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Is Rooftop Solar Finally Good Enough to Disrupt the Grid?
Nathan Richter
DISRUPTIVE INNOVATION

https://hbr.org/2015/05/is-rooftop-solar-finally-good-enough-to-disrupt-the-grid
Over the past two decades, there have been many attempts to reform the electric utility market. The costly and complex operations of transporting energy have made utilities natural monopolies, while regulatory barriers and the high fixed costs of building and maintaining regional electrical grid infrastructure have also kept much competition at bay. But recent technological advances and new business models are now allowing nimble players to compete and provide consumers with cost-saving alternatives. With the rise of distributed forms of energy, such as rooftop solar power, and batteries, it’s become much more feasible to match individual demand for electricity with on-site production.

Distributed energy systems are basically comprised of small-scale energy-generating devices (the most common example being solar panels) that allow for electricity to be produced on-site and consumed immediately, without drawing from the local electrical grid. Recent developments, such as falling solar panel prices and increases in efficiency rates (the rate at which sunlight hitting panels is turned into usable energy), have made distributed energy increasingly economical, while new business models and financing methods have made it more accessible.

This story of disruption should feel familiar. Consider how Uber opened up the transportation market. Prior to Uber’s ascendance, entrenched taxi companies oversaw highly centralized, often unresponsive, operations, leaving consumers with few alternatives for private transportation. So the company mobilized existing, under-utilized assets and connected them to a sharable revenue stream. And it built a strong technology platform that optimizes various factors like market conditions, location, and availability to meet your needs and those of the 100 other people within your half-mile radius.

While Uber’s app can make one’s car a potential source of income, a solar panel can turn a home or a company facility into a productive asset by allowing it to produce its own electricity. In both cases, the two goods (car and real estate) are given value-creating potential through a process of market fragmentation and consumer empowerment. The result is a new value proposition: consumers get more personalized, flexible service, and new companies can charge competitive prices.

In the case of distributed energy, various financing options let consumers save in a number of ways. They are offered either solar leases (leasing the panel and its energy for a fixed periodic payment) from a solar company, power purchase agreements (they purchase each unit of electricity produced by the panel at an agreed upon rate), or solar loans (the consumer, rather than the service provider, owns the panel; effectively a solar panel mortgage). In each case, the cost per unit of electricity is not only cheaper but more stable when compared to rates charged by utilities.

With the introduction of batteries that can store electricity, such as Tesla’s, solar energy’s value proposition may well increase. Batteries can store excess solar energy produced in the middle of the day when the sun is strongest and then release the energy at peak price hours. While this isn’t quite as cost-effective for the residential sector yet, due to battery costs and regulatory issues, batteries are already being used in commercial and industrial sectors, where extra charges for using energy during high-demand periods can make up 30% of electric bills. Instead, batteries can pull electricity from the grid when prices are low, like in the middle of the night, and store it. That electricity can then be consumed later when energy is more expensive and demand charges come into play.

New energy management software can also help identify consumption inefficiency and automate electricity usage when necessary by collecting site-specific energy data. But before distributed energy can make a greater impact, more comprehensive energy management platforms must be developed. Ultimately, Internet of the Things software could optimize the interactions between a distributed energy system comprised of solar panels, batteries, and commercial or residential buildings’ energy management systems, based on real-time data from each component — much the way Uber’s platform oversees and coordinates a ride by transmitting and analyzing data from mobile devices.

To build this kind of fully integrated, smart system, different firms will have to collaborate — even Elon Musk noted that Tesla couldn’t change the energy market alone. Some solar companies, battery manufacturers, and software companies are starting to work together. Google’s Nest, a smart thermostat, now has an agreement with SolarCity, the largest U.S. residential solar installer, to eventually integrate Nest’s smart thermostats with SolarCity’s panels, and presumably Tesla’s batteries at some point in the future. And SunPower, the second largest U.S. solar manufacturer, is partnering with EnerNOC, which provides energy management software and was also announced as an early Tesla Energy partner.

Meanwhile, utilities are not standing idle. More are looking into real-time data and batteries to make the grid more efficient and reduce the variability in electricity prices throughout the day. But similar to the taxi industry, one weapon utility companies are relying on is their political muscle, which is considerable, but anti-market. This trend is becoming so well-established that the term “utility death spiral” has been coined. Utilities raise prices on customers in order to combat lost revenues from those that have turned to distributed energy forms. Of course, this response only ends up making distributed energy forms even more competitive.

The electricity market won’t see change quite as fast or garner the same headlines that Uber has, primarily due to the sheer size and complexity of the electricity market. But despite the challenges, the signs from the marketplace are auspicious. Residential use of distributed energy grew at a 50% annual rate in the U.S. from 2012 through 2014. And as distributed energy and smarter management software systems evolve, the changes could be much more profound.

Nathan Richter is a master’s degree candidate in management from Peking University’s HSBC Graduate Business School. He is a former assistant editor at The Globalist.