Talk of a distributed generation-related ‘death spiral’ is overblown, Moody’s says

While a large switch to distributed generation (DG) could hurt vertically integrated utilities, most of the talk about a utility ‘death spiral’ is premature, according to Moody’s Investors Service.

That’s the crux of a Nov. 6 “special comment” report issued by Moody’s. The report is titled “Regulatory Response Looks to Stay Ahead of the Distributed Generation Curve.”

“Technological developments are inherently uncertain and could be disruptive, but today, we don’t see the utility structure being upset on the horizon,” Moody’s said in the report. “We discount the “death spiral” scenario, because the electric grid is a critical piece of infrastructure, and consequently, we believe utilities will continue to receive reasonable regulatory treatment.”

A key point on the near-term agenda for utilities will be reforming net metering standards to avoid “cost shifting” between customers who have rooftop solar and those who don’t. Rate design reforms that fix the issues that arise from net metering include decoupling, which reduces volume risk to revenues, and higher fixed charges, which better match the fixed costs of operating utility assets, Moody’s said.

Many legislatures and regulatory commissions are assessing DG, including pre-emptively in states, such as Idaho and Oklahoma, where DG is still “miniscule,” Moody’s said.

While solar overall accounts for less than 1% of generating capacity in the United States, double-digit increases in residential solar installations (a 45% leap in capacity between Q2 2013 and Q2 2014) are pushing lawmakers to act early.

Hawaii has by far the highest market penetration, with 11% of Hawaiian Electric Co. residential customers with solar photovoltaic (PV), Moody’s said. While energy storage is too expensive and impractical for homeowners now, technology will advance to make storage more common in the next decade, Moody’s said.

Utility markets that will see faster adoption of distributed generation tend to be those in states that are deregulated, feature high electricity prices and have policies that encourage DG, such as renewable portfolio standards and net metering, Moody’s said.

While DG does pose something of a competitive threat to utilities with generation assets, transmission and distribution (T&D) utilities don’t face that threat. In fact T&Ds could see their business position improve from the increased investments in the electric grid.

DG could be a business opportunity for vertically integrated utilities as well. Lessons learned from these early initiatives will set precedents for others in the sector, Moody’s said.

Moody’s noted that utility subsidiaries of Xcel Energy (NYSE:XEL) and Pinnacle West Capital (NYSE:PNW) have recently rolled out programs designed to work together with residential customers on rooftop solar.

Some of the chief authors of the report include Senior Vice President Mihoko Manabe (mihoko.manabe@moodys.com) and Vice President – Senior Analyst Toby Shea (toby.shea@moodys.com).

ScottMadden Consulting Partner Stuart Pearman will discuss issues posed by distributed generation at the one-day PennWell GenForum Dec. 8 in Orlando, Fla. More details are at available at http://www.energyhubforums.com/genforumpgi/conference.html.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.