DERs in 2016: What experts expect for a booming sector
Tax credit extensions can be a big opportunity for utilities and DER developers in the upcoming year
Just before the new year, the wind and solar industries won some hard-fought extensions of vital federal tax credits in a omnibus spending bill brokered in Congress. But that's just the beginning of a big 2016 for the renewable energy industry, according to sector insiders.
More affordable wind, utility-scale solar, and distributed solar are going to leverage new applications in energy storage and smart devices, experts told Utility Dive. Synergistic distributed energy resources (DERs) will attract corporate buyers, shared renewables developers, and even mainstream energy sector players.
Utilities will also incorporate DERs into planning processes, transforming formerly hostile regulatory proceedings into collaborative, solution-oriented rate design conversations. The result will be new levels of grid reliability and resiliency, making it easier and cheaper than expected to meet Clean Power Plan goals.
“Regulators are realizing it is no longer business as usual and the status quo isn’t going to work going forward,” said Marlene Motyka, Deloitte Center for Energy Solutions alternative energy leader.
Regulators need to figure out how to work with utilities and the market to provide customers with "the affordable, reliable, clean electricity they want. It is the over-riding trend that cannot be ignored.”
Tax credit extensions
The federal investment tax credit (ITC) extension will add an additional 25 GW of solar installed capacity by 2020, a 54% increase over what would have been deployed without the extension, according to GTM Research. The production tax credit (PTC) extension will result in as much as 19 GW of additional wind, Bloomberg New Energy Finance (BNEF) estimates.
The two industries will bring $73 billion to the U.S. economy’s energy sector and, by the time the tax credits expire, “solar and wind will be the cheapest forms of new electricity in many states across the U.S,” according to BNEF.
In the coming year, the ITC extension will allow solar developers who had been gearing up to beat the December 31, 2016, deadline in the previous tax credit to take a breath and start thinking long term.
Next year will, however, be the last year wind developers can qualify for the full $0.023/kWh PTC before it drops 20% in 2017. Since the PTC drops a further 20% in 2018, 20% more in 2019, and terminates in 20202, analysts expect developers to rush to meet minimum “in-construction” terms for projects they can complete each year. That means wind developers will have to run the familiar race to meet tax credit requirements annually, but with more predictability for the next few years.
One broad subject DER experts are talking about is the disruptive force of combined DERs.
“Disruption is the potential for new third party companies to get between customers and utilities,” explained Navigant Research Associate Alex Eller. “It is the potential to threaten utility revenues and force them to react.”
Navigant expects demand response (DR) to be the most widely deployed set of DER technologies in 2016 and going forward, Eller said. It forecasts 40 GW of DR to be brought online globally in 2016, ramping up to “about 1100 GW of new DR capacity through 2024.” Market leaders will be Comverge, EnerNOC, Honeywell, Schneider Electric, and Eaton.
Navigant expects solar to be the next biggest deployment among DERs, with just under 25 GW of distributed solar installations of less than 1 MW coming online worldwide in 2016.
“The big story that goes with PV is residential and commercial energy storage,” Eller said.
That combination of solar and storage will be the fast-growing and likely to be the most disruptive of the DERs, he added. “Utilities around the world are experimenting with distributed storage, and with solar and storage.”
Vermont’s Green Mountain Power (GMP) is the best example, he said. Working with Tesla, GMP is testing a customer ownership model, a utility ownership model, and a utility-customer partnership in owning and using stored power.
A suite of DERs?
“The solar space will get much more interesting in 2016,” said James Mandel, principal for Rocky Mountain Institute. He expects standard offerings to expand to include a “full suite” of DERs, and he expects to see such offerings coming from major solar companies.
“Home control is something consumers will start demanding and expecting. Grid operators are going to start asking for smart inverters. Batteries are already being sold as an added feature to solar,” Mandel said. “And the demand flexibility that comes with home control will drive consumers toward more and smarter devices.”
A standard DER suite offering will give the four big players – SolarCity, Vivint, Sunrun, and SunPower – a competitive advantage, he believed.
Almost half of solar is now sold by small companies, Mandel explained. But managing a standard offer that includes smart inverters, home controllers, rate optimization intelligence, and battery storage is too complex for most small installers and local solar contractors.
In energy storage, the majority of battery systems were sold and financed in 2015 “on a single use case,” Mandel said. “Stacked value will be the norm for customer-sited batteries in 2016. And that will lead a stacked benefit or stacked value proposition for other DERs.”
Load management will contribute to grid services and it will lead a debate about what DERs can do across the board, he added.
“Though RMI work has shown the multiple benefits solar can provide, it is still mainly used for on-site electricity,” Mandel said. “But as people start to understand the stacked values in batteries, they will see a much broader range for other DERs.”
Utilities will begin to think “more holistically” about DERs in the coming year, said Julia Hamm, President and CEO of Solar Electric Power Association (SEPA), who is leading the trade group in an expansion beyond solar and into all types of DERs.
“We want the electric industry to think beyond just offering customers a rooftop solar asset or participation in an energy efficiency program or participation in a demand response program,” Hamm said. “We want utilities to think about the end objective, about whether it is the lowest cost bill or high reliability or high power quality, and whether it is for the individual customer or the system, and to think about how to combine the suite of technologies to reach the objective."
Load, electric vehicles and resiliency
A consequence of a variety of factors, including the increasing use of DERs, is that retail electricity sales will fall for the sixth of the last eight years, Mandel said.
“Load growth has ceased to exist," he said. "Load is falling and we expect that decline to accelerate.”
Electric vehicle charging will, however, boost load, Eller said. Navigant predicts 7.6 GW of new electricity consumption for EV charging globally in 2016, rising to over 55 GW in 2024.
