Economics of Grid Defection I
Grid defection and contestability
[Note: Image courtesy of DALL-E, which said this upon delivery: "Here is an artistic representation of the evolving electricity landscape, illustrating the integration of traditional power grids with decentralized energy solutions like solar panels and battery storage. It symbolizes the transition towards a more sustainable and contestable energy market. Let me know if you'd like adjustments!"]
Yesterday Elisa Wood hosted a webinar with Seyyed Ali Sadat and Joshua Pearce of Western Ontario University, who have a new paper: The threat of economic grid defection in the US with solar photovoltaic, battery and generator hybrid systems (Solar Energy, November 2024). Grid defection occurs when electricity customers generate and store enough power locally to become fully self-sufficient and disconnect from the central utility grid. This typically involves using technologies such as solar panels, wind turbines, and energy storage systems (e.g., batteries) to meet all energy needs independently.
I've been interested in this question for as long as I've worked on electricity regulation. In 2002 I presented a research paper at the International Association of Energy Economics conference in Aberdeen, Scotland called "Institutional Change and Contestability: Promise and Reality in U.S. Transmission Policy". Contestability, the ease with which new competitors can enter and compete in a market, irrespective of whether entry actually occurs, is central to understanding what we now call grid defection. A market is highly contestable if there are low barriers to entry and exit, meaning incumbents face the constant threat of competition (or what the concept's authors Baumol, Panzar, & Willig called potential competition).
In the context of the distribution grid, technological advancements in distributed energy resources (DERs) have increased contestability. Solar PV, battery storage, and other DER technologies have reduced the dependence of customers on centralized grids, effectively lowering the barriers to competition for energy services. As these technologies become more affordable and accessible, customers can bypass traditional utility services, eroding the natural monopoly once enjoyed by distribution utilities. Increased contestability forces utilities to innovate and adapt their business models to retain customers and remain relevant in a decentralized energy landscape.
Grid Defection
In 2014, the Rocky Mountain Institute (RMI) published The Economics of Grid Defection, which explored the long-term potential for solar-plus-storage systems to challenge the traditional vertically-integrated utility business model. The report modeled scenarios across different U.S. regions, projecting the timeline for achieving "grid parity"—the point at which the levelized cost of electricity (LCOE) from solar and storage equals or falls below the retail price of grid electricity. RMI identified Hawaii and parts of California as regions where grid parity was imminent, given high electricity prices and abundant solar resources. While full defection was not yet widespread, the economic tipping point was approaching, particularly as the costs of distributed energy resources (DERs) continued to decline.
At around the same time, the global financial services firm Barclays downgraded the entire U.S. electric utility sector from an investment perspective. The firm argued that rapid cost declines for both solar generation and energy storage technologies posed a long-term threat to the utility sector's ability to maintain its traditional revenue streams, as more customers would consider reducing their reliance on the centralized grid or potentially defecting from it entirely (contestability!). Barclays also identified regulatory frameworks as a significant variable in shaping the future of the sector, an early recognition of the growing awareness that the intersection of technological innovation, customer preferences, and regulatory change could upend the traditional utility business model.
To be continued …
In the past, the question of grid/load defection for residential customers was limited to solar PV with battery backup. In the studies I and others conducted, the economics mostly pan out except for some hours or days during the year. Depending on the region of the country, the hours that a combination of solar and battery was capable of providing the energy needs of "typical" homes were 93-97% of the hours of the year. The issue is solar dunkelflaute, to borrow an expression from the wind turbine folks. There are periods of insufficient solar insolation to both provide energy and maintain batteries sufficiently charged to carry homes through nights and other periods of solar deficiency. The authors of the paper being discussed relieve this constraint by permitting fossil-fueled backup generation to relieve that constraint. The authors' use of backup generation doesn't affect the validity of their findings, but prior research only sought renewable alternatives as the basis for grid/load defection. It wouldn't be surprising to find other areas that are also susceptible to residential grid/defection with a solar PV/battery/backup generation combination available to them.
Hi Lynne, totally agree that grid contestability does the the things you mention - but it also increases the uncertainty of repayment for fixed assets deployed in the past (no doubt part of Barclay's concerns). So the cost of defection has to include that buy-out, no?
Looking forward, how should a classic IOU structure the financing of the local (or long distance) infrastructure capex?