Why utilities need to wake up to the distributed solar boom
Utilities across the world have so far overlooked or ignored the wave of distributed generation, based on cheap solar power. This, however, represents nothing short of a revolution: it transfers power (actual and economic) from suppliers to consumers. Utilities are at a crossroads. They can focus on protecting their existing business or on mastering the new opportunities as they arise. They are perfectly positioned to adopt distributed solar PV as a new business avenue. But will they do it?
- Most utilities are trying to limit the spread of distributed solar PV since it undermines their monopolistic position and existing business model, resulting in a loss of revenue. They often tout the excuse of grid instability to prevent the proliferation of distributed PV.
- The grid will likely not be a bottleneck and can easily accommodate significantly large amount of PV without any investment in additional infrastructure.
- Distributed solar PV can be a win-win for utilities, consumers and policy makers, provided utilities recognize this.
Utilities across the world have two functions: the supply of energy to consumers and maintenance of the grid. One can argue that without maintaining the grid, energy cannot be effectively supplied. While this is true, it is important to recognize that these are two independent activities. This distinction is highly relevant to the business of distributed solar energy.
Distributed solar PV (solar PV connected at distribution level voltages) is increasingly challenging the traditional utility business model. Victor Hugo once famously remarked: “No one can resist an idea whose time has come”. Distributed solar PV is such an idea. Based on our research, we believe, by a conservative estimate, that the market in India alone will be around 2 GW in the next four years. This offers a significant business potential. What is more, tapping into this market is an important step towards learning how to succeed in the longer term, when distributed power might make up as much as half of the generation capacity (bearing in mind that India already has 60 GW of diesel gen-sets installed). We believe that in India, the growth rates will remain in the high double-digits for the next 15 years.
Distributed solar offsets grid power consumption and reduces utility revenues. Utilities in India currently try to play the “maintaining the grid” card to prevent anybody else from supplying energy to their consumers. They do this by using two arguments:
1) that the grid has been designed for a unidirectional power flow and
2) that distributed solar will result in instability due to the inherent variability of solar energy.
There is some merit to the argument, though only at very high deployment levels of PV. There have been several studies that have been carried out internationally to show that the grid can actually accommodate high levels of PV without any considerable change in grid infrastructure. Both the perceived problems of reverse power flows and variability of solar energy can be adequately managed with the existing technology. The concerns of utilities are therefore overrated – at least until significant PV capacity is built up.
Experience from across the world tells us that distributed solar is going to happen whether the utilities want it or not. Utilities must start perceiving distributed solar as an opportunity instead of a threat. In fact, they are better positioned to do so when compared to independent renewable energy service companies (RESCOs). Utilities, already have contractual obligations with thousands of consumers, they already have established processes, databases, and software to provide solar energy along with conventional energy. In addition, they have the necessary technical knowledge of handling grid connection issues. They are also present across the country in most places where a demand for energy exists.
So what is preventing them from doing it? Many utilities are organizationally not ready. They still live in a world that hasn’t changed since the days when the first cities and towns were being electrified. The business of supplying energy and maintaining the grid has changed very little since then. Utilities have not had to innovate and enjoyed monopolistic market positions. Today, the situation is radically different and for the first time in more than a century, their traditional business model is being challenged.
Utilities now have a clear choice – innovate and jump on to the distributed solar bandwagon or simply perish.