to consider the potential for rooftop solar to reduce the cost of infrastructure for utilities.

Case study: solar’s opportunity to reduce future utility capex costs in Arizona

Arizona has been a hotbed of debate about whether their tens of thousands of solar homes are helping or hurting the grid. To inform the debate, Sunrun commissioned research from Crossborder Energy, an independent research firm that has participated in power sector economic analysis for regulators in over a dozen states. This research suggests that solar homes can save the state’s electricity customers money by virtue of having reduced utility infrastructure costs.  

Crossborder analyzed how solar homes can reduce the “capacity cost” of generation, transmission and distribution infrastructure in the future. Specifically, Crossborder looked at solar’s ability to replace the most expensive “peak” generation capacity and the cost of new transmission and distribution (T&D) capacity to serve new electricity demand. The conclusion is, by addressing the most expensive parts of the grid, solar homes can contribute more than 100% of the capacity value for every unit of electricity they produce. This means that if they are compensated at the retail rate, they are actually subsidizing the utility. As noted below, other independent analyses have reached similar conclusions.  

With the addition of batteries, solar homes can do even more with energy management to reduce peak system demand even further – adding back over 200% in capacity value vs. average capacity costs. This shows how we can start saving money with smart solar and storage instead of polluting power plants and new transmission lines.  

Here’s how it breaks down:

In the research linked above, Crossborder used industry standard methodology to estimate the cost of building the transmission and distribution capacity tied to new electricity demand for APS. As we saw, at the national level this cost can be very high for each additional unit of electricity. In Arizona, an estimated 36% of a solar system’s production comes during peak hours and thus counteracts load growth and associated new T&D costs. The results suggest that a typical home solar system in Phoenix would save almost $250 annually in future utility T&D infrastructure costs.⁷  

Second, Crossborder looked at avoiding the cost of building new natural gas plants that would only be used a few hours a day during peak demand – and thus are expensive for each unit of electricity produced. Using APS data, Crossborder discovered that APS would save another $500 in avoided utility costs from each home solar system each year by serving new peak load with solar generation instead of building new gas power plants.8    

Together this is approximately $750 in annual infrastructure benefit per solar home, from an asset with a lifetime of 20-30+ years – and this is in addition to the clean energy the system generates. Multiply this by tens of thousands to consider the value of solar homes for Arizona.

And it gets even better:

Generating power locally is also more efficient because electricity is lost along transmission lines and in substations as it moves from power plants to consumers. MIT researchers estimate in their Future of the Utility report that locally-generated power can save a further 9% to 18% vs. wholesale power due to these line losses. In Arizona, APS estimates this as 12% in savings.  

Finally, when rooftop solar displaces centralized generation, it reduces environmental compliance costs created by fossil fuel generation.  These costs can range from half a cent to 2 cents per kilowatt hour, or approximately 4% to 15% of the cost of electricity in Arizona, according to utility estimates.

Taken together, the opportunity to avoid future generation, transmission and distribution, and environmental costs by integrating distributed solar into the grid of the future is substantial. We must not squander the opportunity by doubling down on the centralized grid of the past.

Real-world examples of the value of solar

If you don’t believe this math, don’t take my word for it. Instead look to Texas, an entirely deregulated market where all costs and value should be baked into the market prices. In Texas, the leading retail electricity providers are signing up solar homes to buy back their daytime solar power at retail rates because they know it is the most reliable source of low-cost midday power.

And we are already seeing specific examples where local rooftop solar and other local energy approaches are solving grid pain points and reducing the need for the utility capacity spending:

• In California, the grid independent system operator (CAISO) has eliminated multiple planned transmission lines due to distributed generation and energy efficiency. In 2015, it deferred $192 million transmission lines planned for northern California and, in 2016, revealed that a $145 million transmission line adding capacity in Fresno may be unnecessary thanks to rooftop solar covering midday load in the hot Central Valley.
• In New York, ConEdison is avoiding $1.2 billion in costs to add a new substation by instead using localized resources, not owned by the utility, to serve 41 megawatts of load growth at a cost of less than $200 million.
• In New England, power plant operators auction the capacity of their plants to utilities in advance, to ensure that there will always be enough power to meet demand. Now that the grid operator (ISO-NE) has started taking account of 400 megawatts of local solar capacity, there is less capacity required in the auction – resulting in substantially lower overall costs that will be passed through to all New England electricity customers.

