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How Distributed Generation Affects Unregulated Utilities’ Margins

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Distributed generation

Renewables were initially criticized due to their huge setup costs and the requirement that they be set up in remote areas. As a result, transmitting the generated electricity through a grid was cost-consuming for renewables utilities.

However, technological advancements have brought us to distributed generation, where few to no transmission lines are used. Hence, these distributed energy resources (or DER) have become potential threats to traditional operating utilities. Additionally, renewables is a technology, so its efficiency will improve while its costs are bound to fall.

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DER eats away at utilities’ peaks

Power players in competitive markets are more directly exposed to the progress of renewables. These utilities garner the highest margins during the peak load period, that is, when power demand is at its highest. If distributed generation such as rooftop solar power serves the end-user during this period, unregulated utilities’ peak load revenues will fall.

US utilities with large exposures to unregulated markets include Exelon (EXC), First Energy (FE), and Public Service Enterprise Group (PEG).

First, there was the persistent issue of energy efficiency programs. Now, distributed generation is reducing electricity demand. Reduced demand results in lower wholesale power prices, which ultimately means reduced profitability.

To talk more precisely about technological advancements, the electricity price from solar PV (photovoltaic) panels has fallen from $3.80 per kilowatt-hour in 2008 to nearly $0.12 per kilowatt-hour in 2015. Technological improvements and supportive policies have helped distributed generation. Net metering has quadrupled since 2011.

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