Original artcle posted on U.S. News by Meg Handley, March 25, 2013. Click here for the original article.

 

Most of the attention may be focused on domestic oil and gas production, but it could be solar power that really helps the United States on its path to energy independence.

Aside from the high-profile bankruptcy of Solyndra—the solar panel maker that defaulted on a $528 million federal loan in 2011—the industry has been on a tear over the last couple of years. Solar installations are up more than 75 percent, according to the Solar Energy Industries Association, which projects another 65 percent increase in 2013. The industry's rapid expansion has made solar the fastest growing energy source in the United States, according to the SEIA.

Much of those gains are thanks to a combination of tumbling installation and equipment costs—photovoltaic solar costs dropped almost 30 percent in 2012, the SEIA reported—and the rise of an innovative approach to financing expensive rooftop solar panels called third-party-owned solar.

With this approach—also known as solar service—homeowners no longer have to pony up tens of thousands of dollars to enjoy the long-term cost savings of solar power. Instead, a solar service company purchases the rooftop solar panels—which run about $30,000 on average—and installs and maintains them. The homeowner then purchases power generated by the panels from the solar service company at about a 20 percent discount of what they would pay for power from a utility, according to some estimates. At night or when it's cloudy, the homeowner is still hooked up to their local utility and purchases power from there.

"Homeowners used to be slaves to their utility," says Edward Fenster, co-CEO of Sunrun, a California-based solar service provider. "The only way to get power was from a centrally generated source. Now solar service is providing the average consumer, for the first time, choice in how they want to get their electric power."

But not everyone is excited about the increasingly competitive solar sector and its applications in the residential market. In 2012, the residential solar market grew a staggering 62 percent, with solar service accounting for half of all new residential solar installations in California, Arizona, Colorado and Massachusetts, according to market analysis firm GTM Research. After 2013, the growing adoption of third-party-owned solar will "start to erode the utility sector's market share," the report added, a trend that's making utilities increasingly nervous.

A lot of the angst has to do with how utilities make money. Instead of relying on the amount of power sold, most utilities earn a rate of return based on the assets they own, such as power plants and transmission lines. The larger the asset base, the more potential to increase their profit with the expansion of generation, transmission and distribution infrastructure.

But with less demand on the grid thanks to increased adoption of solar power and other factors such as more energy-efficient appliances, utilities have less and less justification to build more infrastructure that would increase their asset base and revenue. "It's nothing if there are just a few of these [rooftop systems], but utilities see them spreading and that poses a big problem," says Michael Burr, editor-in-chief of Public Utilities Fortnightly, a trade publication for the utility and energy industries. "[Company executives] are taking this seriously on a level they never have before. If the trend continues with solar being increasingly economic, as it has been on an accelerating basis, within five years solar will reach grid parity."

But utilities aren't standing idle in the face of a burgeoning threat from rooftop solar. According to Sunrun's Fenster, they're reacting "aggressively," threatening potential rate increases and villainizing solar service for shifting higher costs onto non-solar users. Other utilities are responding by phasing out solar energy incentives and putting caps on how many homes, schools, and other facilities using solar can participate in net metering, an arrangement that allows customers using solar to earn credits while their home or business uses solar-generated power. "Arizona Public Service sent a note to customers that said because people installed energy-efficient devices and recycled refrigerators, they had to raise electric rates," Fenster says. "Utilities have never faced competition and they're so used to having a monopoly, they're being very aggressive about it."

The situation isn't quite so black-and-white, according to other industry experts who say that while the rise in customer use of rooftop solar is a concern it isn't a death knell for utility companies. That's because there's plenty of work to do updating the nation's 100-year-old electricity grid infrastructure, says Gary Stern, director of regulatory policy at Southern California Edison. "There is potentially less need for new transmission lines as a result of local generation," Stern says. "But we're not hungry for new investment—there's plenty of opportunity dealing with and upgrading the existing distribution system."

Nevertheless, a fundamental sea change is occurring when it comes to the principles that have governed the power industry for more than a hundred years. Until recently, electricity generation has been almost solely wed to large, centralized power generation plants with transmission and distribution lines connected to demand centers because that was the most economical way to produce and deliver power to customers.

But that predictable, century-old formula is crumbling, as a new economy of scale emerges in the manufacture of solar panels, which have become increasingly cheaper in recent years. "Now the economy of scale is in manufacturing, putting out larger and larger volumes of things that look more like a silicon chip," Burr says. "It's an approach to the economy of scale that caught utilities blindsided."

Despite the steep drop in equipment and installation costs, the solar industry still faces hurdles in expanding adoption, not least of which are state regulations that prevent or make it very difficult for solar service companies to operate in certain states. Although those in the industry welcome a more coherent national strategy when it comes to the place of renewable energy in electricity generation, the reality is oversight of utilities has historically been left up to state and local governments. That has resulted in drastically different policies across the country with just 22 states plus Washington, D.C., and Puerto Rico that authorize or allow third-party solar power purchase agreements, according to the Database of State Incentives for Renewables and Efficiency.

In other states, third-party-owned solar is limited to certain sectors, and burdensome permitting processes and costs associated with connecting panels to the electricity grid can be a deterrent to the adoption of rooftop solar. "It's funny because Florida has 'Sunshine State' plastered everywhere as their state motto and yet they don't allow solar service," Sunrun's Fenster says.

Nevertheless, he is confident that options such as third-party ownership have the potential to fundamentally transform the way Americans get their electricity while also saving consumers money and helping the environment. Solar makes up only about 1 percent of the power used on grid now, but by 2016 Fenster expects solar power will be able to undercut about $30 billion a year in electricity sales to homeowners.

"Residential has always been the best end market for solar because homeowners pay the most for power, and they stretch the transmission and distribution network the most," Fenster says. "There's a significant transfer in consumer power arising from solar because now homeowners can generate their own power at a lower cost."