Utility Ownership of Rooftop Solar Can be a Significant Earning Opportunity: Report

The program increases the shareholder earnings by 2-5% as compared to a non-solar scenario

August 29, 2020


The growth of the rooftop segment has changed the landscape of solar space, and it poses several questions for the financial stability of regulated electric utilities. In its latest report, the Lawrence Berkeley National Laboratory (LBNL) has come up with findings that deal with the economic viability of utility-owned rooftop solar program in the United States.

This analysis relied on Berkeley Lab’s FINancial impacts of the Distributed Energy Resources (FINDER) model, which was developed to evaluate the effects of distributed energy on utility shareholders and ratepayers under varying regulatory and market conditions.

According to the report, over 20 years, the program increases the shareholder earnings of utilities by 2-5% relative to a non-solar scenario. This is in contrast to the 2% loss of earnings when an equivalent amount of rooftop solar is deployed but owned by non-utility parties. The report notes that such a utility-owned residential rooftop solar program can be highly attractive from the perspective of utility investors.

The expansion of rooftop solar and other distributed energy resources has the potential to disrupt the existing business models by changing the traditional utility business models. The regulators in the United States have developed new rate structures for customers by forming new alterative revenue models and by expanding utility products and service openings.

According to the report, the ownership of distributed energy resources offers new avenues of earning opportunities for utility shareholders. The ownership of distributed energy sources provides many advantages like targeting locations with low interconnection costs or high potential for deferring future network upgrades, and the ability to target low-income and moderate-income households.

The report notes that despite the advantages, the prospects for broader application of utility-owned rooftop solar remains highly uncertain.

The report mentions that the program is different from the conventional ownership structures in two crucial ways. The first point is that it is owned by the utility rather than the homeowner or the third-party owner. The capital cost of the assets is added to the utility’s rate base, generating earnings for its shareholders. The second factor that makes it different is that the rooftop systems are metered separately from the customers’ load, and it is directly connected to the utilities’ distribution network.

Base Case Earnings

The program begins by considering a utility-owned residential rooftop solar program over ten years to supply 8% of the total residential electricity consumption ultimately. Under the base-case set of assumptions, the utility-owned residential rooftop program increases the shareholder earnings by 3.4% over 20 years. This compares to a 1.7% reduction in shareholder earnings under the more conventional homeownership or third-party ownership structure.

According to the report, the added shareholder earnings generated by utility-owned rooftop solar come at a cost to utility ratepayers. The average bills for residential customers without solar are 2% higher than without any rooftop solar. Similarly, the same bill impact is found under the traditional home owned or third-party-owned structure, which is 2.2% higher than without any rooftop solar.

Deferral Value

The deferral value of the rooftop solar program is affected by factors related to both the utility system in place and the rooftop solar systems. With rooftop systems, one potential benefit of utility ownership is that it may better enable the utility to direct deployment of rooftop solar toward those locations where it provides the highest deferral value.

To test the efficiency of this program, the study focused on the utility sites’ rooftop solar on west-facing rooftops. Orienting panels westward does reduce the utility’s peak load, though by only 3% more than in the base case.

The results show that utility ownership of residential rooftop solar can offer a potentially significant earnings opportunity to utility shareholders, especially compared to the loss that accompanies more-typical ownership structures.

The report notes that the utility with higher levels of solar generation would likely find excellent value with direct utility ownership due to higher solar integration costs, which direct ownership might help to manage. Utility-owned rooftop solar that defers planned large-scale solar generation would yield a more significant generation of CAPEX (capital expenditure) deferral value than in the present case.

Allowing direct utility ownership could better align utility shareholder interest with those of their ratepayers, to an even greater extent than this analysis shows to be possible for rooftop solar.

In conclusion, the report noted that though this analysis focuses on rooftop solar, the results are suggestive of the prospects for utility ownership of other forms of distributed energy. In particular, behind-the-meter battery storage offers higher deferral value as it is dispatchable and has a broader range of grid services. Those attributes create more significant ratepayer bill savings, but also greater erosion of traditional utility earnings opportunities. Allowing direct utility ownership of behind-the-meter battery storage could better align utility shareholder interests with those of their ratepayers, to an even greater extent than this analysis shows to be possible for rooftop solar.

Like the U.S., the rooftop solar segment is crucial in India’s renewable targets too. This segment, though with immense potential, has struggled due to several exacerbating factors. The DISCOMs (Utilities) in India have constantly thwarted rooftop installations by making net metering connections difficult to obtain. This report provides an alternative scenario for utilities which the Indian DISCOM needs to study and explore seriously.

The rooftop installations in India stood at 85 MW for Q2 2020, a 56% fall from the first quarter’s 194 MW, according to Mercom India Research’s newly-released Q2 2020 India Solar Market Update. Compared to Q2 2019, rooftop installations were down 71%, the report showed. The average rooftop solar project cost in India per MW was ₹36.5 million (~$489,027), a drop of 9% as compared to the same period last year. The figure dropped marginally by 1% when compared to Q1 2020. The decline in rooftop figures, as well as large-scale solar projects, could be attributed to the falling prices of modules.