Why We Still Need To Discuss Grid Defection

The rapidly declining costs of distributed energy resources (DERs), including rooftop solar photovoltaics (PV) and behind-the-meter batteries, have introduced new dynamics into a traditionally slow-moving electricity industry. This paradigm shift has ushered us into a new era where previous assumptions about how, where, and at what scale electricity is best generated, transmitted, and distributed may no longer hold.

In 2014, Rocky Mountain Institute (RMI) released a groundbreaking analysis of the potential for “grid defection”—when and where it may be economical for customers to disconnect from their utility in favor of using on-site solar + battery systems. In the years since, as DER technologies have evolved and costs have come down even further, a number of fellow analysts have offered their own interpretation of the economics of these technologies and the implications for electricity industry stakeholders.

For example, a recent study by Eric Hittinger and Jawad Siddiqui for the Rochester Institute of Technology (RIT) reexamined a subset of the issues RMI addressed in our original 2014 paper. Although Hittinger and Siddiqui reinforce many of the conclusions we made in the paper, media coverage of the RIT study contends that it “throws cold water” on the economics of customers using solar and storage to defect from the grid, and in particular RMI’s 2014 findings.

We acknowledge that, because grid defection is a relatively new topic for the industry, we must proceed with humility and openness to contrasting views; however, we also believe that it’s important to clarify misconceptions regarding the research RMI has conducted to date on this topic and its consequences for the electricity ecosystem.

A NARROWER SCOPE LIMITS THE INTERPRETATION OF NEW RESULTS

The RIT study takes the analytical structure of RMI’s 2014 paper and applies it to more locations in the U.S., with more-specific technology options. It arrives at many of the same conclusions as our 2014 study did for the present-day potential of grid defection (namely that grid defection makes economic sense today only in Hawaii where retail electricity rates are the highest in the nation).

However, it also makes several assumptions that differ from ours. First, the study only examines current DER costs without considering future trends, as our 2014 paper did. Second, it does not consider the full suite of options available to customers, as our more recent studies—The Economics of Demand Flexibility and The Economics of Battery Energy Storage—explore in greater detail. Finally, it misses the point of why the future potential for cost-effective grid defection matters, even if most customers may not ever consider it.

1. Focus on present-day costs. The RIT study, which covers present-day PV, battery, and grid costs, does not consider how these costs may change a decade from now (i.e., cost declines in solar and storage, and cost increases in grid supplied power). RMI’s original study explicitly aimed to highlight these points, studying cost trajectories from 2014–2050. Without acknowledging the future potential of cost-effective defection, the RIT paper misses the implications that a big portion of the ~$100 billion per year of utility capital investment today could be stranded by future customer investment. Major investment banks, among others, have also seen this potential danger to the current utility business model if present trends continue.
2. No consideration for a broader suite of DER options and use cases. The paper sets up a comparison of customer costs under a limited set of solar power scenarios (e.g., net-metered PV versus complete grid defection), but ignores other DER options that are potentially more likely. The paper does not consider options we explored in RMI’s more recent work that assesses the present-day customer value of demand flexibility under real-world utility rate structures, or the potential to gain expanded value from behind-the-meter battery energy storage systems. We have found that these middle-ground solutions, stopping short of full grid defection, offer much better economics for the customer, and likely for the utility and larger grid as well.
3. Why grid defection still matters. By failing to consider both the implications of changing future costs of defection, and the present-day cost-effectiveness of other DER solutions, the RIT paper misses an opportunity to emphasize why grid defection matters today even if it is only economic in the future—namely, that it empowers customers to determine the pace of decarbonization, retail pricing evolution, and other grid investments (e.g., in resiliency) that would otherwise be left entirely up to incumbent utilities.

Because of these differences, the RIT study doesn’t actually challenge the core conclusion of our 2014 study and our more recent papers: that the rapidly evolving costs of the full range of modern DER options make distributed, customer-centric solar power increasingly practical and competitive in a rapidly expanding range of conditions. We believe this conclusion is more important and indicative of the future than absolute grid defection would be.

MISINTERPRETING THE RESULTS

Because of the framing of the RIT paper, it may reinforce some mistaken beliefs on the evolution of the electricity grid that are worth noting.

• Claim 1: The “grid as a battery” for customer PV is the most economical choice.Hittinger and Siddiqui’s comparison of net-metered PV versus grid defection may suggest that the former option, net-metered PV, is always the least-cost solution. Yet both the RIT study and RMI’s own recent work have laid out that while net-metered PV may be the most favorable outcome for individual customers today, there are likely better ways to assess the value of and remunerate solar PV and other DERs on the grid. “Using the grid as a battery,” with solar PV and no other DERs like efficiency or demand flexibility, is likely to require continued investment in expensive and lightly utilized assets that utilities will find difficult to justify. It is important to encourage customers to manage some of their own capacity and flexibility needs, for example through updated retail pricing.
• Claim 2: Utility ownership of PV and other DERs is always the right solution. It is easy to take the negative results of the RIT study for the specific customer-sited DERs under consideration and assert that utility-scale and/or -owned DERs must be the most cost-effective choice. However, RMI’s recent work on the value of flexibility and storage has made clear that utilities, instead of owning or directly deploying DERs, can also reap their benefits by passing the correct price signals to consumers and/or aggregators. California, New York, and other leading markets are actively exploring these approaches.

CUSTOMERS WILL PLAY AN IMPORTANT ROLE IN THE INTEGRATED GRID

A conclusion that grid defection is not cost-effective now in most of the country glosses over the other ways in which customer preferences and investment decisions are actively transforming today’s grid. In our aforementioned papers, we detail how customers can invest cost-effectively in DERs (e.g., smart thermostats, batteries, electric vehicles) that provide better services and can reduce grid costs at the system level. Although these technologies do not amount to grid defection, they do indicate that DERs are playing an increasingly important role in the architecture of the grid.

We continue to believe that increasingly cost-effective DER options will encourage customers to take a more active role in their energy, and lead utilities more rapidly into a new kind of electricity system, as we said in one of our earliest blog posts. Whether that leads to customers defecting from the grid or not, these customer choices will continue to transform the grid outside the scope of utility planning processes and regulatory structures. The lowest-cost and most desirable outcome for all customers will embrace this dynamic and seek to keep these customer-sited technologies integrated with the grid, rather than apart from it.

RMI recognizes the systemic challenges presented by widespread grid defection, and will continue to advocate for an integrated grid. The “fork in the road” message we used in our 2015 follow-on study to the grid defection work, The Economics of Load Defection, frames how reforms in electricity tariffs, utility business models, and utility regulations are crucial to arrive at an integrated, resilient, and cost-optimal grid. RMI’s ongoing work in the electricity sector is tightly focused on that outcome.
Image courtesy of iStock.