Distributed Energy: Utilities’ Existential Challenge?

Distributed energy technologies like rooftop solar are eating away at electric utilities’ business. Can utilities adapt, and at what cost to consumers?

Rooftop solar attracts homeowners with the promise of electricity savings and environmental benefits. Yet every kilowatt hour of electricity generated at home translates into an equivalent amount of electricity no longer sold by a traditional electric utility. As utilities face the prospect of flat and even declining electricity revenue, concerns over their future economic health, and the reliability of the electric power supply we’ve long taken for granted, have been called increasingly into question. 

Sonny Popowsky, former Consumer Advocate for Pennsylvania and advisory board member of the Kleinman for Center Energy Policy explores how utilities might adapt to the challenge of distributed energy and energy efficiency, and the costs their survival could bring to ratepayers.

Andy Stone: Good day. I’m Andy Stone and you’re listening to another episode of the Energy Policy Now podcast brought to you by the Kleinman Center for Energy Policy at the University of Pennsylvania. Rooftop solar holds great promise for consumers who want to generate clean energy and save money. But what’s good for owners of rooftop solar may be less positive for electric utilities who risk losing business as customers use less energy.

That begs the question, will utilities continue to be financially sound, maintain reliable electric service, and all the while enabled new forms of clean, homegrown energy and energy efficiency? This is a complex issue that often pits consumers against power companies, involves challenging issues of social equity, and ultimately impacts the wallets of everyone. Here to shed light on the issue is Sonny Popowsky. Sonny, thanks for joining the show.

Sonny Popowsky: Thanks for having me.

Stone: Sonny is former consumer advocate for the State of Pennsylvania. During his 30 year career, he represented consumer interests on electricity and natural gas prices and also successfully advocated for consumers in front of the U.S. Supreme Court. He continues to speak on behalf of utility consumer interests on a number of national, state ,and local boards, including the Electric Power Research Institute and the Pennsylvania AARP. He is also on the advisory board of the Kleinman Center. Now, Sonny, just to get started, I wonder if you could give us a bit of background on the Office of the Consumer Advocate and some explanation of the process by which electric rates are set.

Popowsky: Sure, my office, Pennsylvania Office, of Consumer Advocate was established in 1976. I actually started working there in 1979. Offices like ours were created across the country and in nearly all the states back in the 70s at a time when energy prices were spiking, telecommunications industry was in a somewhat turmoil. And the idea was that utilities have always been well-represented when they go before the state and federal utility commissions. For example, when they seek a rate increase.

On the other hand, it was felt back then that the consumers, the many millions of, particularly residential consumers, who have to pay those bills were not well-represented. So offices like ours were created to create a level of expertise for customers so that they could be represented by lawyers and experts in these cases that involve literally billions of dollars of consumer money over the years. And then at retail you actually have competitive providers who can sell electricity to individual retail customers.

Stone: Okay so historically electric utilities make money when they build more infrastructure, more power lines, distribution lines, power plants, when that’s under their purview. So they’ve also had the incentive to do just that and enjoy the added profits that come along. Of course, they sold more electricity too over the years, another source of growing revenue. But over the past few years, utilities maybe haven’t been the safe investments they once were. What’s going on?

Popowsky: Well, this really goes back some time to the point where the competition was allowed. So you do have different sources of competitive energy. On the other hand, I think in states like Pennsylvania, the utilities have been able to accommodate that because what they’ll do, what are utility here like here in Philadelphia, PECO, will buy energy for customers in the wholesale market, sell it at retail for the same price. And they’re pretty much indifferent as to whether you buy that electricity from them or from a competitive retail supplier.

The new development which you mentioned in your introductory remarks, and what I think you wanted to talk about mostly today, is a new type of generation. Where the generation is actually on the customer’s premises, where it’s on what we call the customer side of the meter. And if you think about it, that’s what primarily what we’re talking about there is a rooftop solar. And that does pretty much change the utility equation because when we’re talking about, even competitive generation that I mentioned at the wholesale level, it’s typically part of the grid. Like I said, the local utility buys the power at wholesale, can sell it at retail, and they can accommodate that. What’s become more of a problem for the utilities is this new type of generation on the customer side of the meter where the customer, at least for a portion of their service, can bypass the utility altogether. And rooftop solar is the best example of that.

