Nearly any commercial or industrial facility with an organizational footprint in states like Florida, South Carolina, North Carolina, and Virginia, will be located within regulated or “closed” electricity markets, which means there is no competition for the supply of electricity to these facilities. As it relates to renewable energy and cleantech solutions, the implications of this are three-fold:
Access to Competitive Renewable Energy Pricing is Blocked
Lazard’s 2017 Levelized Cost of Energy Analysis indicates solar and wind are as cheap or cheaper than any other source of energy (natural gas, nuclear, coal, etc.) at the wholesale level, especially when paired with energy storage systems. A recent Xcel Energy solicitation for bids to build generation assets in the utility’s Colorado territory even indicates these cleantech assets will quickly exceed the financial advisory firm’s 2017 projections and far surpass natural gas¹.
Unfortunately, the opportunity for large electricity consumers in regulated markets to access this cleaner, more lucrative pricing available at the wholesale level is diminished at the retail level. While there are several nuanced reasons for this, one major reason is the inability for retail consumers to select a different electricity supplier, one aggressively deploying clean energy and not guaranteed a return on equity (ROE) and overall rate of return by state regulators (e.g. currently, Duke Energy Carolinas is requesting the North Carolina Utilities Commission grant a ROE of 10.75% and an overall rate of return 7.93%²).
Incremental Purchases of Clean Electricity revented
Interlinked with the exclusion of competition is another negative aspect of regulated electricity markets: loss of the opportunity to adopt renewable energy through incremental purchases (kWh-by-kWh), the way electricity is purchased from conventional fossil-fuel based generation.
In deregulated markets, one manner organizations implement solar is through the execution of a power purchase agreement (PPA) with a solar company. The solar company installs, owns, and manages the solar asset and sells power, on a per-kWh basis, to the entity who now receives clean cost-competitive electricity without incurring the significant up-front capital expenditure associated with buying a power-generating system that lasts for thirty (30) years. Conversely, in most of the Southeast, any entity other than your business and the incumbent electric utility is considered a “third party” and third-party sales of electricity are not allowed. Instead, to ensure your company’s operations are actually consuming renewable energy, your business must own the distributed energy resources (DERs) directly (either through an outright purchase, term loan, or equipment lease).
Inaccurate Reflection of Power Markets
In addition to restricting competition and incremental purchases, a regulated market does not accurately reflect the real-time pricing and volatility (spikes and dips) of the deregulated or “open” power markets to which a consumer would normally be subjected. In the short-term, this can be favorable to businesses; however, in the long-term, this decreased correlation to true market characteristics and price signals causes improper valuation of DERs and grid assets in general. In this case, it reduces one of the major advantages renewable energy holds over other fuel sources: the mitigation of fuel price (and, thus, OPEX) uncertainty.
¹ Xcel Attracts ‘Unprecedented’ Low Prices for Solar and Wind Paired With Storage, Greentech Media, January 8, 2018
² Current general rate case, Docket No. E-7 Sub 1146, before the North Carolina Utilities Commission