Moody’s Skeptical of Utility “Death Spiral” from Distributed Generation

It is sometimes argued that the advent of new “Distributed Generation (DG)” resources, such as home solar rooftop installations coupled with batteries, will actually allow customers to stop taking any electric service from distribution utilities. Then, the scenario goes, to recover their costs and earn a fair return on their capital investment in their transmission and distribution system infrastructure, the utilities will be forced to charge ever higher rates to fewer customers, creating a “death spiral” — higher and higher prices driving more and more customers to cut the cord, followed by even higher prices and more customer defections. This prospect of a potential utility “death spiral” scenario has become a justification for new and possibly very expensive solutions.  See, e.g., Rocky Mountain Institute, The Economics of Load Defection, 2015; see also, New York Public Service Commission, Case 14-M-0101, Reforming the Energy Vision, Order Adopting Regulatory Policy Framework and Implementation Plan, adopted February 26, 2015, p. 28.

Moody’s, which rates the financial health, risks, and prospects of utilities, doesn’t buy the DG “death spiral” scenario for utilities.  See  Moody’s Investors Service, Regulatory Framework Holds Key to Risks  and Rewards Associated with Distributed Generation , April 23, 2014.  Their report on DG states:

[W]e are reluctant to incorporate a view that the utility sector will enter a period of material and significant volume reductions associated with a mass market DG deployment without a change in the rate making structure. These technologies are all still in the very early stages of development, which leaves time – decades, perhaps – for utilities to evaluate and adapt. Moreover, utilities have seen this movie before, about 15 years ago when fuel cells were looking to corner the energy market for both homes and autos. For example, we recall a time when big industrial companies such as General Electric Company (Aa3 stable) were promoting a fuel cell generating device (the size of an air conditioning unit) that would eventually allow millions of home-owners to drop off the utility grid. Other companies, such as General Motors Company (Ba1 stable) and Toyota Motor Corporation (Aa3 stable), were promoting fuel cell-powered vehicles. At the time, the market was anticipating that more than one million fuel cell powered cars would be on the road by 2010.

Actually, very few residential solar rooftop customer-generators produce enough electric energy to meet all their needs, even during daytime.  Battery storage of surplus sunny day energy, if there is any, is high priced and short lived, and batteries may not be recharged on rainy days.

Also, the scenario of lower volumes of usage are doubtful.  While electric usage declined and flattened during the economic recession, it may grow again.  For example,  if there is significant growth in the number of all-electric vehicles, they will need to be charged overnight, using significantly more electricity, increasing revenues, and requiring continued and possible greater use of the distribution system at night — even for customers with solar rooftops (whose panels do not work at night), unless they hedge by installing their own windmills or microhydro.

Further, Moody’s “death scenario” report addresses the perverse scenario in which a utility’s revenues to support its fixed cost infrastructure decline because of reduced usage by customers who generate part of their own requirements, thereby contributing less than their fair share of fixed costs under existing traditional rate structures which recover fixed costs through volumetric charges.  This is already happening, and is unfairly subsidizing solar customer-generators when they reduce their usage and thus reduce their contribution to fixed utility costs for infrastructure still needed to serve them at night, on cloudy and rainy days, when their own usage outstrips limited capacity of their rooftop solar systems.  At a conference regarding distribution system restructuring,  PSEG CEO Ralph Izzo is said to have

“noted that distributed energy resources are far less efficient than the grid, calling rooftop solar’s load factor “fairly pathetic.” The current subsidies for rooftop solar may be creating “enthusiasm for potential over-generation” and placing a greater burden on lower-income utility customers, Izzo observed.

“If the owners [of rooftop solar systems] are high-disposable income people benefiting from market mechanisms called solar renewable energy credits or investment tax credits,” Izzo said, “I would just tell you we are driving the system to one of the most highly regressive, poorly designed social solutions to a nonexistent problem.”

Moody’s report on DG points out that the remedy to stabilizing utility revenues and inequity of the current rate structure is simple, which is to reclassify the customer so that they are not evading their equitable share of fixed system costs for grid infrastructure upon which they are likely to rely:

* * * *  Theoretically, if a customer decided to self-generate a portion of his or her electric needs, the utility would no longer view the customer as full-requirements customer. If a utility, or its regulator, changed the designation of the DG customer to a “partial requirements customer”, that customer’s allocation of the utility’s fixed and variable costs would change, as would the economic proposition that the DG service provider is using to market its product or service.

In this case, were the regulator to change the customers’ classification, we still think DG customers would have lower bills, but the lower bills would be solely due to reduced energy usage associated with lower volume needs. A change in rate classification would address the mis-allocation of fixed charges. Because this solution appears to be so simple, that is, a change in the rate making structure, we think today’s DG economic proposition is somewhat fragile.

As Moody’s report observes, in all likelihood, as more customers accept the deep subsidies to install solar rooftop DG, state regulators will need to devise new rate treatment for customers who self-generate, in order to avoid unfair shifts of cost to other customers that up to now have been recovered in volumetric usage rates.  See  CAPUC REPORT: ROOFTOP SOLAR “NET METERING” PROGRAM BENEFITS HIGHER INCOME CUSTOMERS AND IS SHIFTING ADDITIONAL COSTS TO LOWER INCOME CUSTOMERS, NYUP May 20, 2014.   Such rate changes would take the form of higher customer charges or demand charges for solar customer-generators.  Revising the charges for “bottleneck” services still relied upon by DG customers would prevent the “death spiral” and would  assure that the DG customers pay a fair share of the fixed costs of the system they are still using and relying upon when the sun isn’t shining.  As Moody’s says, this regulatory solution is obvious and “simple.”