Solar Power Continues to Conquer the World

The Economist reports anew on my favorite topic: how solar power will kill utilities.  Solar power is rapidly becoming more price-competitive, leading Europeans to become extremely fond of mounting them on their roofs.  Power is rapidly becoming cheaper and greener every day.  What’s the problem?

For established utilities, though, this is a disaster. Their gas plants are being shouldered aside by renewable-energy sources. They are losing money on electricity generation. They worry that the growth of solar and wind power is destabilising the grid, and may lead to blackouts or brownouts. And they point out that you cannot run a normal business, in which customers pay for services according to how much they consume, if prices go negative. In short, they argue, the growth of renewable energy is undermining established utilities and replacing them with something less reliable and much more expensive.

Their basic issue is this: utilities run a business with enormous fixed costs that are suddenly facing variable demand.  In the good old days, they would forecast out electricity consumption and decide how much they needed to charge, and they would lobby local regulators who would approve their price structure.  Over decades-long timescales, they would amortize their absolutely massive capital investments.  The problem with that is that any drops in demand would completely screw them up – their variable costs were very low and their fixed costs are huge, which means they are extremely vulnerable to drops in price.

Today, solar is driving just that.  There’s a lot of noise made about feed-in tariffs, but that’s just a sideline to the larger picture of fixed-cost vulnerability.  The basic dynamic facing utilities is that they cannot deal with any drop in projected demand.  As solar eats in to their demand base, they will need to raise prices, making solar more price-competitive.  Absent heavy regulatory intervention to basically ban distributed solar generation, utilities are the walking dead.  And they know it!


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