Stone: Okay. So, we’ve got rooftop solar but that’s created some revenue challenges for the utilities themselves.

Popowsky: Yeah, that’s right. And particularly the way that the industry, the rooftop solar industry developed and the way it was priced. And the primary way that as a new industry, as a relatively new product. The initial way that that was developed to price that is something called net metering. And if you think about what net metering is, it’s basically your meter on your house. You probably have seen, probably noticed it. Well, basically it runs in both directions. If you buy, when you’re buying electricity from the grid, it runs in the positive direction. When you as a rooftop solar owner are producing energy from your rooftop, the meter runs in the other direction.

So net metering, as the name implies, is what you’re paying is the net, you the customer pay the net bill, which is how much you buy from the utility minus how much you produce. And that’s on the net meter. That can be a positive number. It could be zero, it could be a negative number at the end of a month. So net metering was the way that the industry got started basically. It makes sense. It’s sort of elegant. You don’t have to, it’s not all that complicated, customers can understand it.

The problem that’s developed though, particularly in states where you have a whole lot of solar power, think about states like Hawaii or California or Nevada or Arizona, where you have now very large amounts of rooftop solar. What the industry, the utility industry is arguing in those states is, well, wait a minute, these customers are producing a lot of energy on their rooftops, they’re dramatically reducing their bills in some cases to zero or even a negative amount, but they’re not leaving the system. They’re still part of the electric utility system. They still use the electric distribution wires that come into their home. They still rely on the utility for power when the sun goes down.

So what the utilities are arguing is that taken to its logical extent, the net metering system produces what some utilities call a death spiral. I think it’s a bit of an exaggeration, but you could see in states like Hawaii, California, where you have an awful lot of solar, that they’re saying the more customers who produce their own generation, maybe to the extent that they can zero out most of their bill, they’re not contributing to the network. And what that means is that either the utility has to eat those costs, or they have to just charge them to other customers.

So, there’s a very significant debate going on across the country about what the best way, what the best ways are to promote the types of power that I think we all want, which are renewable more renewable resources, cleaner resources that help us when it comes to environmental issues. So I think there’s a general consensus that we want more renewable energy versus how do you do it? How do you produce this energy in a way that can be priced and operated in a way that’s fair to the solar owner. That’s fair to the utility. And from my perspective, perhaps most important or very important is, how do you make that fair to the other customers who are paying for some of these costs?

Stone: Somebody has got a solar rooftop, they’re paying less for the grid because they’re using more of their own homegrown electricity, for example. And then the revenues that would go to utility, the maintain the distribution network fall on somebody else’s back.

Popowsky: That’s right. And that is because, like I said, the distribution portion of the system in particular, in all the states and the generation portion in many states. But let’s look at the distribution. That is still regulated as a monopoly. Again, we don’t have multiple distribution companies running their lines down our streets. And furthermore, we’re not talking really just about, you know, a cabin in the woods that just has a solar panel that just, that is not part of the grid. We’re talking about customers who are still connected to the grid, still use the electricity grid every day, either to buy power or to sell power. And the question is, how do you pay for that?

Stone: It sounds like utility revenues are going to be, you know, trending downward as more people do, you know, produce their own electricity. Not to over-exaggerate this, but is there anything that the utilities can do to stop this revenue bleeding?

Popowsky: Well, that’s the big issue right now in utility regulation across the country because what the utilities are saying is we have to find a way to recover the costs of operating and building and maintaining the network. So they’ve tried a number of approaches. The simplest approach, let me stop for a second. If you go home and look at your bill or go in your desk and look at your bill right now, what you’ll see is that there’s a portion of the bill that’s called the monthly customer charge. And that’s a flat rate. That’s a flat amount that you pay every month. You know, maybe $5, $10 a month here in Philadelphia where we are, it’s about 8, a little over $8 a month. That remains on your bill no matter what. Even if you use no electricity, even if you spend the winter in Florida, you’re going to get that $8 a month bill every month.

