It’s always sunny in San Diego, California, or at least it seems that way.

The vast majority of U.S. electric utilities have very little solar on their grids — less than 1% penetration. But that’s not the case for San Diego Gas & Electric (SDG&E).

The utility has about 45,000 rooftop solar customers today — and that figure is growing fast. The total number of solar installations is increasing at a rate of 4-5% per month, according to SDG&E.

About 3.2% of the utility’s customer base has gone solar, if you consider the number of rooftop installments among SDG&E's 1.4 million meters in San Diego and southern Orange counties. (In July, when the utility reported it had 39,000 solar rooftops, the nameplate capacity of all the installations came to 270 MW — the equivalent of 5.9% of SDG&E’s 4,600 MW peak load.)

The issues caused by rooftop solar are some of the biggest challenges that SDG&E faces today, James Avery, senior vice president of power supply, told Utility Dive in an interview at SDG&E’s headquarters outside of downtown San Diego.

“There’s this interesting situation where people have a perception of, ‘I’m putting solar on my roof, I’m doing something that’s good,’” Avery said. “Yet at the same time, they don’t realize that they’re actually creating burdens on the system that everyone else has to pay for.”

The problem, as SDG&E would have it, is that the adoption of solar makes the electricity system harder to run, but solar customers pay less for it.

Solar troubles in sunny San Diego

As in most locales, solar output in California peaks in the naturally sunny middle of the day. But lots of people are at work and there isn’t much demand on the system. SDG&E’s system peaks closer in the evening, when people get home from work and the sun goes down. The drop in solar production almost perfectly coincides with the utility’s daily ramp up to peak demand.

“I don’t see that solar is ever going to be a significant benefit to the distribution grid,” Avery said. "If you could give me solar that produced energy at 8:00 pm at night, it would make a big difference where I put it, because then I could put it on heavy distribution circuits that are heavily loaded," Avery said. "But I'm a realist — you're not going to give me solar that produces power at 8:00 pm at night."

The soaring number of solar installations has created “significantly high intra- and inter-class subsidies” amounting to over $100 million per year, according to Avery.

Solar-induced cross subsidies are the subject of industry debate in California and elsewhere. The average residential customer with rooftop solar in SDG&E's territory pays only 54% of the cost to serve them, according to a CPUC study.

However, not all stakeholders agree that solar is the cause of the problem, per se. It is important to remember that net metering "is not the only cross subsidy embedded in electric rates," energy consultant William Pentland wrote in a recent op-ed on Utility Dive. Pentland argued that the cross subsidies in California are evidence of a greater problem — the traditional utility cost-to-serve rate recovery model. 

For Avery and SDG&E, the issue comes down to the flawed design of California’s current rate structure.

After the California energy crisis in the early 2000s, the state legislature enacted a four-tiered rate system to protect ratepayers. The law froze rates for the lowest two tiers and it remained that way until last year, when the legislature passed a rate reform bill. The frozen tiers created severe disparities between higher-use and lower-use customers — the top two tiers were paying 50% more than the cost to serve them, according to the utility. 

The rates are not aligned with the true costs of running the system, according to SDG&E. The fixed costs of operating the grid don’t change with growing rooftop solar penetration, but only about 15% of the utility’s costs are variable.

“The only incentives [customers] have today are to try to manage their way around the utility rates,” Avery said at an industry conference in June 2014. Rooftop solar “avoids energy, but it doesn’t do anything to serve the capacity needs on our grid.” 

Upset customers have approached him over the unfairness of the rate structure, Avery said. “If you were sitting right next door to someone that you were essentially subsidizing to the tune of a couple thousand dollars a year, you’d probably be a little upset.”

SDG&E: Not against solar

Despite the issues caused by solar, Avery wants to be very clear about one thing: SDG&E is not against solar.