Scaremongers and critics often ask the hypothetical question: if 99% of people go solar, do the remaining 1 percent have to pay for the upkeep of the whole grid? In practice, many different energy sources will make up our $1 trillion system and the technical potential of rooftop solar is approximately 40% of electricity load, according to the National Renewable Energy Lab (I’ll note to investors that this is a level that would sustain robust industry growth through 2030). What's missed by the critics in this simplistic, yet alarmist, scenario is that instead of utilities spending considerable amounts of money on replenishing the high-cost areas of their existing infrastructure (another $90 billion anticipated in 2016), as we reach that 40 percent, smart distributed energy can take its place as it naturally retires.  At that point, it no longer "costs" anything. Indeed rooftop solar can do this more cost effectively until approximately 40% of the load is reached. Over time, what's left is a more resilient, cost-effective energy infrastructure for us to collectively maintain. Said differently, there are no fixed costs; there are only variable costs of different useful lives. If the grid was a fixed cost, there’d be no utility capex at all.

The multiplier effect of smart home batteries

Energy storage is the key to unlocking even more value from solar homes. In Arizona, Crossborder’s research shows that value to the grid increases $1,500 per year for an average solar system equipped with storage. Batteries last for 10+ years and solar systems last for 20-30 years or more. This value is substantial and we can’t afford to ignore it as we prepare to invest hundreds of billions of dollars in our grid.  

Here’s how it works:

Networks are stronger and more efficient when they add capacity at the nodes, not at the center. Adding energy storage to rooftop solar in the form of home batteries not only gives homeowners the benefit of backup power in an outage; batteries can store and release electricity to balance the grid exactly when needed. And doing this locally has unique advantages relative to centralized storage.  

The opportunity for storage is rapidly emerging as battery costs drop. Costs have declined by over 50% in the last five years and rapid continued improvements are predicted. Greentech Media estimates that in just four years, the market in behind-the-meter storage will be 1,000 megawatts annually from approximately 35 megawatts today. Sunrun launched zero-down home solar + storage in Hawaii and California and more states will follow.

Storage provides flexibility to help shift power to meet peak period needs. For example, in many markets peak demand begins in the late afternoon. Homeowners can store solar electricity generated from their roof during the day to use it in the early evening. In this case, solar plus storage can be a cost-effective replacement instead of ramping up dirty fossil fuel power plants each afternoon.  

Importantly, a home battery can also take solar power generated during the day and share it with the grid at peak hours – to be used by a neighbor. This eliminates both the peak cost of electricity and the transmission and distribution cost to deliver it.

Using APS estimates, distributed solar+storage has the highest benefit to offsetting utility infrastructure requirements

Source: Crossborder

Crossborder analyzed what batteries can do to improve solar homes’ contribution to the grid. By increasing the percent of a solar system’s production that can be stored and used during peak period (from 36% to 75%), the capacity value jumps to over 15 cents per kWh.⁹ This is higher than adding storage to centralized generation because it also realizes the benefit of avoiding peak T&D capacity. For a representative six kW solar system in Phoenix, that’s over $1,500 in annual infrastructure benefit to the utility each year.¹⁰  

Today’s grid is scaled like a football stadium parking lot that fills up on Sunday but sits empty the rest of the week. It is built for infrequent loads that strain the system to its maximum, but carries far below this capacity the majority of the time. Smart distributed generation with storage can lower the peak capacity requirements and thus reduce the overall capacity needed to be maintained at all times.   

At today’s costs, energy storage could be added to all of America’s million solar homes for approximately $5 billion in private investment – a fraction of the $58 billion utilities spent in 2015 to expand the centralized grid.¹¹ If the Arizona case study is an example, this would generate $1,500 in infrastructure savings per system, or $1.5 billion per year. Over the 10 year life of these batteries, the total benefit to the grid would be $15 billion. As battery costs decline, we will begin to see this play out across the country. Ultimately, as home solar scales, so will the potential aggregate benefit.

The long term rooftop solar opportunity

America needs new and modern infrastructure. But we need to build it intelligently to avoid being mired in costs and stuck with outdated technology. Rooftop solar is a key element. It is the innovative, private-sector, consumer empowerment solution. And it is cleaner, more sustainable and has created hundreds of thousands of new jobs – 17x faster than the rest of the economy.  

