Will utilities fight, embrace, or just accept solar power?
The utility industry is notoriously slow to innovate, using essentially the same technology to generate and transmit power as it did a century ago. But until the ability to generate your own power came along — ie. residential and commercial solar — there were few viable alternatives to the traditional business model.
As a result, some utilities will fight the adoption of solar energy, particularly on rooftops, and some will embrace it. The answer to who will prefer what depends on that a utility’s incentive is.
After the deregulation of wholesale power — which some in the industry also fought by the way — there are now regulated and deregulated markets. A regulated utility will own power generation, transmission, and distribution and get a set rate of return that’s regulated by the state and regional regulators. Deregulated states are far more complicated because every state is different but in general a power plant owner will sell power to a utility at a market price instead of a set price and a customer can choose the utility they buy their power from (reality isn’t quite this simple).
If you’re an unregulated power producer or utility and you see an opportunity to own solar asset it may be an attractive investment option because you’re in a competitive market. But if you’re in a regulated market there’s little incentive to adopt new technology that might upset the profits of your monopoly, especially if someone else owns the asset (ie. a solar lease).
The forward thinking utility
It is Nat Kreamer’s belief, and one that I agree with, that eventually solar power will infiltrate utilities across the country whether they do so willingly or kicking and screaming. The utilities that view solar as a productive asset that can generate a steady return on investment will be the ones who profit more quickly.
In essence, Kreamer thinks that the role of leasing solar, which is currently dominated by Clean Power Finance, SunRun, SolarCity Corp (NASDAQ:SCTY), and SunPower Corporation (NASDAQ:SPWR), can eventually be dominated by utilities — where CPF could provide financing. If you think about it, this model makes a lot of sense. Utilities have available low cost capital and already have monthly contact with their customers. Why shouldn’t they play a role in building the future of electricity generation?
NRG Energy Inc (NYSE:NRG) and Edison International (NYSE:EIX) are starting to make this transition. NRG Energy Inc (NYSE:NRG) has built a solar leasing subsidiary called Residential Solar Solutions and Edison International (NYSE:EIX) subsidiary Southern California Edison was one of the first utilities to embrace solar with a 250 MW plan for commercial solar in 2008. More recently, Edison International (NYSE:EIX) has invested in a fund organized by Clean Power Finance, another ownership option for utilities.
The exact model utilities take state by state may change and it may even evolve over time but the ones who find a way to make solar a part of the future will prosper. Those who allow third party installers like SolarCity Corp (NASDAQ:SCTY) and SunPower Corporation (NASDAQ:SPWR) own the power generating assets give up power in the electricity market and will eventually pay the price.
Solar is coming
Like it or not, solar power is coming and with installations up 76% last year and residential solar growing rapidly companies have to evolve. The transition utility companies make will be very important and it will be key to see who is able to make solar an asset and who looks at it as a liability.
The article Utilities Must Adapt to the Intrusion of Solar originally appeared on Fool.com and is written by Travis Hoium.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares as well and has the following options: Long Jan 2015 $7 Calls on SunPower, Long Jan 2015 $5 Calls on SunPower, Long Jan 2015 $15 Calls on SunPower, and Long Jan 2015 $25 Calls on SunPower. The Motley Fool has no position in any of the stocks mentioned.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