“In our case — and in a lot of utilities’ cases, and maybe they don’t all realize this — I’m not competing with somebody else,” he said. “If my customer is using twice as much power, half as much power — my earnings are the same. I’m decoupled. It does not matter to me from that perspective.”

“There’s no doubt in my mind” that customers want a cleaner grid, he said, which is why so many are going solar. But he also wants to make sure SDG&E’s rates are “fair and equitable” to all customers and align “with the business that we have today.”

A utility veteran who has worked at American Electric Power and Citizen Utilities Company, Avery recognizes that SDG&E is “in a unique position in our time and history.”

“Utilities used to be perceived as, well, they’re really there to protect their own interests and help with the customer. That’s not the case today. If you think about it, the utility is probably biggest advocate on behalf of the customer,” he said. “Our role has started to become the protector of the customer.”

'The right incentive is the trigger' to changing customer behavior

Like many in SDG&E’s service territory, James Avery has a swimming pool, owns an electric vehicle and has solar on his rooftop. But he uses them a little differently.  

Avery has programmed his home to be use energy at the right times of the day — when it will impact the system the least. He installed a controller on his pool pump to run when his solar panels are generating. He replaced the most-used lights in his house with LEDs and set them on timers. He set his air conditioner to pre-cool his house from midnight to noon, and not run after. And he charged his electric vehicle in the middle of the night.

Avery’s neighbor also has a pool, an electric vehicle, and solar panels, but he doesn’t do the same thing — even though Avery has told him about the impact on the system. When asked why not, the neighbor responded, “Change [SDG&E's] rates and I will.”

“He isn’t going to change his behavior because the rates don’t incent him to change his behavior,” Avery said. “I do it because I want to demonstrate that it’s easy to do.”

If 20% of SDG&E customers were to make similar changes, Avery estimated it would translate to a 20% reduction in rates. That’s because the changes would reduce the utility’s exposure to peak demand — the single biggest contributor to SDG&E’s costs.

SDG&E wants to align electricity rates with the cost of doing business. That means incentivizing customers to use energy during the right times — when the costs of running the system are lower.

SDG&E is working on rectifying these issues through its next rate proposal, Avery said. The proposal has already been filed with the California Public Utilities Commission and SDG&E expects a decision later this year.

The proposed new rate structure has two tiers, and a third optional non-tiered time-of-use rate for residential customers. The utility eventually wants to move its customers to time-of-use rates by default. The proposed rate design also includes a monthly fixed fee, starting at $5 and moving to $10 by 2018. 

But will rate changes really get customers to change their behavior as SDG&E would like? The fact is that very few utility customers actively think about their electricity usage today. And unlike the price of gas, not many know the price of power.

If and when the utility does changes its rates, it will be “critically important” to educate customers and get them to take the appropriate behaviors, he said.

“To get the customer to care, the right incentive is the trigger,” Avery said. “You get your number high enough, you’ll find that people are interested.”

Avery imagines a world where your house pre-cools during the off-peak, where your electric water heater delivers demand response during the peak, and your electric vehicle charges based on price signals.

“All these things today are reality. They can happen right now," he said.

SDG&E on the future: ‘Our customers tell us what they want'

When the right incentives are in place, what role will SDG&E play?

Avery is unequivocally clear: “If we are going to sit here and presume that we are going to be a pipes and wires company only and sit back, then we are forsaking our customers — and that’s all we should be.”

What’s the point of having a relationship with the customer if you’re not going to do anything about it?

SDG&E is already delivering new services and advising customers on energy, but there’s a lot more they can do, according to Avery. “Our customers trust us,” he said, adding that the utility’s energy expertise is “one of the things they like best about us.”

This gets into the hard question of how SDG&E builds new customer-oriented, service-based business models — and the even harder question of whether regulators will enable them to do so.

For SDG&E, it’s a matter of going into the home where it makes sense, and partnering with third parties where that makes sense.

