Seen another way, though, solar power is seeing serious threats.

Predictions from even last year were that solar energy would soon match the price of electricity from utilities – known as “grid parity” in the business. But the plummeting cost of natural gas, which has become the most used fuel to generate power, has kept electricity prices low. And after dropping precipitously for several years in a row, solar panel prices have recently leveled off, making grid parity more elusive.

Solar businesses are feeling some of this market instability. First Solar, a large manufacturer of solar panels, has seen its stock price gyrate up and down over the past several months, while the stock price for Solar City, a large installer of solar panels, has dropped nearly 50%since its high in December.

And now, electric utilities are pushing back against solar – with some success. In late 2015, the state of Nevada more than tripled a monthly fee customers need to pay on rooftop solar projects. A last-minute appeal in early January failed, and Solar City laid off hundreds of workers and saw its stock price plummet within the space of a few weeks.

The battle between the solar industry and electric utilities has the makings of a classic David versus Goliath tale, but the debate raises legitimate questions, notably: how should regulations be updated to recognize the growth of solar while still ensuring a reliable and affordable power system? And ultimately what value do distributed solar and utilities provide to society?

Solar: friend or foe to the grid?

Any part of the energy business is going to be volatile at times (just ask any shell-shocked oil executive). But the situation being faced by the solar industry is different, because the industry’s success and failure depend as much on a complex web of state and federal regulations as on genuine technological progress.

Many of these regulations were designed to provide a stable environment for electric utilities, and to promote reliable electricity supplies, by keeping the utility shielded from competition. Utilities are feeling threatened by solar energy upstarts, which effectively turn customers into competitors, and are leaning on those regulations to fight back.

In some places, those fights have not ended well for the solar industry. Nevada and Arizona states have imposed fees on rooftop solar power. In California, the state has resisted the types of fees assessed in Arizona and Nevada, but has also changed the incentives for rooftop solar to limit the amount of excess power – those times when solar panels produce more power than a building consumes – that flows back to the grid.

The whole fight revolves around a seemingly simple question: is rooftop solar power good for the grid, or bad for the grid?

Two sides to every solar panel

While the question seems innocuous, there isn’t a very simple answer. There are basically two sides to the debate.

On the one hand, more rooftop solar power lowers the amount of power needed from centralized power plants. That means upgrades to the grid – such as new power plants or bigger power lines and substations – can be delayed or even canceled altogether. Utilities and their regulators, even those opposing the expansion of rooftop solar power, have long recognized the value of lowering demand.

Rooftop solar would seem particularly valuable in this regard since it can be set up to produce more energy during the afternoon peak, when demand is most expensive to meet and the risk of blackouts is the highest.

On the other hand, the legacy grid and the goal of providing reliable electricity to society are not simply going away. A utility needs to bring in enough revenue to pay for the grid and to support social programs like providing low rates for poor customers.

Also, utilities have a responsibility to make sure there is enough electricity to meet consumers’ demand at all times. Having more customers generate their own solar power (and selling some back to the grid) makes the job of utilities more complicated, because it is harder to predict how much power the grid will demand at any given time.

An argument made in solar-friendly California (captured by the infamous “duck curve”) was that large amounts of rooftop solar would actually increase the cost of maintaining a reliable grid, because a utility would need new power plants to handle the rapid increase in the demand for grid power after the sun goes down.

Each of these arguments has some merit. Power grid operators in some parts of the country have found that reducing demand for electricity from the grid can reduce costs and prevent blackouts. California has enacted some reforms to its electricity system to create incentives for the types of supplies that could keep the grid balanced when solar production swings unpredictably. These reforms will encourage new technologies, but will probably also increase the costs of grid-provided power.

Existential questions

An even thornier question that California is wrestling with is the scope of a utility itself.

If solar power achieves the magic point of grid parity, then what is left for the utility to do? How long can the existing power grid work its way around customers who install their own solar power and battery systems, thus cutting the cord to their utility altogether?

Maintaining the grid requires money, which ultimately comes from electricity users. Who will be left to pay for the grid as more people cut their ties with utilities? What does that mean for electricity access for poor people in particular?

Some states, including California, New York and Vermont, are proactively thinking about the overall place of the utility and a sustainable business model in a world of solar grid parity. These states are starting to view utilities as service providers, rather than just kilowatt merchants.

States like Arizona and Nevada are, for better or worse, effectively kicking the can down the road. Sooner or later the moment of grid parity is likely to arrive, where cutting the cord to the grid is economical even without any subsidies. That will force a major conversation about the utility business and how to best ensure reliable access to low-cost electric power.

This article originally appeared on The Conversation

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A few days later, the Supreme Court announced that it would hear a case during its fall term that could very well determine whether Tesla’s technology gamble succeeds or fails. Justices heard arguments on October 14 addressing questions having to do with federal jurisdiction over the fast-changing electricity business.

