As solar booms, utilities look to build new business models with strategic investments
Beyond simply contracting for solar, utilities are increasingly investing in the sector to ‘position themselves to be the utility of the future'
Solar energy is becoming a generation resource so ubiquitous that utilities are looking beyond simply contracting for new capacity and are increasingly moving into the sector themselves.
Solar added a record-breaking 14,762 MW of capacity in 2016, nearly doubling its 2015 growth. The resource added 39% of all new U.S. generation capacity in the year, making it the leader among all resources for the first time.
Growth was dominated by utility investment in 2016, a trend that’s expected to continue, according to a new report from the Solar Energy Industries Association and GTM Research.
Utilities will provide two-thirds of the 13.2 GW of solar capacity forecasted for 2017, estimates the U.S. Solar Market Insight 2016 Year In Review.
The expected new capacity is about 10% lower than what was deployed last year, but experts say it doesn’t herald the end of the solar boom. GTM reports that deployed capacity in the U.S. “is expected to nearly triple over the next 5 years.”
Solar’s cost competitiveness will continue to drive growth, particularly with utilities, said Shayle Kann, report co-author and vice president at GTM Research.
“Our projections are that solar will get 8% to 10% cheaper than its present $1/watt each year for the next few years,” he told Utility Dive. “It will likely fall to the low $0.80/watt range in 2020 and be competitive with natural gas and other generating resources without the federal tax credit.”
As solar has gotten more cost competitive, voluntary procurement — solar investments not driven by a government mandate — has become a more significant part of the market for utilities and corporate customers alike, Kann said. As prices fall further, the procurements are expected to increase.
Lower prices are also attracting utilities to previously-unfamiliar parts of the solar market, analysts say.
Since 2010, utilities have invested more than $2.9 billion in private providers of distributed energy resources (DERs), according to Utility Investments in Distributed Energy, a GTM report. That includes not just solar, but demand management, behind-the-meter batteries and other DERs.
“Utilities understand the utility-scale space well and will continue to invest in it, but are attracted to the relatively faster growth in the DER space and see its potential for long term value,” said Andrew Mulherkar, a senior research analyst and co-author of the report. “It is also an opportunity to capture customer relationships and brand and position themselves as a utility of the future.”
As solar’s price continues to decline and utilities gain familiarity with the distributed energy technologies, analysts see these strategic investments in the solar and DER sectors as a key strategies for companies to diversify their businesses and access new markets for growth.
Record 2016 solar growth
By 2022, GTM forecasts that more than 18 GW of solar PV capacity will be installed annually. In its record-breaking 2016, the sector added a new megawatt of capacity roughly every 36 minutes.
At 10,593 MW, central station PV was 72% of the 2016 build, representing a 148% year-on-year jump from 2015. California, Georgia, and Utah each added over 1.0 GW. Q4’s 5.2 GW was the biggest single quarter growth in solar’s history.
The key factor was the long-term extension and phase down of the 30% federal investment tax credit (ITC) extension at the end of 2015. Utilities procured an enormous pipeline of projects that developers had prepared to bring online before the ITC’s scheduled end-of-2016 expiration. Though the ITC was extended at the end of 2015, the biggest single part of that pipeline still went into service in 2016.
With what Kann called the “post ITC expiration expectation hangover” now dissipated, 2017 will likely see 8.7 GW of new utility-scale capacity, the USSMI reports. About 60% of that capacity will be projects that were originally scheduled for completion in 2016.
By the end of 2017, new demand is expected to begin driving a new wave of procurement. Development of those projects will begin but not be completed in 2018, making it a slow year. They will be brought online between 2019 and 2021 and meet basic “commenced construction” guidelines by the end of 2020 to earn the full 30% ITC.
Three factors, all due to solar’s cost-competitiveness with natural gas generation, are altering utility procurement of central station solar.
One is state renewables mandates. Nearly all utility-scale installations in 2015 and about half in 2016 were built because of state renewables mandates but only 36% of projects currently in development are to meet those policies. And almost all new procurement is non-mandate driven.
Second, the biggest non-mandate driver of utility-scale solar is the Public Utility Regulatory Policies Act (PURPA). It requires utilities to purchase the output of certain types of generation facilities if it matches the cost of other system resources. PURPA-installed solar generation is expected to be the biggest source of new generation capacity in 2017,according to USSMI.
The third trend is the continued growth of non-utility procurement of utility-scale solar. Corporations and institutions, motivated by self-imposed sustainability and clean energy goals and targets, contracted for or owned a record-setting 10% of new solar capacity, over 1 GW, in 2016, USSMI reported.