Stone: That’s just to be hooked up to the grid?

Popowsky: Exactly. That’s just to be connected. So you’re paying that $8 a month. But the majority of the bill is based on what’s called a kilowatt hour basis. That is the more you use, the more you pay. So in Philadelphia for example, the distribution portion of the rate is around 6 or 7 cents per kilowatt hour. The generation portion of the rate, depending on where you buy it, may be 7 or 8 cents a kilowatt hour. And those vary based on how many kilowatt hours you use.

So looking at just the distribution rate, let’s say you use a thousand kilowatt hours a month, and if the distribution rate is 6 cents a kilowatt hour, that’s about $60 a month. Now remember I said the customer charge is only about $8 a month, but your distribution charge is $60 a month. That’s what you’re paying to maintain that distribution system.

Stone: So the flat part is very small?

Popowsky: So the flat part is relatively small. So, think about from the utility perspective, if that customer now puts a solar panel on their roof and instead of, and they may use 50 kilowatt hours on Monday, or they may generate 50 kilowatt hours on a Sunday, on a sunny day on Monday. But when the sun, on a cloudy day on Tuesday, they may buy 50 kilowatt hours. Those to net out to zero. And at the end of the month, if lo and behold, that customer has bought a, used a thousand kilowatt hours but also generate a thousand kilowatt hours, then the only portion of the bill that they actually pay is that $8 a month customer charge.

So with the utilities are saying is well, let’s raise the customer charge. And that’s what they’re trying. And around the country we’ve seen proposals. One in a Wisconsin, I think, Madison Gas and Electric where they wanted to raise the customer charge, to I think a $60 a month. We’ve seen other proposals for $30, $40 a month and what that means though and one of the reasons that’s a problem is if you think about it, so what they’re saying is let’s say you have a one room efficiency apartment in Center City Philadelphia, you pay $60 a month. Let’s say you have a 10 bedroom mansion on the Main Line, you pay $60 a month. So that would be, so it doesn’t matter how much electricity you use except for a very small portion of the bill. Sort of oversimplifying it. But that’s the point is the larger the customer charge is, the less the customer’s usage matters. So it doesn’t, again, it doesn’t matter for that portion of the bill whether the customer again is using very little electricity or an awful lot.

And that’s bad. I think, in my opinion, at least for two reasons. One is that it doesn’t treat the low usage customers who tend to be lower income, for example, who were using less energy. It’s not fair to those customers. In addition, it doesn’t provide very much incentive for customers to conserve energy. And that is one of the things that we’re all looking for, I think as a society, is to use energy more efficiently, is to conserve energy. And if you have, if the vast majority of the bill is a monthly charge that you can’t do anything about, then what’s the point of conserving? What’s the point of turning the lights out when you leave the room?

So anyway, so again, to oversimplify, so that’s one of the reasons that the utilities proposals across the country and they have occurred right across the country to substantially raise the customer charge for everybody, not just for the solar customers who may just be a small percentage in a given state like Pennsylvania, but for everyone. They’re proposing to increase those customer charges by substantial amounts. And that’s been widely opposed by both consumer advocates and by environmentalists because of the impacts that that I mentioned. So that’s one of the things that utilities have proposed. I could mention a couple of others.

Stone: So basically what you’re saying is that everybody would have the higher fixed fee, no matter how much they use.

Popowsky: Right

Stone: And that puts an undue burden on people who may use less or may, as you mentioned, could you just, you know, raise the price on the per kilowatt electricity that you’re using?

