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Mar 11, 2014

Why the Potential for Grid Defection Matters

An evolving electricity landscape, customer choice, and forging solutions for the grid of the future


Two weeks ago, Rocky Mountain Institute, HOMER Energy, and CohnReznick Think Energy released The Economics of Grid Defection, which assesses when and where distributed solar-plus-battery systems could reach economic parity with the electric grid, creating the possibility for defection of utility customers. The results of our analysis have been startling to many: continued rapid declines in the cost of solar and the start of the same trend for storage mean that grid parity may come much sooner than previously thought—and well within the 30-year planned economic life of typical utility investments.

This blog post explores why cost parity doesn’t necessarily equate to widespread customer defection, why defection would create a suboptimal electricity system, and why even the specter of customer defection is relevant.

We selected the pairing of solar PV and batteries—and, for commercial scenarios, the addition of diesel gensets—to explore one set of economics around the trend. There are other disruptive challenges to the grid, including grid-tied solar PV, distributed gas microturbines, and integrated resource microgrids. If anything, these multiple potential disruptors increase the urgency to plan and execute a purposeful electricity system transformation. That transformation is already under way, and the approaching date of grid parity for solar-plus-battery systems is an important consideration.

Economic parity doesn’t necessarily mean customers will defect

Our report does not predict if, when, or how many customers will choose to defect. Rather it projects the economics of several current (and possibly, accelerating) trends that are reshaping the electricity landscape: dramatically declining costs for solar and batteries; increasing customer demand for clean electricity, resilience, and other value-added services; and recent upward pressure on retail electricity prices. Ultimately, the impact of these trends depends on a number of factors, including how customers, utilities, regulators, technology providers, and society choose to respond.

The economics that were the subject of our analysis are one of many factors that influence any customer decision to defect (or not) from the grid, or even to adopt grid-tied distributed resources. Other factors customers consider include transaction costs, the relative convenience or hassle associated with the decision, upfront capital and time requirements, confidence a given solution will reliably meet their needs (including the risk that a distributed generation and storage system’s capacity would be sized either too small or too large to closely match a customer’s demand), uncertainty about their long-term electricity needs, and more. Very few customers, especially in the commercial sector, know with certainty their electricity demand for the next twenty years.

Service providers—utilities or third parties intent on winning customers over from grid-supplied electricity—will need to create integrated service packages to overcome adoption barriers that have plagued efficiency and distributed generation providers. Regardless, in addition to the rapidly growing grid-connected distributed solar market, we’ve already seen early adopters working with service and technology providers either to go entirely off-grid or install grid-tied solar-plus-battery combinations that similarly impact (and reduce) their demand from the grid.

Defection wouldn’t be the best outcome

Customers will make decisions that serve their best interest based on the many factors referenced above, and while for a very few defection might ultimately be the best outcome, mass defection from the grid is almost certainly suboptimal. Distributed resources such as solar and storage can generate more value and have better economics for customers and society both if they are connected to the grid. The challenge is that today’s utility business models and regulatory environment don’t incentivize the rapid evolution of those solutions, something that needs to change if society is to capture that value.

There is tremendous potential system value in identifying where grid-tied distributed energy resources can create new sources of value and how to access that value. But does most or all of the new value accrue to customers? Or can these resources also create important new sources of value for the grid and ultimately for society? The answer to the latter question can be a resounding yes, so any sustainable solution will need to find a way to equitably share value created through distributed investments.

So how would widespread grid defection create undesirable outcomes?

For one, large numbers of customers going it alone for their electricity generation introduces all manners of economic inefficiency. Each customer faces the risk of over- or under-investing in capacity. Over-investing especially—via necessarily larger systems sized to individual peak demand—would result in significant overbuild and sunk capital. Instead, markets (via a connected grid) provide for greater economic efficiency by allowing customers and suppliers to readily make transactions to balance their own supply and demand, including optimizing distributed generation and storage investments across larger pools of customers rather than one by one, each for their own. Grid-based solutions reduce this economic risk and allow assets to be utilized more efficiently.

For another, grid defection raises social equity concerns. With widespread defection, utilities operating under legacy business models would be forced to significantly raise retail electricity prices to recover costs of grid infrastructure. Those higher prices would unfairly burden remaining grid-connected customers who cannot or choose not to invest in distributed generation and storage, including low-income families who can’t afford system upfront costs and apartment residents who logistically can’t install systems.

An entirely off-grid system would only become a reality if customers are not given an opportunity to participate, through new business models, in the business of generating, storing, and balancing electricity needs. Or if customers’ requirements, including for resilience and clean energy, are not being met by their central provider. That’s a future that would be suboptimal for all.

