Ken Zagzebski wears a number of different hats as president of AES United States, which gives him unique insight into diverse, and sometimes competing, parts of the energy system.
Zagzebski leads 10 businesses across the country with a cumulative total of more than 12 gigawatts of electric generation, made up largely of coal and natural gas. The portfolio also includes more than 700 megawatts of wind. In addition, AES owns two regulated utilities -- Dayton Power and Light Company and Indianapolis Power & Light Company -- that deliver energy to 1 million customers in the Midwest.
Zagzebski also oversees AES’ expansion into the evolving U.S. energy market, with the deployment of grid-scale battery storage and distributed energy solutions -- solutions that are often seen as a threat to the traditional utility business model.
AES entered the distributed energy business last year with the purchase of Main Street Power. AES Distributed Energy currently operates 65 megawatts of distributed solar PV in North America, and more than 200 megawatts in development across the Western Hemisphere. For Zagzebski, getting into the distributed solar arena was an obvious choice.
“From a strategic sense, I’m a big believer that this is where the future is going -- if you want to play in the future, you’ve got to be part of the solar industry,” he said in a keynote interview at GTM’s Solar Summit in Arizona this week.
“Also, if you take a look at the mission of AES, it’s to improve lives by providing safe, reliable, sustainable power,” he continued. “It’s impossible to argue that distributed energy and solar don’t improve lives. It’s sustainable, safe, reliable -- so it [embodies] the principles we believe in.”
Not all utilities think about solar in this way, however. Zagzebski said he recently attended a utility conference where the room was divided roughly in half between executives who believe “solar is evil” and that the grid needs to be defended, and executives who view solar as a freight train utilities should get on board with or risk missing. He put himself in the second camp.
The telecommunications industry offers a cautionary tale, according to Zagzebski. In just a couple of years, that industry saw rate guarantees for landline service effectively disappear with the mass adoption of wireless phones. “[People] say that will never happen in our industry, because you need wires to transmit electricity,” he said. “But the reality is, you take solar and take a battery, and that’s the equivalent of a wireless phone.”
With that said, Zagzebski is not an advocate for going off-grid. To be successful in the distributed energy space, he believes that companies need to come up with products and services that are not only attractive to customers, but also work well with utilities. Putting on his regulated utility hat, Zagzebski said one of the most advantageous things for a solar company is to understand the utility perspective.
Utilities are responsible for 100 percent reliability, so utility employees tend to be risk-averse. In addition, under existing regulatory frameworks, they’re penalized for taking chances and see little or no reward for innovation. Utilities are also very sensitive to cost. Around the country, Zagzebski said roughly 20 percent of customers call their utility every month for credit-related issues. At the same time, utilities want to make money, which is traditionally done through the rate base.
“Most utilities -- can’t speak for all of them -- aren’t big, bad guys,” he said. “They’re people who want to do the right thing; they may just tend to be more conservative. So I’d just say to give them the benefit of the doubt and try to find ways to work together.”
Zagzebski recommended solar companies participate in utilities’ resource-planning processes, which are typically less stressful environments than rate cases. However, those processes look several years into the future and may not have a bearing on market decisions today.
Zagzebski wrestled with how utility-solar industry relations would play out in the near term. He acknowledged that a growing number of customers want more control of their energy usage, less dependence on a big utility company, and cleaner energy resources -- which presents an opportunity. Meanwhile, utilities’ sunk costs are a big obstacle. Based on Zagzebski’s back-of-the-envelope calculation, U.S. utilities would have to recover somewhere between $3,000 and $6,000 per customer just to account for investments they’ve already made.
Cost is another concern. State policies have been a major driver of renewable energy adoption to date, but once renewable penetration reaches 2 percent to 5 percent of grid capacity, customers will start to feel the pain in their pocketbook, said Zagzebski. For that reason, solar has to become economically viable without incentives and mandates. In Indiana and Ohio, where AES works, the competitive price point is around 3.5 cents per kilowatt-hour.
For Zagzebski, one of the most surprising takeaways from Solar Summit was to see how much the solar industry had matured, and was starting to place greater emphasis on cost over policy and partnering with utilities.
Tom Werner, CEO of SunPower, expressed a similar view that the utility-solar industry relationship will have to evolve, particularly around distributed generation.
Today, regulated utilities cannot rate-base distributed generation, so they’re economically incentivized not to have distributed solar in their territory. But through the work being done by progressive public utility commissions, Werner said it’s likely that the economic conflict will eventually be "designed out." Meanwhile, unregulated utilities are already making meaningful plays in the solar space.
“Utilities are going to play a huge role in solar over next 10 years, for sure,” Werner said in a keynote address. “How much distributed generation? I think it’s going to be meaningful.”
“The challenge that I see is how to allow customer choice so it’s not a monopoly,” he added. “Hopefully, we can work constructively with the utilities to come up with a method where we can both allow choice and let the market drive things.”
An estimated $4 trillion will flow into the solar sector over the next 20 years, according to Werner. By 2030, Deutsche Bank estimates $5 trillion in cumulative revenue will flow out. That potential will attract an increasingly diverse set of players, and not only utilities and distributed energy providers, but also tech conglomerates and ESCOs.
As more companies get into the industry, they will need to differentiate their products, price aggressively and take risks, and at the same time manage their products and execute on their plans effectively, Werner said. As SunEdison’s decline shows, this isn’t an easy proposition.
“This is a massive opportunity, but it breeds a fair amount of chaos,” said Werner.