“We have gone through an evolution — in our company and in the industry — where at different times the regulators wanted us to take on different roles,” Avery said. “It has really evolved to the point where we are the customer advocate. We are the ones who have the connection with the customer. Our customers tell us what they want.”

Despite being excited by the innovation taking place in the energy sector, Avery doesn’t want to stray too far from the core utility mission.

“You cannot forget what you are here to do. That’s to provide safe and reliable power,” he said. “But at the same time it is also to meet our customers’ needs. Sometimes those needs are unspoken — they don’t know them yet.”

Utilities must solve problems of tomorrow

James Avery has a message for the industry: “If you are not prepared for the change, you’re too late.”

“If somebody were to come to me and say we have this problem, we’ve got to start thinking about it — it’s too late,” he said. “We had to start thinking about these problems before they became problems.”

When deregulation was first coming about, SDG&E examined the challenges that lay ahead. One of the big concerns was that the utility owned a lot of aging infrastructure that was just getting older and older.

While the industry’s System Average Interruption Duration Index (SAIDI) numbers have "skyrocketed," SDG&E’s numbers have trended slightly down “because we put focus on a problem that was 15 years out,” Avery said.

"We didn’t install [the self-healing grid] because a customer said, ‘I can’t handle a two hour outage anymore,’” he said. “We installed it because we thought it was a way to provide better service.”

And when SDG&E saw that electric vehicles were coming, the utility understood that DC fast chargers would come out as well. DC fast chargers use 100-and-something kilowatts for a couple minutes and go away just like that.

“That’s pretty devastating on the grid,” Avery noted. To address the problem, SDG&E has proposed installing electric vehicle charging stations at workplaces and multi-family dwellings.

Tomorrow's big problem? For SDG&E, it's 15% solar

The challenge facing SDG&E is the continued growth of rooftop solar in its territory. The good thing is that the utility has been thinking about it for some time. 

“We identified that rooftop solar was going to start creating an issue when you to about 15% penetration on a distribution circuit,” Avery said, meaning 15% of the peak capability on that load could be served by solar.

“When it gets to that stage, the intermittent issues associated with the solar can create havoc on our system,” he said. “Now — keep in mind a lot of our system is antiquated analog equipment.”

For Avery, the problem of rooftop solar has become a question of: “How do we deploy new technologies to solve some of the problems of the past?”

SDG&E and many other utilities use analog devices — load tap changers, voltage regulators, and switched capacitors — to keep voltage on distribution circuits from sagging. But with the intermittency of solar, the voltage can swing all over the place, causing the devices to act far more often than they normally might.

“[The devices] were intended to switch on in the morning and switch off at night. They were designed to last about 30,000 operations – 30 years," Avery said. "Now, they could have 30,000 operations in 3 years.”

Six or seven years ago, before the solar boom, SDG&E’s chief engineer figured out that they could make smart inverters that could transfer DC voltage from the solar panel to the grid while protecting the circuit. Smart inverters are commonly used in the industry today to do just that. 

'Wealth of opportunities' exceed what's out there today

While solar is a burden on the system today, Avery acknowledges the equation can always change in the future. But “until you couple solar with energy storage devices, it's not going to be a benefit to the grid," he said.

 “I don’t want to suggest that what works for us, works for all utilities,” Avery said, pointing to his utility’s small footprint. But for an industry that’s changing fast, SDG&E — a utility located in a progressive and early adopting state — is one to watch.

The utility has already come a long way in the last decade alone. Driven by state policy, SDG&E exited the coal and nuclear businesses, retiring its “big old dirty base load steam boilers” and replacing them with renewables and new natural gas-fired turbines.

“10 years ago, our utility was less than 0.5% renewables,” Avery said. “Today, we are 32% renewable.”

But despite all the change that’s already happened, Avery knows there’s a lot more on the horizon.

“We haven’t begun to think of the technologies that will evolve” out of the digitalization of the grid, he said. “The wealth of opportunities far exceed the programs and applications that exist today.”