Popowsky: Well per kilowatt hour. That’s right. Yeah and you can do that. The problem from again from the utilities perspective now is, let’s say they raise the price from 6 cents to 8 cents. Well now going back to the solar customer, they’re paying zero in that example because of the way net metering works is the net, the meter only knows a typical, you know, single meter that can operate in either directions is charging 8 cents for what you use, but it’s also reducing your bill by 8 cents for what you don’t use. So just raising the cents per kilowatt hour doesn’t address the problem that the utility has with respect to the solar customers. And that in fact, theoretically, at least at some point, gives rise to the kind of death spiral that they’re worried about. Because you can keep raising it and raising and raising it until you’ve got, until the majority of customers suddenly are paying nothing or very close to very little because of net metering. Whereas the remaining customers and now paying double, you know.

And let me mention by the way that there is a, you know, a very strong defense even of the net metering, and I just want to mention that. Which is that solar advocates would argue, and many do that, that the solar power that is provided to utility is very valuable.

Stone: In what wat?

Popowsky: Well, for example, let’s say that the time when it’s most expensive for a utility to provide energy is during peak periods, the hottest day of the summer, let’s say in the afternoon. Well, if that happens to coincide with the time when my roof, you know, from the solar owner’s roof is producing power that actually benefits the whole system because the utility can now use less of the expensive energy that they have to get from the grid because they have access to the energy that they’re getting from their solar customers.

Also, solar energy has no emissions. So, hopefully we as a society will eventually address the problem of climate change. And when we do, we’ll be glad to have a lot of solar power. The question in my mind, just getting back from my own perspective, is there are other ways to get solar power, by the way. It’s not just rooftop solar. Many of our most successful solar projects are very large. You can see them in areas, solar fields and solar farms and community solar, larger arrays of solar, which tend to be less expensive, less costly than doing an individual rooftop solar. Also in some ways can be more efficient in the sense that they’re often designed so that they can actually follow the sun. They can build on an axis so they can go up and down and follow the sun a little better.

So I think there are, even from an environmental perspective, there are, there’s a big debate, let me just leave it at that. Say there’s a very important debate I think going on across the country about the value of solar and particularly whether it makes sense to have that solar on rooftops, whether we want to promote that, or whether it’s better, a more economical and more environmentally beneficial to focus on larger arrays of solar panels.

Stone: In the meantime, it sounds like we do have two kind of separate but related issues here. One is that less electricity is being used. So how do you equitably pay for the grid so that everybody pays their share and they’re not unduly burdened. And the other side you do have declining revenues, but we still need the grid. I mean, solar power doesn’t really work economically unless you have a grid that you can sell into that you get your net metering rate from. So how do we keep the utilities revenues where they need to be and how do we also, again, what would the proposal be to make sure that everything’s handled equitability from the customer side?

Popowsky: Yeah. My own view is there’s an alternative way to priced solar, which is variously called a value of solar, avoided cost of solar where, and those sound like different things, but I think they’re pretty similar, which is basically what you’re saying is that net metering was a reasonable way to get the industry started. An alternative method, which is being used in some states, is to treat the solar energy that you’re generating, treat it as a distinct product, separate from the electricity that you as a customer are using.

For example, the city of Austin, Texas, which is a very progressive municipally-owned a utility in Texas. They have a tariff where what they’re saying is for whatever electricity you use, you pay the utility rate for that electricity. For whatever electricity you produce, that you generate, you receive a credit from us, from the utility based on the value of the solar. And the value of the solar could be higher than the retail rate or it could be lower than the retail rate. It depends on how much the utility would have to pay for buying generation from the wholesale market.

There are other benefits to solar. For example, if you have the solar right there on your rooftop, you don’t have to pay the cost of transmitting it from the power plant on the grid to you. And when you do transmit electricity, there’s something called line losses. You generate a hundred kilowatt hours over here, you may end up only end up with 95 kilowatt hours over there because electricity over as it flows, it loses some of its power. And you have what are called line losses. So you avoid line losses. You also get the, in the city of Austin, they also give you a credit for the environmental benefits of the solar generation, which is they acknowledge that there are environmental benefits.

