Andre:
Welcome to the Industries in Motion podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast moving markets and industries to help you stay ahead of the curve. Please listen to the end of this podcast for important disclaimers. My name is Andre Hardy and I am Head of Canadian & APAC Research. Let's get into today's episode.
Andre:
I'm very pleased to introduce our guests, Nelson Ng and Elvira Scotto. Nelson is responsible for RBC's equity research coverage of the Canadian renewable energy and chemical industries. Nelson has 20 years of experience in the energy and infrastructure spaces, including 13 years at RBC. Elvira covers US energy infrastructure at RBC. She began covering the sector in 2007, joined RBC in 2011 as a midstream energy analyst, and recently expanded her coverage to include solar. Today, we'll be discussing the rise of energy prosumers. Prosumers would be consumers of energy who can also produce energy themselves, for example, from rooftop solar panels, to self-supply power or sell it into the grid.
Andre:
The Russia/Ukraine war has highlighted the world's dependence on oil and gas and how interconnected global energy markets are. This has amplified focus on the energy transition, electrification, and countries and companies setting net zero targets. Nelson, Elvira, what are you seeing in the renewable energy sector? Can you also provide some background on that term prosumer, which I used earlier, and how that concept is changing the dynamics in the sector?
Nelson:
Great. Thanks, Andre. The global electricity sector is in a particularly interesting situation right now. We have wind and solar energy. They are the cheapest forms of electricity in many regions, even cheaper than the variable cost of coal. Also, a number of industries including automobiles are being electrified and many organizations have set out net zero targets. Against this backdrop, we believe the term prosumer is becoming more relevant and mainstream because it essentially means a consumer of energy who is also a producer.
Nelson:
Large industrial companies like pulp and paper mills and mining operations in remote areas, they might be connected to the grid but they also build their own power plants, producing and consuming power. However, with advances in technology and the cost reduction in renewable energy, some power generation is taking place at a much smaller scale. For example, warehouses, commercial buildings and homes have been installing rooftop solar at a rapid pace. We also see electric vehicles, essentially battery on wheels, potentially playing a large role in the grid as EV adoption rates increase.
Nelson:
Now I'd like to pass it over to Elvira, who's been doing a lot of work on the rooftop solar industry in the US. Elvira?
Elvira:
Thanks, Nelson. On the residential rooftop solar side, in the US installations have grown at an average annual rate of more than 15% over the past decade. Despite the significant growth, residential rooftop solar penetration in the US is still under five percent. Looking ahead, we expect continued growth in the US although in the near term, supply tightness and regulatory challenges could impact the pace of that growth.
Elvira:
A key driver of this growth has been the declining cost of residential rooftop solar. Prior to the pandemic-related inflationary pressures, solar PV module prices and lithium ion battery costs had declined more than 80% in the past decade and overall solar system costs are down 50%. Costs increased last year given the pandemic-related supply and logistics challenges. Longer term, however, as technology improves, costs should continue to decline, especially on the battery side.
Elvira:
In the US, there are also federal tax credits and various state incentives such as net metering, which allows solar rooftop home owners to sell electricity back into the grid, that have increased the value proposition for residential rooftop solar installations. In addition, large installers also offer power purchase agreements or leases which allow homeowners to install solar without the large upfront cost. While the early adopters of residential rooftop solar were homeowners with excess disposable income interested in combating climate change, the declines in solar system costs, government incentives and different financing options have increased solar adoption to homeowners of different economic classes who could save on their electricity bills. Now, payback period for rooftop solar will vary by state, but in general, consumers view a payback period of 10 years or less as attractive.
Andre:
Wow, that is quite the decline in cost we've seen over the last decade. And it's interesting to see the improved project economics, but outside of cost and economics, what are some of the reasons why companies or individuals are becoming prosumers, whether it be through rooftop solar or other larger scale facilities?
Elvira:
Yeah, so in addition to reducing long-term energy costs, adding rooftop solars, batteries or other forms of renewable helps companies reduce their carbon footprint, getting companies closer toward achieving their net zero goals where applicable. On the residential side, while lower costs versus utilities remains a critical driver of residential solar adoption, we see electricity reliability and resiliency as one of the main factors driving the next level of residential solar adoption and growth as homeowners have grown increasingly frustrated with power outages.
Elvira:
Weather-related power outages, in fact, have increased in frequency and were up 77% over the past 10 years versus the previous decade. In February of 2021, winter storm Yuri in Texas left 4.4 million homes without power for several days. And hurricane Isias in August of 2020 caused power outages at 3.8 million locations across New Jersey, New York, Connecticut and Pennsylvania. In addition, wildfire risk in California has prompted utilities to implement rolling blackouts in order to avoid power lines from causing fires.
Elvira:
So we have seen increased adoption of residential solar in states like New Jersey that have less solar resources, and Texas, that does not have net metering. And that's on the heels of these power outages. In addition, battery attachment rates with residential solar have increased as have generator sales to further enhance reliability. These home owners have more energy independence and are less tied to the grid as they not only produce their own electricity but can store it and use it at times when the solar panels do not produce power.
Andre:
That's really interesting. So far everything you've mentioned, Elvira, sounds quite appealing from a cost, economics and other benefits standpoint. What is getting in the way of adoption rates rising faster than they have?
Elvira:
Yeah. We do see some headwinds to growth in the near term but still see long term growth potential. One headwind to residential solar growth has been supply constraints. Growth would have been stronger last year, especially on the battery side, had it not been for supply constraints. Inflation is another headwind but we see this as manageable. Inflation cuts across all sectors including utilities. In the US, utilities pass on the higher costs to consumers so while solar system costs may move higher, utility rates are also likely moving higher, which keeps the value proposition of rooftop solar intact.
