What Happens When Solar Energy is Cheaper Than Local Electricity Prices?

November 5, 2014
Mike Jacobs
Senior Energy Analyst

The future keeps changing! Banks are telling us that solar energy is becoming mainstream. 

UCS projects that for more than half of the states in the U.S., solar power on your roof is going to be cheaper than the price of electricity delivered by the utility company. Deutsche Bank reports the number will be 36 states in 2016, or 47 states if federal tax credits continue as they are today.

Solar competing and beating prices for utility delivered power.  Source: UCS

Solar competing and beating prices for utility delivered power. Source: UCS

What does all this solar contribute to peak demand for electricity?

In the middle of the country, solar panels produce a decent amount during the times of greatest demand for electricity—more than 50% of solar panel capacity can be counted towards carrying the demand in engineering terms. The number, 58%, comes from a 3-year analysis by GE for the PJM power pool, which covers the region from Chicago to Virginia. This should help PJM reduce in the future the $10 billion spent on generator capacity commitments for 2015-2016.

How will the utility industry respond?

There’s a $10 billion question! Many utilities are following a playbook posted by the Edison Electric Institute and the lobby group ALEC to block the rise of the sun. Attacks on decades-old net metering policies are everywhere, and recent legislative sessions saw numerous efforts (all defeated) to end renewable energy standards. Those battles are well reported.

Projected growth in rooftop solar by UCS

Projected growth in rooftop solar by UCS

But there is an enormous battle behind the scenes over the nitty-gritty of everyday power plant operations, and making money from older, inefficient plants. Low natural gas prices, inadequate gas pipelines, and inefficient operations has stirred up some nasty stuff.

Part of PJM’s response to poor fossil-fuel power plant operations during last winter’s polar vortex is a massive and sudden overhaul of power plant planning and payments. There’s disagreement about what kind of changes are needed, and how other changes will meet the need. It’s a mess.

Included in the problems is the termination of the one provision that would allow planning to adjust to the impact of all this cheap solar! Presently, PJM makes commitments to pay for power plant capacity three years before the need, but holds back 2½% of the forecasted demand for late course correction. Inexplicably, PJM plans to jettison this consumer-friendly provision.

So, when the solar boom expands, will PJM hear it coming?

No. Demand forecasting in the utility world is very conservative. As in, look-to-the-past-for-answers conservative. As all this rooftop solar predicted by UCS and bankers begins to reduce demand on the grid, PJM and others in the utility industry will be looking at past consumption data and making commitments to three years into the future. Bad enough, but to then terminate the practice of updating the amount needed in these multi-billion dollar capacity commitments just makes no sense.

Surely there are regulators watching, no?

Yes. PJM heard yesterday from the state regulators, repeating their comments submitted October 28.

Plain and simple, the Organization of PJM States (state regulators in PJM region) said that changes costing $8 – 15 billion should be discussed first, and that the elimination of this forecast adjustment is unjustified. Now, its not that solar power cost competition is front and center in this debate. But given that the future keeps changing, the state regulators seek to retain this 2 ½% hold back on commitments as the best way to balance all the other things going on in the PJM calculus.

We have to bring to bear a lot of new ways to reduce carbon emissions, recognize consumer choice in energy, and adopt new technologies that can support these needs. Participation in power pool debates is increasingly important for consumer interests, for power system reliability, and for climate protection. We can all do better to learn what is happening around us. The sun will rise tomorrow, and a rapidly growing number of consumers are going to make their own electricity when that happens.

What do you think we should do?