When you add those numbers up, like I say, you could end up with a price that’s more than the net metering costs or less than the net metering costs. But at least from my perspective, you’re asking the right question, which is, you know, what benefits are you providing to the utility? What costs is the utility avoiding that other customers don’t have to pay? I mentioned earlier that one of the, to me, one of the more important factors now is the fact that we really are seeing the price, the cost of solar panels coming down, particularly in these large arrays. We’re seeing utilities that are now able to enter into wholesale contracts for solar power in large quantities for 4 or 5 cents a kilowatt hour, which is less than the total retail rate that you’d pay, effectively pay to a rooftop solar customer. So there’s a, I think there’s a good argument that the value of solar, you start with the wholesale value, and then you add in any additional benefits that you get from having that power located right at the customer’s premises rather than having to transmit and distribute it from the larger sources.

You can actually say, hey, that particular area is an area where we need more power. We need more generation. We may, if we didn’t have solar rooftop, we may need to build something else as a utility. There’s a project going on right now, in New York, in Brooklyn and Queens, where the utility is saying, well, we could spend $1 billion on a new major utility improvement on our side of the meter, or we could encourage projects on the customer side of the meter in terms of rooftop solar and energy efficiency and what’s called demand response programs, where you reduce your energy use at peak times. And what the utility is saying is that, hey, that actually could be more economical, not just for the solar customer, but for everybody. So again, it’s not a black and white debate. It’s a debate where we can be more granular in our analysis and say, let’s look at what are the benefits of solar depending on where you are on the network and what time of day you’re producing your electricity.

Stone: One related issue I’d just like to bring up here as the issue of simply electricity demand is flattened off, it’s declining. There is less electricity being sold. So, regardless of, you know, however you charge the net metering rates in these types of things, the utilities are selling less. So how do they maintain their businesses in that light?

Popowsky: Well, again, one of the things they’re proposing is, and it’s not so much that they’re selling without, aside from the net-metering issue, which you know, can be customers basically eliminating all of their uses…

Stone: We’ve also got efficiency, right?

Popowsky: Right. So, but on the other hand, we do have much more efficiency now and I would say that utility sales have flattened out maybe slightly declining. So one way that the utilities, again, want to deal with that problem is high customer charges. Again, that’s in mind, not the best solution. Another solution that’s been proposed in a number of states is something called a decoupling, where basically what you’re saying is if the utility sells overall a little bit less, let’s say they sell 1% less than they expected, they get to raise the price per kilowatt hour by 1%. Again, remember let’s say the price per kilowatt hour is 10 cents a kilowatt hour. Then maybe they can charge 10.01 cents, you know, and it depends if it’s a 1% or… So on the other hand, if they, if the utility is selling a little bit more than they expected, they have to reduce the per kilowatt hour charge by that amount. And the idea is that the overall revenue for the utility stays the same over time. That’s a solution that’s been proposed now in a number of states.

Stone: Our guest today has been Sonny Popowsky, former consumer advocate for the state of Pennsylvania and current advisory board member for the Kleinman Center. Sonny, thank you for appearing on the show.

Popowsky: Hey, thank you for having me and thanks to the Kleinman Center. It’s great to be a part of that now here at the University of Pennsylvania and the great work that the Kleinman Center is doing.

Stone: Thank you and thanks to our listeners for tuning into Energy Policy Now from the Kleinman Center for Energy Policy at the University of Pennsylvania. If you enjoyed today’s podcast and would like to share with friends and colleagues, give Energy Policy Now a five-star rating and review on iTunes and Stitcher. And of course you can keep up to date on the latest news, research, and events from the Kleinman Center by visiting our website, www.kleinmanenergy.upenn.edu.


Sonny Popowsky

Former Consumer Advocate of Pennsylvania
Sonny Popowsky is a member of the Kleinman Center Advisory Board and served as the Consumer Advocate of Pennsylvania from 1990 to 2012.

Andy Stone

Energy Policy Now Host and Producer
Andy Stone is producer and host of Energy Policy Now, the Kleinman Center’s podcast series. He previously worked in business planning with PJM Interconnection and was a senior energy reporter at Forbes Magazine.