Electric utility 'death spiral' in US is premature, Moody's says

Washington (Platts)--6 Nov 2014 342 pm EST/2042 GMT

The dramatic drop in renewable power costs and predictions for distributed generation growth can be disruptive to electric utilities, but projections for a so-called "death spiral" in the utility sector are premature, Moody's Investors Service said Thursday.

Action by utilities, state lawmakers and regulators to refine utility cost-recovery models to stay ahead of a potential industry transformation involving widespread adoption of DG lessens the threat of disruption, Moody's said.

"We don't see the utility structure being upset on the horizon ... [because] we believe utilities will continue to receive reasonable regulatory treatment," Moody's said in a report.

That regulatory treatment can include decoupling utility revenue from being totally dependent on electricity sales, approving standby charges to customers installing DG facilities, or allowing utility ownership of DG projects, Moody's noted. A proactive regulatory response is a positive development for utility credit ratings, it said.

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The term "death spiral" is used to describe a scenario in which the growth of DG reduces utility power sales and demand for electricity, prompting utilities to raise rates. Higher rates can make DG more attractive and spur more rooftop solar and DG installations, leading a downward spiral for utilities.

Moody's discounts the notion of a mass defection of customers from the utility grid "because the electric grid is a critical piece of infrastructure that is a vehicle for policymakers to implement their energy policies." As batteries and new technologies advance and become available at lower costs, the power grid "will become even more important as the platform for the more complex flows of power and information in the utility of the future," the ratings service said.

Net metering is available in 43 states, but numerous utilities are looking to reform state measures for compensating customers with renewable DG facilities now that such policies have made rooftop solar more common, Moody's said.

Consulting firm ICF International issued a recent report that said residential photovoltaic facilities grew 60% from 2012 to 2013, with further steep growth projected.

In a separate report, GTM Research predicted solar DG installations among residential and commercial customers will increase from 1.9 GW in 2013 to 5.8 GW by 2018.

Utilities that will face faster adoption of DG tend to be those in restructured states or where power costs are high, or where state policies encourage rooftop solar, such as through net metering or renewable portfolio standards, Moody's said. It listed the top 10 states in that category as California, Hawaii, Connecticut, Oregon, Delaware, Arizona, Massachusetts, New York, New Jersey and Maryland.

Regulatory treatment of DG resources among those states is advancing, with Hawaii, California and New York examining different utility business models and approaches to foster DG by tackling rate design and policy issues, the report said.

DG poses more of a competitive threat to vertically integrated utilities that own generation, and policymakers can slow DG growth by setting limits on net metered capacity, reducing incentives for renewable energy projects and boosting demand charges for customers with rooftop solar facilities, Moody's said. Regulators can adjust net metering rules and state lawmakers can address renewable portfolio standards to manage the growth of DG.

The report said the 10 states with the least favorable factors for DG adoption, listed from the bottom, are Tennessee, Mississippi, Alabama, Kentucky, South Carolina, Indiana, Iowa, South Dakota, Nebraska and Wyoming.

--Tom Tiernan,
--Edited by Jason Lindquist,

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