Distributed Energy: A Disruptive Force

Distributed Energy: A Disruptive Force

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Distributed Energy: A Disruptive Force

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    DE Penetration Lowers the Value of Traditional Generation

    As DE proliferates, traditional generation assets are likely to decline in value. Parallels with the German market—in which the total share of generation represented by nuclear and fossil-fuel-based sources is expected to fall from a level of 83 percent in 2010 to 30 percent by 2030—illustrate the devastating financial impact that such a drop can have on utilities. (See Is Germany Pioneering a Global Transformation of the Energy Sector?, BCG report, March 2013.) By lowering the total net load, DE reduces the market value for traditional generation. The intermittent nature of distributed generation means that the greater DE’s penetration, the greater the requirement for base-load generation to become more flexible. (The problem is compounded by utility-scale renewables, which also provide intermittent power and often receive loading preference.) In most cases, DE, combined with demand response programs and other forms of demand management, will also shave the peak off the load, cutting into the most profitable portion of the traditional generation business. These factors are influencing utilities’ decisions about whether to invest in generation or hold off and seek to optimize its residual value instead.

    DE may also be a harbinger for a broader type of deconstruction that is affecting the power value chain. Integrated utilities provide bundled services: energy generation, transmission, grid services (such as power reserve and stabilization), demand response management, distribution, metering, and customer service. When a non-
    utility third-party cherry picks the value chain and provides specific services at a lower price, the traditional rate design no longer matches costs and revenues. New entrants have a growing stake in generation through distributed products, but they also derive benefits from services such as demand response management and energy storage. Over time, the power value chain could change dramatically.

    The utilities’ business model is about investing capital and capturing returns. As DE penetration increases, capital shifts from areas that utilities have traditionally controlled to areas in which they are not involved. (See Exhibit 3.)


    What’s more, as large investors turn their attention to the emerging DE industry, traditional utilities are beginning to lose their advantage in terms of low cost of capital. For example, we estimate that when a major solar installer and developer securitized its solar leases last year, the company’s cost of capital dropped to a level that was 200 to 300 basis points lower than most regulated utilities’ cost of capital.

    With microgrid technology, DE has the potential to enable areas such as subdivisions, cities, and counties to form “islands” that either exist off the grid entirely or depend on it only for backup generation. DE could, therefore, turn the existing infrastructure of transmission lines and power plants designed to serve those areas into stranded assets.

    Finally, utilities’ regulatory edge is eroding as DE companies gain leverage through regulatory management teams that represent a growing number of individual consumers. Taken as a whole, these changes are turning the odds against the traditional utility model.