The first step is making sure we keep growing from 1 million American homes to tens of millions more. By doing so we can avoid spending some of the billions of dollars of expected costs to fortify the old, centralized grid and instead embrace a clean and more diversified grid. We need to make it possible for all Americans to choose solar – and to do so we need to get smart about accounting for all of the value that solar homes are providing across the grid.

When we let innovative technology flourish, and give American families the choice to lead the way, utilities can operate more efficiently with benefits for all of their customers.

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¹ Calculated on a net basis as new capex over depreciation

² Goldman Sachs Global Investment Research, December 20, 2016, using data from APS FERC Form 1-2013

³ Based on an average system size of 6 kW and average annual production of 1,200 kWh/kW.

⁴ Sunrun’s “solar as a service” provides customers with solar electricity at a fixed rate that is locked in for the duration of the twenty-year initial contract period.  These rates are generally lower than utility rates, creating customer savings starting on day one. The average Sunrun customer will save 20% vs. projected utility rates over the course of the 20-year initial contract period.  For the duration of the contract Sunrun covers all maintenance costs and guarantees the contracted solar energy production.  

⁵ At an average system size of 6 kW and average annual production of 1,200 kWh/kW, approximately 555,000 solar homes are required to produce 4,000 GWh per year.  At an average cost of $4/W, this represents $13.3B in investment required.

⁶ For example, Lazard’s Levelized Cost of Energy Analysis 10.0 incorporates the all-in cost to deliver rooftop solar to the point of consumption, but does not add the cost of transmission and distribution to the cost of centralized generation technology.

⁷ Crossborder uses an industry-standard regression methodology from the National Economic Research Associates to evaluate how APS’s long-term capital expenditures for transmission and distribution capacity change with load growth. APS data from its FERC Form 1 from 1995-2014 have been used to arrive at marginal costs of $392 / kW for transmission and $1,149 / kW for distribution.

These values are converted to the annual cost borne by APS using research conducted and published by SAIC for APS in 2013.  This report finds annual carrying costs for APS of 11.29% and 11.05% for distribution and transmission infrastructure, respectively.  This leads to an annual capacity cost of $43.30 / kW-year for transmission and $127 / kW-year for distribution.

Crossborder examines how to translate these marginal capacity costs to the valuation of distributed solar, where distributed solar replaces the need for this incremental systemwide transmission and distribution expansions. To do this, only the portion of solar generation falling during peak periods (and thus contributing to incremental capacity needs) is considered.

This means that for a given installed kW of south-facing PV solar capacity, the avoided carrying cost is $15.70 for transmission capacity and $25.60 distribution capacity respectively.  For a representative 6 kW solar system, this equals $253.80 in capacity value per year.

⁸ Crossborder uses the cost that APS discloses for the construction of new gas peaker plants in its 2014 Integrated Resource Plan.  With a capital cost of $1,493 per kW and a carrying charge of 11.17% per SAIC, the annual cost to APS is $166.80 / kW.  Adding fixed O&M of $17.90 / kW per year and taking account of a 15% required reserve margin plus line losses, Crossborder reaches a total capacity cost of $237.30 / kW. Solar’s capacity value is taken as 36.2% of nameplate.  For a 6 kW system this equals $519.

⁹ APS has estimated in its draft 2017 IRP that storage increases the capacity value of solar substantially. APS estimates that 4 hours of storage results in an increase in solar’s capacity value to approximately 75% of nameplate capacity.  Applying this to the above generation capacity results $0.103 / kWh in value.  However, distributed storage also eliminates the need for peak T&D capacity.  Increasing capacity value from to 75% from 36.2% for transmission and 20.1% for distribution results in an increase to $0.019 / kWh for transmission capacity value (from $0.009 above) and to $0.055 for distribution capacity value (from $0.015).  The total additional T&D capacity benefit is $0.05 / kWh.  This is the benefit of placing storage at the point of consumption, instead of at the site of a remote utility-scale generator.

¹⁰ With a capacity value of $0.153 / kWh and 1730 kWh / kW and a 6 kW system size.

¹¹ Using an assumption of $500 / kWh, substantially above current battery pricing, a million solar homes could be retrofitted with a 10 kWh battery for $5 billion that would enable backup power and store power for export to the grid when it is most needed.