“It makes the point that not all DERs are bad for utilities,” Eller said. “It will be a huge opportunity for utilities and but it will necessitate a lot of new investment from utilities and a restructuring of their business model so it is a disruptive technology but in a different way.”
Utilities are already moving to own EV charging infrastructure or partner with third parties to install it. “Another aspect of disruption is that they require massive new investments in the grid as a whole so it is not necessarily a bad thing for utilities,” he pointed out. “If they invest in EV infrastructure, they can rate base it and increase load at the same time.”
The push for resiliency after Superstorm Sandy will continue to be a driver for DERs in 2016, Motyka said. Regulators and utilities are realizing distributed generation can speed recovery after outages, especially when linked through a microgrid to energy storage and a control system isolated from the main grid.
There will be a 127% increase in U.S. microgrid capacity from a more than $3.5 billion investment between 2015 and 2020 with renewables supplying 26% of the cumulative 2.8 GW, Motyka said, citing a recent GTM Research report.
Development of commercial microgrid markets has lagged primarily because a microgrid is a more complicated, non-standardized product, Eller said. “Every installation is a one-off with a lot of unique, time-consuming engineering and integration so it is only cost-effective for certain customers,” he explained.
It will, however, become increasingly important for utilities to consider offering such services because customers are discovering its value. In markets where solar-plus-storage systems from companies like Stem and Green Charge Networks are available, early adopters have found intelligent controls can turn the storage and generation into “nanogrids” with building-level microgrid functionality.
”Global solar PV-plus-energy storage nanogrid revenue,” Navigant has reported, “is expected to grow from $1.2 billion in 2015 to $23.1 billion in 2024.”
Utility-scale and corporate solar in 2016
With a five year extension of the 30% credit, BNEF’s report “How extending the investment tax credit would affect US solar build” estimated in October that utility-scale solar PV installations would be 36 GW.
“Without the artificial deadline, we expect more projects to come online, we expect the build to be smoother, we expect fewer bottlenecks in 2016 as a result of the rush, and we expect second tier developers to have greater access to capital,” BNEF analyst and study co-author Maddy Yozwiak told Utility Dive.
Given this growth in utility-scale solar and recent price trends, GTM Research senior solar analyst Cory Honeyman said utility-scale solar contracts will likely come in regularly over the next two years at “less than $0.04/kWh.”
That would accentuate trends already in motion. Utility off-takers will increase their buying of big solar because it is the best deal on the table, and corporate renewables procurement will continue growing, increasingly justified not just by sustainability goals but by cost, Mandel said.
“It is economic for them," the RMI analyst said. "It is good business.”
Mandel also expects 2016 to be the year when mainstream non-renewables energy players move into the DER space.
“With low oil prices and little growth in traditional generation, there are a lot of companies with good access to capital, sophisticated engineering, and good scale, looking for growth,” he said. “That will shake up competitive dynamics.”
More big business buy-ins will change utilities’ attitude toward building solar, Hamm believes.
“Suddenly their biggest customers are telling them they want the same thing residential customers are demanding,” she said. “Utilities can’t afford to say ‘no’ to their big corporate customers. They have to find a way to give them that option.”
Motyka agreed: “Corporations can’t be ignored." A 2015 Deloitte survey showed 55% of businesses generate some portion of their power on site, up from 44% in 2014. Wind and solar make up 13% of the onsite supply, she said.
“Corporations are not going to back off,” the Deloitte analyst said. “The new ITC and PTC extensions will encourage companies with existing renewables targets to increase them and others to look at where they stand.”
Community solar will also continue to grow, both Hamm and Motyka concurred.
“In 2010 there were only two shared solar projects and in 2015 there are over 50 projects across 19 states,” Motyka said. “NREL expects 11 GW of community solar by 2020.”
“More and more utilities are understanding the different models and realizing they don’t have to create a program from scratch because there are templates available they can tweak and replicate within their organizations,” Hamm said.
What to expect in policy debates in 2016
Experts agreed that the many heated rate design disputes of the last two years are about to give way to something more constructive.
Deloitte is watching New York's Reforming the Energy Vision. The initiative is overhauling the state’s energy grid and utility regulatory system, Motyka said. “Renewables will play a key role and I would not be surprised if it is used as a model by other states as they move to regulatory reform.”
RMI counts regulatory debates over fixed charges in at least half the states. But demand charges, often paired with new time varying rates or other rate structure changes, seem to be emerging as “a workable alterative,” Mandel said. “As an optimist, I believe attribute-based rates can win over fixed charges.”
SEPA is watching the same debates. Opponents to fixed charges “have been saying ‘no’ but it ended there,” Hamm said. “They didn’t have ‘here’s what we want instead.’”
But, she said, they have begun to realize “they can only say ‘no’ for so long without saying ‘no – instead we want this,’” she said. “We are beginning to see an environment more interested in collaboration and solutions.”
No single answer has emerged, she said. But "Smart Rate Design for a Smart Future," a report from the Regulatory Assistance Project, outlines a set of well-received steps and recognizes energy efficiency, demand response, and customer-sited distributed generation as important, cost-effective resources.
Compensation mechanisms “range from value to grid approaches using avoided costs to the establishment of a system of distribution credits,” the paper reported.
“What value the distributed resource provides to the grid is determined using avoided cost calculations that can be made system-wide or, preferably, are location specific. While the former uses an average rate for DER, the latter is based on location-specific costs and projected growth rates.”
SEPA's Hamm said “We are not quite to alternative solutions ... but we are turning the corner on people realizing it has to happen and happen quickly.”