BCG: Distributed Energy – A Disruptive Force

ATN-300InsightaaS: Boston Consulting Group (BCG) describes itself as "a global management consulting firm and the world’s leading advisor on business strategy." Like Bain & Company, McKinsey & Company and Booz-Allen, BCG provides strategic guidance to the world’s most senior public and private-sector leaders. In this post, BCG principals and directors from San Francisco, Dallas, Houston and Washington D.C. present an extremely thorough review of distributed energy - what it is, what is driving its growth, and how it is likely to affect energy supply in the future. 

"Distributed Energy: A Disruptive Force" is a multi-chapter report. An overview chapter outlines investment trends in distributed energy and its impact on supply and the supply industry (utilities). "The three types of distributed energy" describes energy extractors (technologies used to boost efficiency or manage demand), energy sources (such as solar) and distributed storage. "The cost of DE has dropped" describes the declining costs of DE systems ("In the past five years, PV module prices have declined by about 80 percent, and the costs of lithium-ion batteries for storage have fallen by about half...") and discusses how these price drops, amplified by performance improvements and rising retail energy costs, have improved the economics of DE. "A new wave of innovation in DE" is primarily focused on new financing approaches, while "DE's threat to utilities" provides an excellent illustration of how increased DE adoption will stress utility business models: "As DE reduces revenue, utilities seek to recoup their costs by raising the rates for traditional customers, creating an implicit cross-subsidy of DE users." The balance of the report expands on this theme, with chapters examining why DE's penetration reduces the value of traditional generation infrastructure, the need for utilities to respond proactively to DE, and a capstone chapter that closes with a stark proclaimation: "Distributive energy is a disruptive force. It will require an equally big disruption among utilities if they are going to survive and grow in the changing U.S. power environment."

Distributed energy (DE) technologies have grown significantly in the U.S. Last year, DE represented one of the largest investments in the utilities space, and that investment, along with consequent growth, is likely to accelerate. From 2010 to 2013, DE accounted for about 21 percent of all new capacity in the nation. (See Exhibit 1.) The number of commercial and residential rooftop solar installations, for example, increased by 22 percent in 2013. The increase comprised about 1.9 gigawatts and represented roughly $8 billion in investments.

Sunny states, such as California (with about 700 megawatts) and Hawaii and Arizona (with about 130 each), led the growth. New Jersey and Massachusetts, with about 225 and 200 megawatts respectively, also are growth markets because of state-funded support. Government incentives, offered at both the state and the federal levels, have helped drive this growth so far, as have improving economics in the form of decreasing costs and rising retail electricity prices. As the trend toward DE gains strength, however, growth will no longer rely on such subsidies.

Already, costs have declined significantly. In the past decade, prices for residential rooftop photovoltaic (PV) solar systems, for example, have dropped by more than 50 percent, declining from about $9.15 per watt in 2004 to $4.50 per watt in 2013. At the same time, improvements in technology have created new applications and market segments that previously were not viable. These technology improvements and ongoing cost reductions, combined with heightened consumer awareness and federal and state incentives, continue to bolster DE’s growth...

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