Future of Energy: Utilities Need to Embrace Renewable Energy or It Will Kill Them

By Markets Fool.com

Image source: Getty Images.

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Utilities across the U.S. are facing a crisis. Electricity demand isn't growing for the first time since Thomas Edison invented the lightbulb, meaning there's no demand growth to fulfill with new power plants. That would be a challenge in and of itself, but now customers can now produce their own energy with rooftop solar, creating the first real competition in electricity markets.

Within electricity markets, renewable energy is now displacing fossil fuel power plants, hurting wholesale power producers, and regulated utilities are having to spread grid upgrades across a stagnant supply of electricity to customers. The result is rising electricity prices, making it even more attractive for customers to choose rooftop solar for their energy needs. It's a vicious cycle, but one that can be broken with a little innovation -- if utilities chose to go that route.

Image source: SunPower.

The problem renewable energy provides

Renewable energy can be a challenge for utilities in two ways. First, since utilities are normally contractually obligated to buy energy from the power plants it contracts with, it lowers demand for fossil fuel energy, particularly at peak hours. The decline in earnings from NRG Energy (NYSE: NRG), Dynegy (NYSE: DYN), and Calpine (NYSE: CPN), who focus on the wholesale market, show what a challenge that has been for utilities.

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The other challenge is more one of operations for regulated utilities. Solar produces energy during the day and nothing at night. This can result in something called the "duck curve," where electricity demand from the grid is low during the day only to rise sharply at night when the sun goes down and people get home from work. Whether solar is installed on a rooftop or a large solar farm, the dynamic is the same.

Wholesale utilities are seeing weak demand and regulated utilities are having a harder time matching supply and demand of electricity, partly due to renewable energy. Solutions like energy storage could help, but that's costly. But there's a solution that could work for everyone.

The solution renewable energy could provide

As utilities grapple with how to cope with growing amounts of renewable energy, they need to consider that customers want to buy renewable energy. They spend tens of thousands of dollars to put it on their homes and some are even putting batteries in to store energy for evening hours. Customers will pay a premium for renewable energy, so why not combine that with a utility's low cost of capital and ability to buy cheap renewable energy in bulk to provide a solution to both parties?

Community solar or wind can help utilities retain customers and give customers the option to buy renewable energy as well. Developers would build a utility-scale power plan, but energy would be sold to consumers through the utility. It's direct access to renewable energy without having to put it on your roof.

If rates are designed correctly, it can save more money than installing rooftop solar. Customers are paying in the neighborhood of $0.13 per kWh for rooftop solar from SolarCity (NASDAQ: SCTY)and utilities are buying solar energy for less than $0.05 per kWh in competitive bidding. Wind has been quoted at $0.02 to $0.03 per kWh in the right locations.

SunPower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR), and SolarCity have been bullish on community solar's future for a long time, but it hasn't yet resulted in much demand. Earlier this year, Deloitte reported that 106 MW of community solar had been installed in the U.S., a fraction of the 25,600 MW of solar installed at the end of 2016.

Nonetheless, there's a lot of potential for community solar and utilities could design a green energy tariff option for customers, who would potentially pay a premium for clean electricity, while still paying utilities for energy. If designed correctly, the system could keep customers with the utility, grow renewable energy deployment, and provide customers with the renewable energy they desire. A rare win-win-win in energy.

Why utilities aren't adapting quickly to energy changes

This seems like an easy solution that could be good for everyone involved. But it's not that easy for utilities to implement. For a century, utilities have been given monopoly control over electricity and making a transition to market-driven consumer choice is harder than it seems. But with demand for electricity on the decline and customers choosing to buy solar energy on their own, utilities have to reconsider how quickly they're moving on community renewable options.

They face a choice when looking at the future of energy. We know that customers want to buy renewable energy and they're willing to spend a lot to put solar on their rooftops. If utilities don't adapt and offer compelling solutions, customers will take their renewable choices a step beyond rooftop solar and begin installing energy storage in large numbers, potentially defecting from the grid altogether. That would be terrible news for utilities, so adaptation might be their only option.

Community renewable are a solution utilities should be rolling out rapidly to fend off the threats they're facing. But it may be easier said than done for an industry used to operating a monopoly.

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Travis Hoium owns shares of First Solar and SunPower. The Motley Fool owns shares of and recommends SolarCity. The Motley Fool owns shares of NRG Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.