Non-residential, or commercial-industrial (C&I), PV added 1,586 MW in 2016, nearly 50% higher than the growth rate in 2015.
Much of the non-residential market was flat, Kann said. Community solar’s breakout year could, however, be just the beginning.
“Markets with legislated policies, like Minnesota and Massachusetts, are starting to show real strength,” Kann said. “States like New York and Maryland are coming next.”
In 2016, the U.S. added only 218 MW of community solar, Kann said, but that was a marked increase from the 50 MW brought online the year before. In 2017, GTM expects total installed community solar capacity to nearly double to 800 MW.
Community solar builders are expected to add twice as much new capacity, or about 400 MW, in 2017, he added.
This could be a significant underestimation if a forecast from the National Rural Electric Cooperative Association (NRECA) holds true. The co-op trade group expects its members to add 480 MW of community solar this year themselves, more than five times what they added two years ago.
“From 2018 onward, the non-residential space will rebound as community solar drives a growing share,” the USSMI reports. Improved financing for commercial-industrial arrays and a constantly improving “value proposition” for solar-plus-storage systems will add to the sector’s growth.
The residential solar PV sector’s growth, which had been at more than 50% per year for four years, fell to 19% between 2015 and 2016, Kann said. It saw 2,583 MW of new capacity, but “installers in major markets have cited difficulties including reaching customers outside of the early adopters,” the USSMI reported.
The top five state markets provided over 70% of 2016’s capacity, but important new markets in Utah, Texas, and South Carolina were also important contributions. The many and spreading policy debates over incentives, rate design, and net energy metering (NEM) were also central to the slowed market expansion, Kann said.
“Growth in 2017 will continue at a slower rate, more consistent with a maturing industry,” the USSMI reported. Longer term growth will depend on the strength of emerging state markets, how and when stater-level policy debates are resolved, the ability of installers to sell to new customer demographics, and the impact of solar plus storage in the more mature markets.
Utilities target strategic investments
As the price of solar and other advanced energy technologies declines, strategic investments by a "concentrated but expanding group" of utilities in North America and Europe are leading to more comprehensive planning for the emergence of DER, GTM Research’s Mulherkar said.
U.S. utility companies were initially focused mostly on non-residential distributed solar. This was documented in Mulherkar’s earlier report, “The New C&I Energy Management Landscape.”
“They see the rapid growth in distributed solar and other DER and they can see it is an attractive investment, especially in the C&I space,” Mulherkar said. “They are trying to figure out how to capture the value.”
A recent example was the bargain-basement acquisition by Mitsui of the bankrupt SunEdison’s C&I development assets for $15 million, he said.
These strategic investments have given utilities a better understanding of distributed solar and other DER technologies, Mulherkar said. Some are using that understanding to adjust their targets and expand their minority equity positions with acquisitions in a wider set of DER-associated investments.
Investment activity is increasing in direct customer energy management technologies and services, he pointed out. These are hardware or software solutions aimed at helping utility customers modify load, save energy and/or participate in demand response programs.
“The narrative has been that utility companies work against distributed solar and other DER because they fear it will disrupt their business model,” Mulherkar said. “There is some truth in that but there are also utilities looking to understand the DER space and profit from it by making these measured and calculated investments.”
Utilities are still just trying to understand how DER investments fit, he added. “Down the road, there appear to be bigger investments and partnerships coming that will combine utility strengths and vendor strengths in unique ways.”
An early example is a partnership between solar installer Sunrun and Northeast utility National Grid announced in January, Mulherkar said. It is a collaboration between Sunrun and the regulated arm of National Grid on a pilot grid services project and a $100 million equity investment by National Grid's the unregulated arm in Sunrun’s rooftop solar installations.
“This kind of more collaborative approach between utilities and DER providers is the direction we are heading,” he said.
A similar example is the Janaury purchase of Ross Solar by Con Edison Solutions, the unregulated arm of New York’s dominant electricity provider.
The utility goal seems to be “to position themselves to be the utility of the future," Mulherkar said. These investments allow them "to offer an enhanced level of customer service and engagement and provide not just commodities but advanced, customized energy products and services.”
The release of GTM’s most recent report on utility strategic investing was accelerated because the authors could not keep up with the market activity, Mulherkar said. And the deals keep coming.
"There were 37 investments in 2016, but there were nine in the first two months of 2017,” he said. “We could be on pace to see 50 deals this year.”
