A world with widely available clean energy is no longer part of some far-off future. Long dismissed as too expensive, too intermittent, or both, subsidies and technology improvements have made solar and wind energy more competitive with fossil fuels. U.S. capacity for wind-generated energy reached 61 gigawatts at the end of 2013—up from basically zero a decade before—while solar capacity reached 13 gigawatts, nearly 15 times 2008 levels. No longer a mere annoyance to the energy industry, clean energy sits on the precipice of double-digit market share: Credit Suisse predicts that renewables’ market share will rise from some 5 percent in 2012 to around 12 percent in 2025.
Renewables are already causing major headaches for old-guard utilities. Take, for instance, the concept of net metering, which encourages distributed generation by requiring utilities to buy excess power from small-scale home and business installations. The possibility of a solar panel on every rooftop poses a formidable threat to an industry already struggling with weak demand trendlines due to the American economy’s decades-long shift from manufacturing to services, the proliferation of energy-saving appliances and better-insulated buildings, and, most recently, sluggish economic growth. Consider Europe, where rapid renewable energy growth contributed to the top 20 utilities losing about half their $1.3 trillion book value between 2008 and 2013. It’s no wonder that the U.S. industry’s credit ratings have fallen from an average of AA in the 1970s to BB today.
But Credit Suisse’s clean energy and utilities analysts don’t see green technology as an existential threat to utilities. Power companies are both attacking net metering policies and building large-scale wind and solar plants themselves. In a recent report entitled “The Transformational Impact of Renewables,” the analysts forecast that the effect of green energy will be to push electricity prices down roughly 5 percent from where they would have otherwise been over the next three years. That’s significant, but not enough to destroy the industry. “Utilities face challenges from renewables, but the U.S. experience will be different from Europe,” U.S. electric utilities analyst Dan Eggers said in a recent interview.
How Utilities Learned to Love Renewables
While many U.S. utilities claim to be focused on their own renewable efforts today, they did have to be encouraged to join the party. In 2002, only eight states required utilities to generate a certain portion of electricity from renewable sources. Twelve years later, 30 states have adopted a patchwork of renewable portfolio standards (RPS) that require between 10 percent and 40 percent of all electricity to come from green technologies within the next decade. (Eight more have voluntary standards.)
The cost curves have also been moving in renewables’ favor. While there’s been help on that front via state and federal subsidies, technology improvements have also improved the economics of clean energy projects to the point where they can present a viable investment alternative. The levelized cost of wind, a measure that allows cost comparisons between energy sources, is now $86.60 per megawatt hour, according to the U.S. Energy Information Administration. That’s cheaper than both conventional coal, which has a levelized cost of $100. Meanwhile, stiff competition among solar panel makers sent prices plummeting 57 percent between 2011 and 2013, pushing solar PV’s levelized cost to around $144 compared to $236 in the first quarter of 2011, according to Bloomberg New Energy Finance. “The old-line arguments against renewables—too expensive, too intermittent, too remote—will continue to fade,” said Eggers.
The utilities are getting into the renewables game, too. Their formidable financial resources can even give them a leg up on pure-play clean energy providers, particularly in wind, where huge and expensive towers and enormous blades provide more bang for the buck. But they’re also making a push into solar, where small-scale installations pose the greatest threat to their market share. Minneapolis-based Xcel Energy, for example, is seeking state approval to build a 150-megawatt photovoltaic plant in Minnesota and is buying power from utility-scale photovoltaic solar plants in Colorado. Other utilities are eyeing similar strategies, and with an increased urgency since the EPA’s September 2013 release of new carbon emission rules that favor the construction of new solar- and wind-energy generation capacity over coal-fired plants. All-in, the Department of the Interior has approved 50 large-scale solar plants since 2009, including a 500-megawatt field on the Nevada-California border, and more are on the way. Credit Suisse predicts the cumulative investment in renewable energy projects in the U.S. could top $250 billion by 2025.
Of course, all this additional renewable capacity will put pressure on the prices American utilities are able to charge for electricity, while leaving little room to cut fixed costs. What’s more, the wind doesn’t always blow and the sun doesn’t always shine, so even those utilities that fully embrace renewables will have to maintain some sort of reliable, consistently available power source such as gas-fired plants. But based on their actions so far, utilities seem to believe that the benefits of being in the renewables market outweigh the costs and risks.
U.S. utilities may also get an eventual break from net metering, an incentive 43 states have implemented to encourage small-scale clean energy installations. The price utilities can charge consumers is generally too low to offset grid and network maintenance costs, which means they eventually may have to charge all customers more, meaning those without solar panels will be effectively subsidizing those who can afford panels. “It’s not politically sustainable, and it’s unfair,” says Credit Suisse’s Eggers, who doesn’t believe net metering can survive in its present form.
In the end, rooftop solar and wind farms won’t cripple large power companies. Instead, utilities are on track to co-opt renewables into the current delivery system. Credit Suisse thinks installed wind capacity could double again through 2020 while solar could grow elevenfold—and that utilities’ thinking about the long-term will be participating in that growth. The clean energy boom won’t necessarily help traditional power companies, but it need not bring them down, either.
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