Why potential defection matters—customer choice and empowerment

But if a grid-defected future is so suboptimal, why then is it so important to understand the economics of grid defection?

First, there is strikingly little quantitative analysis to inform the discussion. It’s critical to know the facts and underlying analytics to support productive conversations about how to move forward in the face of powerful trends and a dramatically shifting electricity landscape.

Second, the option to defect—whether or not it is ultimately exercised in part or in full—adds urgency for utility business models and regulations to change and identifies when scaled solutions that properly value distributed investments need to be in place. Empowered customers, ones with the ability to choose how they purchase, generate, store, and/or use electricity, have a more important seat at the electricity table. That empowered customer is a force of change.

Customers, utilities, grid operators, regulators, and technology providers must work together to develop business models that stave off the need or even desire for customer grid defection. The electricity system needs to give customers an opportunity to transact with the grid in a way that meets their desires (for clean, reliable, affordable electricity) and be compensated for any value they are able to bring to the system at large (through contributions to peak shaving, investing in local reserve supply through distributed storage, through distributed generation that can supply feeder-level power needs, and others).

Going beyond the either/or of grid-connected or grid-defected

We need not face an electricity future with an either/or dichotomy of two extremes: total utility/centralized dependence and total defection/independence. There exists another path, one in which central and distributed resources are complementary, connected and supported by a nimble grid. That’s why RMI’s high-renewables (80 percent) Transform scenario in Reinventing Fire envisions a future and a grid powered by equal parts distributed and centrally generated renewables.

In such a future, the utility evolves to play a critical coordination and stewardship role, one that helps balance various distributed resources and supports them with low-cost central generation. Customers, utilities, regulators, and technology providers have an urgent need to shape this future, or we could in fact run the risk of the defected extreme.

A commitment to collaboratively forging solutions

Disruptive challenges-cum-opportunities won’t go away. Distributed solar PV is scaling rapidly. Battery costs are declining, with breakthrough innovation accelerating. And third-party service providers are making these systems financially and logistically accessible to bigger pools of customers. RMI’s historic and current activities on energy efficiency, balance of system solar cost reduction, system financing innovations, and storage integration have helped propel the economics of distributed resources forward. An electricity future that includes significantly higher percentages of distributed renewables offers many benefits. But to access those benefits, the entire electricity system must evolve … with utilities and the grid, not in spite of them or without them.

That’s why RMI is committed to collaboratively forging solutions. To achieve the optimal energy future, our Electricity Innovation Lab (e-Lab), for example, brings together utilities, regulators, NGOs, technology providers, and other stakeholders to collaborate on practical solutions to the challenges today’s electricity system faces. In addition, we work hand-in-hand with these and other stakeholders on key components of an integrated solution through direct engagement. Our work on these solutions will be the focus of a forthcoming blog.

Image courtesy of Shutterstock.


Showing 1-9 of 9 comments

March 12, 2014

This is very interesting evolution of power distribution. The article did not address local/community CHP nor Fuel Cells to address baseload. Baseload capacity in the hybrid replacement system is crucial to replace fossil fuel based generation capacity. If we have no sustainable replacement capacity, the argument to perpetuate burning products of old dead things will not easily die. Strategy is important to move the ball forward quickly.

March 14, 2014

knee jerk response: After PG&E smart meters exploded gutting my garage and family archives, leaving me with a shattered shoulder, I am really NOT interested in PAYING PG&E $240.00 /year for analog meter and contributing excess electricity to THEIR grid.. Int he beginning, in California, one HAD to go off-grid to go solar, after all these years of waiting for affordibility I am thinking Off -greed is looking better and better.

March 14, 2014

It's a relatively good problem to have. Together with effective demand management and time of use tariffs, utilities should be selling their services to potential defectors. We have a long way to go before this issue becomes pressing in UK I suspect.

March 14, 2014

There is very little doubt that a host of distributed energy solutions such as solar PV + batteries, but also fuel cells and other technologies will be less expensive that retail electricity before the 30-year amortization period of utility scale generation and distribution assets has run its course. Some of them already are.

But, the worst-case scenario for the utilities is not grid defection, it comes from those that chose to cherry pick the low hanging fruit in the rate structure with alternatives and stay connected. I don't think the utilities or the PUC's are creative enough, informed enough, or agile enough to devise rate and integration structures that preserves their business model and grid stability without driving end users off the grid in droves long before the current round of utility investment is paid for.