Utilities large and small show interest
Strategic investments in the solar sector aren’t a fringe subject for U.S. utilities. Already, the biggest companies in the nation are in on the game.
Duke Energy, through its unregulated Duke Energy Renewables development arm, is tenth on the international list of utility investors in DER, with five investments. It is fifth on the North American list, with $127 million invested.
Among its holdings is a majority interest in REC Solar, one of the biggest U.S. C&I sector solar installers. REC Solar and Green Charge Networks are partnering in a solar-plus-storage system offering.
Duke also holds a majority interest in Phoenix Energy Technologies, which provides behind-the-meter solar, energy storage, and demand management systems and services to help commercial customers reduce their energy consumption.
And Duke Energy Renewables and Schneider Electric have formed a public-private partnership with Montgomery County, Maryland, to build microgrid systems for county facilities that will include advanced microgrid controls, solar, storage, and combined heat and power.
Exelon, through its unregulated Constellation Technology Ventures arm, is third on the international list of utility investors in DER with 13 investments. It leads the North American list with $257 million invested.
“Constellation Technology Ventures invests in growth-stage companies representing innovative energy technologies and business models that complement Exelon’s core businesses,” Spokesperson Kelly Biemer told Utility Dive. The goal is DER-oriented solutions because “demand for distributed generation will continue as customers seek more control over how their energy is produced and supplied.”
Mulherkar said the numbers in his report on utility investments “aren’t really big yet.” But, he said, the deals are “being made at an accelerated pace in the last 18 months and especially since the emergence in 2015 of Energy Impact Partners.”
Energy Impact Partners (EIP) is an investment fund that guides unregulated utility investors to strategic equity investments, CEO and Managing Partner Hans Kobler told Utility Dive.
The fund invests in "emerging and innovative but proven distributed energy resource (DER) technologies and business models with real revenues," Kobler said. The aim is to "help utilities prepare for the new, highly volatile, decarbonized, decentralized digital future.”
EIP's utility investors, according to its website, are Australia’s AGL, the U.K.-based National Grid, Canada’s Fortis, Madison Gas and Electric, Southern Company, Xcel Energy, Ameren, Great Plains Energy, Avista, and TEPCO.
By investing in the EIP fund, utilities become limited partners and minority shareholders in the technology companies identified by EIP’s analysis of hundreds of companies in dozens of sectors, Kobler said.
The utilities' investments are not primarily about the rate of return, Kobler said. EIP is looking for companies that seem promising as businesses, may make good utility partners or acquisition targets, or provide insight for the shareholders into the DER marketplace.
“The utilities want to know what the future will look like or who the next SolarCity or the next leading battery maker will be,” he said. “Another key use of a strategic investment is to learn more about a company and reduce the risk of acquiring it.”
EIP has made five investments. Enchanted Rock provides onsite natural gas backup power. Spark Fund streamlines customer access to energy efficiencies. Sense offers an advanced home energy monitor. AutoGrid’s system management optimizes distributed generation, storage, and demand response. OpusOne software facilitates DER integration into distribution systems.
These are not high risk venture investments, Kobler said. “We are one of the most conservative of strategic equity investors. Our approach aligns with the conservative approach utilities have to take because they have the responsibility to keep the lights on.”
Investing through EIP, he said, is a way for utilities to confront the changes in the industry, get beyond the so-called death spiral, and proactively design the utility of the future.”
Ed Schlect, chief strategy officer at Avista Utilities, an EIP investor, said the fund is helping his company build new business models.
“We know the industry is changing and the momentum is toward the digital utility,” Schlect told Utility Dive. “We have two choices: To build walls and try to be the traditional utility or to participate in the transformation of our industry.”
Avista is a small utility without a big R&D budget to drive that transformation. It has its own pilots in smart grid and battery storage and it is offering services to its solar customers, “but we can only do so much so,” Schlect said.
“EIP adds scale to our corporate venture investments. They give us more access to the deal pipeline and their expertise in assessing those deals.”
EIP working groups also allow participant utilities to get the other limited partners’ perspectives, he said. Avista's ultimate goal is to better understand how the emerging technologies will fit together on the grid it manages.
“The questions are where the interface points on the grid are, and how the customer participates, and how to maximize the grid’s efficiency, and how to create value for the utility and for our customers,” Schlect said. “We are still exploring the questions raised by our strategic investments. If you find anybody who has all the answers, put me in touch with them right away.”