Why utilities are making a necessary foray into renewables

In 1988, as a young developer at what is now First Solar, I contacted dozens of utilities, trying to persuade them to install a small test facility — 500 kilowatts — of solar energy. Not a single U.S. utility expressed interest. Now, that amount of solar capacity is installed somewhere in the U.S. approximately every 25 minutes, and utilities no longer can afford to ignore the renewable energy industry. Today, my company, New Energy Capital Partners, is a leading investor in clean energy projects and companies

To understand why certain utilities have shifted their stance towards renewables, it is important to understand the history and nuances of the sector. It’s equally important to note the consistently positive public sentiment for renewable energy, which has served as a catalyst for a series of government actions aimed at restructuring utilities to meet this consumer demand.

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Early on, the U.S. government recognized the restrictive nature of the monopolistic utility industry. In 1978, Congress passed the Public Utilities Regulatory Policies Act (PURPA), which sought to spur innovation and reduce that monopoly power by requiring utilities to purchase electricity from privately-owned power plants employing new technologies for cogeneration (production of power and steam) and renewable electricity. By the mid-1980s, these generators, particularly those utilizing new gas turbine technologies, were demonstrating that they could produce electricity more cheaply than large central station power plants owned by regulated utilities.

Around the same time in Europe, growing public opposition to nuclear power in the wake of the 1986 Chernobyl nuclear accident led the German government to adopt aggressive incentives for wind energy with the Electricity Feed-In Act of 1991. European companies invested in new wind turbine designs and the installed capacity of European wind generation grew at an annual rate of 40 percent between 1990 and 1995. In 2001, Germany established solar subsidies which led to a 65 percent annual growth rate in German solar generation capacity between 2001 and 2011. As the industry grew, manufacturing efficiencies and technical advancements followed, delivering aggressive cost reductions worldwide. Between 2001 and 2017, the average cost of solar modules on the world market fell 88 percent.

Stateside, the ability of independent generators to produce electricity more cheaply than utilities led the public, regulators and legislators to question the justification for generation monopolies. In 1992, Congress passed the Energy Policy Act, which required utilities to give transmission access to independent, non-utility power generators. Yet, the utilities were generally successful in rolling back early incentives which favored renewable resources. As a result, the U.S. renewables industry remained mostly dormant throughout the late 1990s and early 2000s.

Real change came between 2002 and 2006, during which 18 states adopted or revised renewable portfolio standards that required utility procurement of renewable energy. Other states required utilities to purchase renewable energy on attractive terms from independent generators under PURPA regulations. As a result of these regulations and the falling cost of renewable generation, the solar and wind industries began to grow dramatically. The combined capacity of solar and wind generation grew from 9.5 gigawatts (GW) in 2005 to 113 GW in 2017.

Today, since wind and solar generation incur nearly zero variable costs, these resources are dispatched first by grid operators, disrupting the fossil-based generation market. Supplemented with natural gas generation and emerging battery storage, utilities are finding that they can replace large swaths of their generation fleets with renewable generation technologies at lower cost. Over the long term, utilities may face the prospect of a market in which homeowners and businesses can supply their own power needs more cheaply and reliably with a combination of solar and storage than with utility-supplied electricity.

Across the country, consumers on both sides of the political aisle have expressed their desire for more clean energy. A poll released in September 2018 found that 76 percent of likely voters support more action by the government to promote solar energy. Some utilities continue to resist these shifts. In November, voters in Nevada approved a ballot measure to require utilities to supply 50 percent of their energy from renewable sources, despite active opposition from the State’s largest utility. 

While some utilities are attempting to block the growth of renewables in their service territories, others are embracing renewable energy. In October, the Northern Indiana Public Service Company (NIPSCO), a subsidiary of NiSource, once one of the most coal-reliant utilities in the country, announced that it could save customers between $1.2 billion to $2 billion by retiring its remaining coal generators and replacing them with a combination of renewable and gas generation over the next 10 years. Driven by lower costs and a host of other benefits, many utilities are adopting clean energy as a significant portion of their generation fleets.

The utility industry won’t change quickly. Most utilities have large fleets of fossil and nuclear-powered facilities built around centralized transmission and distribution networks.  These systems change slowly. But smart utility companies are looking 20 years down the road and thinking about how they will compete in a new world of distributed generation. They can’t afford not to do so.

Scott Brown is the founder and CEO of New Energy Capital Partners, a leading investor in clean energy projects and companies in the United States and Canada.