At issue is an obscure federal policy known in the dry language of the electricity business as “Order 745,” which a lower court vacated last year.

Order 745 allowed electricity customers to be paid for reducing electricity usage from the grid – a practice known as “demand response.” It also stipulated that demand response customers would be paid the market price for not using the grid – like the power industry’s version of paying farmers not to grow corn.

Paying people not to use electricity may sound preposterous – one critique of Order 745 was that it permitted overly generous prices and lax performance standards, basically making demand response a license for electricity consumers to print money.

But research, including some of my own, has shown that demand response can make markets operate more efficiently, temper the market power held by power generating companies and reduce the risk of blackouts.

In other words, as long as the prices and rules are right, paying people to use less electricity isn’t such a crazy idea. Indeed, it’s just one way that new technologies, including rooftop solar and batteries, could make the grid cleaner and lower prices.

Smart grid on trial

The Order 745 case has already proven to be a major disruption in the US electricity market. It has thrown uncertainty into business models, market prices, and in some cases even the planning of the power grid to ensure reliability in the coming years.

The case, however, ultimately goes far beyond demand response.

The issue at hand is all about the ability of the federal government to set market rules for local power systems – that is, the portion of the grid that reaches individual homes and businesses – versus the regional grid that transports power over long distances across the US. It therefore has implications for the value of rooftop solar systems, backup generators, and even Tesla’s Powerwall battery – basically anything that would allow individual customers to supply energy to the power grid or reduce demands on an already strained infrastructure.

In fact, Order 745 could very well be the biggest energy-related Supreme Court case in decades.

The significance of this particular case is rooted in the two different and opposing directions in which technology, policy and good old consumer behavior are pushing and pulling the business of electricity.

On the one hand is a federal policy of playing a greater role in the business of managing the regional power grid, supplanting the traditional electric utility. Regional organizations now manage portions of the national grid for more than 70 per cent of all electricity consumed in the US.

The other trend is the increasing democratization of electric power production through rooftop solar photovoltaics, small-scale energy storage devices (like Tesla’s Powerwall) and increased interest in “micro-grids” to produce, distribute and manage electricity on a localized scale. Local energy is rapidly becoming the new local food. (There has even been a buzzword – “loca-volt” – coined to capture this movement.)

The simultaneous trends of regional grid management and democratized electricity supply are now in tension with one another, not for any technological reason, but primarily for reasons of policy and economics.

The Federal Power Act, which was passed in 1935, attempts to draw a “bright line” between those elements of the electricity system that are under federal versus state jurisdiction.

The federal role is to regulate the regional transmission grid – including the power lines that transport electricity long distances and across state lines – and wholesale markets for buying and selling power. The role of the states is limited to the local grid that delivers electricity to homes and businesses and to retail sales.

Market rules like Order 745 provided a pathway for these two trends to be complementary, rather than in opposition, without a patchwork of individual state regulations.

Want solar panels on your house? Sure thing – and those solar panels could also provide power to the grid at a price, perhaps avoiding the need to build some new power plants. Or you could provide demand response by using less electricity from the grid during certain days, and more from your solar panels. Order 745 created rules to compensate people and businesses on the wholesale energy markets to lower power use, whether it was from a bank of giant batteries or highrise buildings in New York City.

Distributed energy technologies

Demand response and Order 745 are so significant because they have blurred the bright line between federal and state control over the electricity sector. This bright line is increasingly becoming an artifact of our federalist legal structure.

A regional grid operator’s primary function is to ensure the lights stay on by having enough power to match the demand. But there is no technological reason that demand response, backup generators or energy storage banks, electric vehicles, and other emerging technologies that are all part of the “smart grid” could not serve the same function for regional power grids that large power plants do today.

And there are good reasons to believe that harnessing loca-volt energy and energy efficiency will actually be cheaper than building new power plants for times when large-scale wind and solar plants aren’t available (France and some places in the US already do this, through controllable hot water heaters).

Striking down Order 745 would make the bright line ever so brighter, but it would also complicate the economic environment for one of the most innovative segments of the electricity sector.

This case, ultimately, is far more significant than getting paid for not using electricity. It’s about who gets to set the rules of the road for emerging technology in the electricity sector – the states or the federal government – and whether the US will be able to modernize its energy policy the same way that it would like to modernize its power grid. (Full disclosure: My university employer, Penn State, has been involved in a demonstration project that uses battery energy storage to balance fluctuations on the power grid in Pennsylvania and I am an advisor to the Microgrid Systems Laboratory in New Mexico.)

Before launching Tesla’s wall-mounted batteries, perhaps Mr Musk should have sat on his hands for a bit longer.

This article was originally published on The Conversation.

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