Why Elon Musk is a utility executive’s worst nightmare

Yet another threat to utility power.
Yet another threat to utility power.
Image: Quartz/Todd Woody
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Attention US utility executives: You have a decade at most before the boom in renewable energy makes your century-old business model as relevant as a rotary telephone. In the time it takes to get a transmission line built in California, solar energy production and other new technologies could render obsolete the monopoly business of selling electricity at a fixed price for a fixed profit to a captive audience of consumers.

Sound far-fetched? Just ask German utility executives how their coal-fired power business is doing. In the course of a decade, Germany has transformed itself into a green energy powerhouse. On Oct. 3, for instance, nearly 60% of the electricity generated in Germany came from wind farms and rooftop solar panels. That’s pushing fossil fuels off the grid and utility profits off a cliff. Utility EON’s profit is expected to fall 40% this year, according to Bloomberg, and it and other traditional power producers are moving to shut down coal and natural gas-fired power plants.

“Solar is most productive in middle of the day when coal is usually fired up,” Chris Nelder, an energy consultant, said yesterday at the Verge green business conference in San Francisco. “Now in Germany, at certain times of day power prices go negative and utilities have to pay to put electricity on the grid.”

US utility executives are paying attention. “The threat is absolutely there,” said Josh Gerber, manager of smart grid operations for San Diego Gas & Electric (SDG&E), one of California’s three big investor-owned utilities. He noted that the number of customers generating their own electricity on their roofs in California has doubled to 29,000 in the past year alone. (That’s not counting the huge photovoltaic power plants being built across California. Today, for instance, solar panel maker and developer First Solar said it has signed a deal to build a 250 megawatt (MW) photovoltaic farm for power producer NextEra Energy Resources.)

A more worrying number is 7,000. That’s how many homeowners decided to go solar even though they didn’t qualify for California’s generous subsides for renewable energy.

That means SDG&E is increasingly competing against companies like SolarCity, the Silicon Valley solar installer chaired by Tesla Motors chief executive Elon Musk. SolarCity typically leases rooftop photovoltaic arrays to homeowners who pay less for the electricity they generate than the power their utility sells. “For no money down, they are being sold a product that looks like exactly the same product (electricity) we sell but at half the price,” said Gerber.

Or as SolarCity chief executive Lyndon Rive – Musk’s cousin – said today at the Verge conference: “The absolute goal is to be an energy company.” He noted that SolarCity aims to install 475 MW to 525 MW worth of solar panels in 2014. In other words, the equivalent at peak output of a medium-sized fossil fuel power plant.

Meanwhile, the utilities remain on the hook for maintaining the power grid and dealing with the fluctuations in supply and demand caused by intermittent sources of electricity like wind and solar. Gerber noted that when a San Diego area avocado farmer installed a 2 MW photovoltaic array, SDG&E had to deal with the avalanche of electrons surging onto to the grid in a rural area.

The utilities that will survive will be those that figure out how to make the transition to a world in which electricity is generated from thousands of places rather than a few huge power plants.

An executive with the Sacramento Municipal Utility District, Patrick McCoy, said his company is doing everything from launching pilot projects to store electricity generated by homeowner’s rooftop solar panels in batteries to building community “solar gardens” and selling the power to customers unable to install their own photovoltaic arrays. Independent power producer NRG Energy, for instance, in September signed a deal with FuelCell Energy to sell the company’s fuel cells or the electricity they generate to its utility customers.

“Every once in awhile utilities need a shock wave to get them out of their complacency,” said McCoy.