Even RMI, which has been a valuable pioneer at the leading edge of emerging energy issues for some time now is far too timid and narrow minded in this report. Perhaps if they told the utilities what was really happening, nobody would read or believe it. But therein lies the problem.

March 14, 2014

New generation of solar photovoltaic panels, being tested and developed in Europe, is being required to support the weight of 1,000 kilograms per square meter. Can someone look at this issue? In my opinion, this must be some sort of error, either in the article copy editing, or in the red tape legal requirements for the solar PV panel industry in Europe and possibly elsewhere. As you may realize, the 1,000 kilogram weight per square meter is roughly equivalent to requiring solar PV panels to withstand an African elephant placing all of its weight on one square meter. The article I read indicated that tesing was done by placing metal weights of 12 kilos each on the panel surface, so this is not simply a case in which the European comma is used as a decimal point in typesetting. It is an actual R&D test setup. I hope you agree it is outrageously overengineered, and presumably drives the cost per customer skyward, with no rational reason for doing so. There needs to be a far more reasonable weight capacity requirement for these units.

March 15, 2014

defection..is word for independent and is scary word for old story which has been and is -about control under guise of "protection." Really? Protecting what from who? Classic answer rises throughout the western history. Oh right, not the "Lies my Teacher Told Me" (Loewen history but the stories, pulled off the clip room floors, the stories that show the abusive, exploitative nature of a patriarchal system that protects an ideology based in olde world , Newtonian physics and other false beliefs.

March 20, 2014

Jules, Lena and James,

Fantastic article. Given the recent buzz about storage and the potential for defection, I think the most important thing to keep in mind is that "just because they can, doesn't mean they will" leave the grid. You do a magnificent job presenting the potential outcomes and the pros/cons to each. Bravo.

Those interested in going off-grid rarely realize is how much more careful they will need to be with their energy. The current grid structure provides an unbelievable level of convenience that is hardly appreciated. Yet there may also be benefits to off-grid adopters' increased understanding of their energy and its limitations.... such as a decline in energy waste.

This spring our firm (Circular Energy, solar integrator based in Texas) is installing an off-grid system on a school in Houston that intends for their students to manage their energy use, much like budgeting an allowance. Convenient? No. Efficient? Yes.


March 22, 2014

Part ! -- I just received and read through my Winter 2014 (Vol 7 No 1) "Solutions Journal. Very interesting. Especially the article titled "Distributed Defectors." I was most struck by the part where people in Hawaii who have already made the investment in PV are put on "hold" before they can connect to the system and participate. Since the efficiency of these systems is increasing while the cost is dropping it gave me a thought or two about where things might go. The article also highlighted how the PV systems coupled with local battery storage is pushing the boundaries much sooner than had been expected, bringing on the projected "utility death spiral" sooner than anticipated. Why does there need to be a "death spiral" at all? Couldn't a change in business model prevent such a spiral and encourage the progression of the PV/local storage model as well? Here are my thoughts on the subject. These could be profound as in "Why didn't I think of this?" or they could be the musing of a person with a hyper inflated ego who really has nothing new to offer. I don't know because I have nothing to judge them by. Someone else with much more knowledge than myself needs to make that decision.

I'll try to be brief. The traditional, central power supplier has invested enormous sums of money in a central generating plant (of various types) connected to a distribution grid that brings consumers the power they require to live their daily lives. From what I understand, this supply might be stretched to its limits at 2:00 PM on a hot Sacramento Valley day mid summer or it might be coasting along at an idle, putting out tons of power no one needs in the middle of the night. Feast or famine. In either case it mimics a circulatory system where the heart pumps blood out to the capillaries in the hinterlands of the toes and fingers.

March 30, 2014

Deborah, I think you are hitting on some key points; patriarchal systems that thrive and exist on the protection of the “what” (established market place) from the “who” (independent defectors, off grid adopters). I think some of these off grid independents may become energy providers (maybe energy gardens), resulting in further disruption in the exploitative business models in place; I am sure the grid as we know, will not be eliminated, but the grid managers will certainly need to adjust, reconfigure value and revenue. (unless someone can resurrect Tesla’s wireless power technology).
With the rapid advent of grid parity, utilities pressured to react sooner than expected, maybe increasing their spiraling decay. Pretty cool and dangerous; someone, or some collaborative groups will need to maintain a grid structure of some sort to support the public at large, whom will need electric service and maintenance.
I think there are enormous opportunities to the brave entrepreneurs that will solve these issues, maybe give investors sitting on cash, something to do.
I look forward to the ongoing conversation and opportunities.

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