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The Electric Utility Death Spiral

 

Mark these words: in the next 20 to 25 years, the modern, centralized electric utility company we have all come to know and loathe will either be extinct or so close to the brink that biologists would classify it as an endangered species if it were a living thing.

Those asking why need to look no further than the sunshine pouring down on them in places like Arizona.
Admittedly, Arizona is not known as a hotbed of progressive environmentalism and its politics are best left unmentioned in polite company. Still, a must-read Scientific American article points out that the cost of residential solar power in the American Southwest is leading conventional utility companies into a death spiral. What’s more, where the Southwest leads, the rest of the country — due to simple physics and household economics — is sure to follow.

It is easy to understand the logic of why this is so. First, the cost of solar power per kilowatt hour has now sunk so low that it is effectively at grid parity with dirty, conventionally-produced, fossil fuel-powered power plants in much of the world, including here in the United States. This is partly due to the staggering decrease in solar panel manufacturing costs, which seem to keep on dropping as economies of scale and competition kick in, and by 2017, a 1,000 watt panel could cost as little as $360 to make.

Given that the average, four-person American home consumes a tad under 11,000 kilowatt hours in a given year, that means the manufacturing cost of a system that could power that home for an entire year could, by 2017, come in at just under $4,000, excluding admittedly huge installation costs. Given that those, too, are coming down due to competition and creative financing of home systems to about the price of a low-end automobile, it is clear that the final hurdle to home solar being fully competitive with other methods of power generation is about to be leapt over — or already has.

Indeed, bringing cheap solar power to the masses could now best be described as a business model problem, not the scientific or engineering problem it has traditionally been seen as. Why this new fact about solar power represents a flipping point in electricity markets and why conventional utilities are terrified about the future should be obvious. As prices get lower, more and more consumers will decide to switch to home solar for their electricity needs. This hurts utilities in two crucial ways.

First, it shrinks the customer pool that large infrastructure costs — including costs associated with building a new power plant or maintaining the transmission grid — can be spread out over. With enough defections to home solar, the per-customer cost of conventional electricity provided by utilities will necessarily increase, raising consumer prices and inducing more defections amongst them in a self-reinforcing feedback loop.

If this sounds exactly like the death spiral that destroyed health insurance markets in which increased costs led to more and more people deciding to do without insurance, it should. Only in this case, of course, the alternative to doing without is producing your own power at home. Given the rapidity with which health insurers quickly priced themselves out of the individual marketplace, one can understand just how threatening this death spiral could be to utilities.

Additionally, solar power produces the most electricity on the bright, warm and sunny days that quite often force utilities to bring online more expensive plants — such as those using natural gas — to provide for the increase in demand such weather creates. This production of power in times of excess demand during peak usage periods is often a rich source of profits for utilities that otherwise get paid relatively little for the base load of electricity they normally produce.

Home solar cuts deeply into this peak-usage demand, and thus a utility company’s profits, and a kilowatt of home solar electricity produced on these days costs the company much, much more in lost revenues than the same amount of home solar produced at other times. Home solar power produced at times of peak demand, quite literally, eats the utility’s lunch. With the associated consumer death spiral added in as well, it is clear that for utilities to keep up with home solar, they will have to burn their candles at both ends in terms of costs and revenues.

If you are a utility executive who has grown fat and lazy through the easy profits your electricity monopoly has provided for decades, the market implications of home solar are horrifying. They are obvious to Wall Street, too, and unless utilities have a viable way to cope with the growth of home solar, it is not at all clear whether they will be able to convince fund managers, bankers and bondholders that they have a future. After all, if customers can’t be corralled into purchasing their power, investors won’t be lured into buying their stock or loaning them dearly-needed capital, either.

This means that confronting or co-opting the potential of home solar — especially in those states that have the most solar power potential — has become the new, crucial battlefield for the utility industry. While some companies have chosen the path of co-optation by essentially getting into the home solar market themselves, many others have chosen to fight by using their substantial political power to lobby legislatures from coast to coast to stop the coming home solar tsunami by hook or by crook. It is, they clearly recognize, a struggle to the death.

As reported in the Scientific American article, for instance, this resistance has usually come in the form of anti-solar advertising campaigns and lobbying efforts that paint home solar users as freeloading mooches that don’t contribute to the maintenance of the grid all consumers currently rely on. Arizona, a state at the frontline of this home solar revolution, has recently seen the imposition of a monthly $5 grid maintenance charge on home solar users that has prompted a huge political backlash from angry consumers. In other states, too, utilities have done all they can to discredit home solar, block its development and force homeowners to pay for the privilege of using the sun through a similar scheme of tariffs and fees.

While this may stave off solar in the short run, the long-run political fallout over the home solar revolution will likely overturn traditional politics all over the place. From Arizona to Georgia, corporate conservatives used to having the will of business slavishly translated into law by business-friendly Republicans have already run into a buzzsaw of opposition from pro-solar, libertarian-leaning, tea party conservatives who despise the ways in which utility monopolies have tried to charge people for using sunshine. It has even caused some tea party types to fight back against the mighty Koch brothers, the billionaire fossil-fuel magnates that have financed much of the conservative resistance to clean energy here in the United States.

What this means for those of us on the left concerned about both the state of our planet and our national politics is not yet clear, but it looks very promising. At the very least, anger over having to pay to use the sun can be used to advance the political cause of solar power, and if the stars align in the right way, it could even be used as leverage against corporate interests that have long manipulated our political system for their own financial gain. What’s certain is this: home solar power is real and threatening to destroy the utility industry as it currently exists, and no amount of political sunshade will make that fact go away anytime soon.

(The views expressed in this article are the author’s own and do not necessarily reflect BAMSouth.com’s editorial policy. This piece was originally published on Mint Press News (www.mintpressnews.com) and is reprinted with permission.)

Jeffrey Cavanaugh

Jeffrey Cavanaugh

Contributing Writer
Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in International Relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAMSouth.com and lives in Metairie, Louisiana.
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