New Entrants to DG Market Challenge Utility Dominance


By now we’ve all heard about the threat posed to utilities by distributed generation (DG). Now, ratings agency Fitch Ratings is taking note. Fitch says utilities have even more cause for concern.

What’s driving this? New investor classes and alternative financing, which will further expand the DG market. That will continue to challenge the traditional utility business model, according to a new report from Fitch.

Fitch expects third-party financing and alternative capital sources to play an important role in expanding the market for residential solar DG — something that’s already been happening. Greater access to capital will enable easier residential PV acquisition, reduce upfront cash outlays, eliminate homeowner system maintenance and upkeep costs, and thus broaden the potential customer pool.

Third-party ownership currently represents 60% to 70% of total residential DG installations. But although it has increased solar adoption, it has not resulted in lower rooftop system acquisition costs. The U.S. Department of Energy estimated in a December 2013 report that third-party financing adds about 15% to total system costs.

But it remains the key growth driver of DG installations. Third-party-owned systems have been able to attract new investors and new forms of capital or recycle capital through securitizations.

For a long time, traditional utilities have been the sole distributor of electricity, even in restructured states where generation and retail energy supply may be provided by others. However, under the leasing model advanced for solar DG, in many areas customers can now purchase electricity — at a lower price than the utility retail price — from the owners of rooftop systems. The leasing model is similar to the retail electricity model in a restructured state but potentially has more risks for the incumbent utility, as the volume of utility-supplied electricity is reduced.

Fitch believes this will further challenge the traditional utility business model, already under siege from energy efficiency and other market dynamics.

This may not seem like a major news flash. But it’s noteworthy that Fitch is making such a serious prediction for utilities. With investment bank Citigroup painting a bright picture of the future of solar, it seems that the most staid institutions are betting on solar and sounding an alarm for utilities.

The full report, “Alternative Finance Plugs into Distributed Generation Growth,” is available at the Fitch website.