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Grid parity: Why electric utilities should struggle to sleep at night

Coal power plants such as this one in Page, Ariz. may become a lot less necessary due to advances in solar energy. (Ross D. Franklin/AP)

What’s good news for those concerned with climate change, and bad news for electric utilities? That’s grid parity, which is sometimes called socket parity. It exists when an alternative energy source generates electricity at a cost matching the price of power from the electric grid.

As grid parity becomes increasingly common, renewable energy could transform our world and slow the effects of climate change. Advances in solar panels and battery storage will make it more realistic for consumers to dump their electric utility, and power their homes through solar energy that is stored in batteries for cloudy days.

“I think the grid gets disrupted,” said NRG Energy chief executive David Crane. “The only question is do you want to be the disruptor or do you want to get disrupted.”

Our world is increasingly cordless, and power appears likely to follow. While we’re not there yet, the momentum behind distributed energy is building.

The Rocky Mountain Institute has said that tens of millions of commercial and residential customers will have grid parity by 2030 and perhaps 2020. Hawaii is already there as a result of high energy costs associated with being an island.

Other estimates are more aggressive. A 2013 Deutsche Bank report said that 10 states are currently at grid parity: Arizona, California, Connecticut, Hawaii, Nevada, New Hampshire, New Jersey, New Mexico, New York and Vermont. According to a 2013 note by Citi Research, Germany, Spain, Portugal and Australia have reached grid parity.

This shift has benefited from a dramatic drop in the price of solar panels, which dropped 97.2 percent from 1975 to 2012, according to GTM Research.

For electric utilities to truly be challenged, batteries are just as important as solar panels. With batteries excess energy could be stored. Tesla announced in February it’s building a gigafactory, which it envisions producing more lithium ion batteries by 2020 than were produced worldwide in 2013. The scale of the operation should drive down prices further (Tesla estimates over 30 percent). Some of these batteries will be used by SolarCity, a leader in installing residential solar panels.

SolarCity has a pilot program in California, in which batteries store solar power. It has complained that electric utilities are slowing its rolloutNRG Energy hopes to have a similar product available by the end of 2014.

If utilities are dragging their feet on SolarCity’s initiative, it’s easy to understand why. As solar energy gets cheaper, traditional electric utilities are doing the opposite. The cost of maintaining the electric grid has gotten more expensive, but reliability hasn’t improved. The investments of electrical utilities appear to be poorly spent.

If customers leave electric utilities, it starts a downward spiral. Fewer customers will mean higher rates, which encourages remaining customers to jump ship for a solar-battery system.

Electric utilities appear poorly equipped for how technology will transform the energy industry. For years there hasn’t been an incentive to innovate, in part due to a lack of competition. Plus, making their product cheaper means less revenue, so why innovate?

Meanwhile, energy upstarts are led by forward thinkers with disruptive track records and eyes on society’s big problems, such as climate change and our dependence on fossil fuels for energy. SolarCity chairman Elon Musk co-founded PayPal and leads Tesla, which could transform the auto industry.

NRG’s Crane speaks of having his company mentioned in the same breath as Amazon, Apple, Facebook and Google. It’s radical to imagine anyone feeling passionate about their source of power, but environmental concerns may make it common soon. New devices such as Nest’s popular thermostat are making consumers rethink what to expect from the companies and gadgets that manage their energy.

Crane highlighted the climate change concerns in a recent letter to shareholders: “The day is coming when our children sit us down in our dotage, look us straight in the eye, with an acute sense of betrayal and disappointment in theirs, and whisper to us, ‘You knew… and you didn’t do anything about it. Why?’”