Elvira:
On the regulatory front, the Department of Commerce will open an investigation into solar panels imports from Cambodia, Malaysia, Thailand and Vietnam to determine if Chinese cell and module producers are avoiding anti-dumping and countervailing duties by performing most of the manufacturing for cells and modules in China and then completing them in southeast Asia. This investigation could lead to additional tariffs, however, we note that modules only represent about 10 to 15% of total solar system costs.
Elvira:
We think changes to net metering policies represents the biggest near-term headwind. The most significant proposed change comes from California where the California Public Utility Commission's proposed decision calls for a new fixed monthly fee for solar homeowners and a 70 to 80% reduction in export rates. We estimate that this proposed decision would increase the payback period to over 15 years for residential solar and we estimate that would slow the growth in residential solar in California by 50 to 60%. This proposed decision is currently under review and could change.
Elvira:
There have been more net metering challenges and we expect this to continue as regulated utilities contend that as residential rooftop solar penetration increases, given the rate structure in most states there's a cost shift from solar homeowners to non-solar homeowners and that lower income utility customers are paying more because of this cost shift. Now, longer term, as battery costs decline and homeowners consume more of the power they produce, we expect net metering to actually become less relevant.
Elvira:
Finally, we're still awaiting an extension and expansion of federal investment tax credits. If these pass, we would expect an increase in solar installations.
Andre:
Thank you very much for that color. One thing I want to go back to is something that you both talked about, which are advances in technology as well as lower solar and battery costs. Nelson, maybe going back to you, how do you see these progressing?
Nelson:
Sure thing, Andre. The costs of wind and solar have declined significantly over the past decade, making it more competitive than fossil fuels. However, renewable energy is usually intermittent, so the more renewables you have, the more energy storage or on-demand power you'll need. On-demand power is usually a gas-peaker facility but in the future, the fuel could potentially be replaced with renewable natural gas or some green hydrogen.
Nelson:
Battery storage also compliments renewable energy and the technology is quickly evolving. The cost of battery storage is declining to a point where it makes economic sense without subsidies to pair battery storage with renewable energy facilities. And also, one interesting concept for the future is connecting electric vehicles to the grid. Most cars are only utilized a few hours a day and an EV is essentially a battery on wheels so looking forward, when EV adoption ramps up, idle EVs could be used to provide energy to the grid during peak times and draw cheap power from the grid during off-peak periods.
Nelson:
And I'll pass it over to Elvira, who can touch on how technology has enabled a more connected smart home.
Elvira:
Yeah. Thanks, Nelson. Longer term, we see residential solar playing a big part in the smart home and electrification of everything, especially as EV penetration increases. Currently, in the US homes connecting to the grid, even if homeowners have installed rooftop solar panels. Longer term, with continued improvement in technology and ongoing cost reductions, we believe homeowners could, in theory, completely move off the grid and resiliently power their homes. The combination of micro-inverters that can provide backup power without a battery, the proliferation of low-cost battery storage, EVs with bidirectional inverters, traditional backup power generation and smart appliances that can self-regulate power needs could technically convert the home into a micro grid.
Elvira:
In practice, we do see several challenges to the home as a micro grid under the current utility regulatory environment. Some homes, given their location, may not be suited for solar power. If more homes move off the grid then utilities would have fewer homes over which to spread utility costs. That said, over time we suspect centralized and distributed energy resources can work together to more efficiently and resiliently provide power.
Elvira:
One such way could be through virtual power plants. A virtual power plant aggregates the capacities from different distributed energy resources such as residential rooftop solar and batteries into a network that can dispatch power. Virtual power plants connect to the grid, generally target wholesale markets and have aggregation software that functions similar to a traditional power plant.
Andre:
Well, it's quite the paradigm shift to think that homes could technically go off grid or could participate as a virtual power plant. I'm certainly not used to buying my power from anybody but my local utility. Nelson, what do all those potential changes mean for me, ultimately, and my local utility?
Nelson:
Yeah. Andre, the traditional definition of an electric utility is to generate or source and distribute electricity. Those activities could decline as consumers produce their own power. Utilities need to be flexible and adapt to the changing environment. For example, utilities could potentially broaden out their activities and offer energy management products, maybe get involved in the installation of rooftop solar or even battery systems. They could provide different financing or ownership arrangements for those systems and, essentially, stay relevant.
Nelson:
For consumers like you, Andre, you could decide to install a rooftop solar or battery pack at home to self-supply most of your electricity consumption with green energy and really monitor and optimize the timing and cost of your energy consumption, and potentially controlling everything from your smartphone.
Andre:
Wow, it's exciting to think that I could both reduce emissions and save some money. Nelson and Elvira, thank you both for taking us through your outlook for energy prosumers. These are very exciting developments and opportunities for the energy and utilities sectors and for us as individuals as the energy transition progresses.
Andre:
What else lies ahead in today's ever-evolving markets and industries? We'll be keeping track right here on Industries in Motion. We also ask that you listen to Lori Calvasina's podcast Markets in Motion provided by RBC Capital Markets. Until then, thank you for joining us on this episode recorded on March 31st, 2022. And make sure you subscribe to Industries in Motion wherever you listen to your podcasts. If you'd like to continue this conversation or you're interested in more information, please contact your RBC representative directly or visit our website at www.rbccm.com/IndustriesinMotion. Thank you.
Speaker 4:
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