Value Of Solar Tariffs — The Way To Go?

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There’s a certain issue regarding solar policy that often gets to me. I’ve tackled it in several ways, but the policy idea below is one of the more intriguing of options, in my opinion. It stems from research done by academics from the University of Albany, George Washington University, and Clean Power Research; an article from the Institute for Local Self-Reliance; and a policy put in place by Austin Energy.

First of all, the issue that gets to me is that the value of solar power is consistently underestimated in our electricity markets, in politics, and in the media.

Beyond the electricity it provides, solar power provides many benefits. A unit of electricity from solar is worth more than a unit of electricity from natural gas or coal.

When this really becomes an issue for me is when discussing energy subsidies… or simply when discussing the price of electricity from solar versus the price of electricity from natural gas or coal.

At one point, I even wrote a post contending that solar (and wind) subsidies should continue forever, or at least until a proper price is put on pollution that equals the playing field for all forms of energy. I still like that idea (if the proper subsidies were used), but the problem with that argument is that subsidies are widely viewed as a way to artificially support one industry or portion of an industry over another (even if the subsidies are really just aimed at correcting market failures).

But another way of dealing with this imbalance is to avoid a politically controversial subsidy altogether and simply implement a policy of paying solar power producers (including homeowners with solar roofs) for the full value of their power.

You may be saying to yourself, “isn’t that what we do already?” Not exactly. In most places, we do pay electricity producers for their electricity, of course, but we don’t pay solar power producers for the added value their power includes.

Let me explain this with some more specifics. Electricity from a coal power plant is useful, but pollution from a coal power plant is not — it causes societal harm. However, instead of pricing that pollution (since that is a struggle politically), with a “value of solar tariff,” you pay solar power producers for both the value of the electricity they produce and the value of reducing air pollution, water pollution, and greenhouse gas emissions.

There are some other key things to value, as well. For example, solar provides more grid security, solar provides more price stability (due to its $0 fuel cost and a predictable supply of fuel), solar power boosts the economy to a greater degree, and rooftop solar power reduces the need for additional transmission infrastructure. Valuing all these things takes a bit of calculation, but it’s nothing too difficult or too complex to figure out.

As noted at the top of the page, people have done some research on the matter. Back in June 2011, I posted an article on a study they had conducted on the matter. It had come to the conclusion, using conservative assumptions, that the value of solar power in the state of New York was 15 to 41 cents per kilowatt-hour (kWh) of electricity:

For California, meanwhile, the Institute for Local Self-Reliance found a value of 33¢/kWh:

Additionally, Austin Energy (AE) actually implemented a Value of Solar Tariff (VOST) as an alternative to net metering. “The VOST was derived from analyses by PG&E, Sandia Labs, Clean Power Research and others,” Greentech Media‘s Herman Trabish writes. Benefits that solar brought to the municipality included:

1. Energy value for predictably priced point-of-consumption electricity production;

2. Generation value for the avoided cost of building traditional generation;

3. Environmental value for reduced emissions and pollution;

4. Transmission and distribution system value for reduced burdens on existing wires and infrastructure and the eliminated need for new wires and infrastructure;

5. Disaster recovery value for serving when central stations go offline;

6. Reactive power value for stabilizing voltage drops that cause outages; and

7. Loss savings value for preventing all the above-named losses.

Here’s an initial breakdown of the value of different solar power installations from Clean Power Research:

Since the initial analysis, another value has been identified and added. “In the 12.8 cents per kilowatt-hour 2011 update of the annually revalued tariff, ‘the value for solar went up,’ [AE Solar Incentives Program Manager Leslie] Libby said, because the times ‘when solar is produced match [the times] when ERCOT needs power.'”

“What it is not,” Libby noted, is a special incentive. “It is a credit applied to our customer’s bill for bringing this valuable resource into our service territory. That resource has a value to Austin Energy and we are going to credit them for that value…. [A] residential solar system owner is billed like every other customer for their total consumption. The brilliance of it is this piece. Solar system owners are no longer a special class of customer.”

The Keys to Success or Failure: Assumptions

All of the above sounds great, doesn’t it. But, as with just about everything, the effectiveness and validity of such a policy would depend on the assumptions. Assumptions would have to be made for each item, sometimes several assumptions for each item.

As just one example, a Harvard Medical School study found that the health and environmental costs of coal range from 9–27¢/kWh. If solar were solely replacing coal, the added value in this category would thus be 9–27¢/kWh. But which value in that continuum should it be? It depends on which assumptions from that study you decide to adopt. And what would be the value of replacing natural gas or nuclear power? Again, you’re going to have to make more assumptions.

If the assumptions you use are significantly different from the reality they are supposed to represent, you’re going to come up with a value of solar tariff that doesn’t accurately balance the market. Plus, you’re simply always going to end up missing things. However, even a move in the right direction helps to make the market more balanced and realistic than it is today.

Coming back to the first study above, here are some limitations its researchers noted:

• No value was claimed beyond 30 year life cycle operation for solar systems, although the likelihood of much longer quasi‐free operation is high (Zweibel, 2010)
• The positive impact on international tensions and the reduction of military expense to secure ever more limited sources of energy and increasing environmental disruptions was not quantified.
• The fact dispersed solar generation creates the basis for a strategically more secure grid than the current “hub and spoke” power grid in an age of growing terrorism and global disruptions concerns was not quantified.
• Economic growth impact was not quantified beyond tax revenue enhancement.
• The question of government subsidies awarded to current finite energy sources (i.e.,displaceable taxpayers’ expense) was not addressed.

This all makes the value of solar identified even less than its true value.

Overall, though, as long as a decently qualified and unbiased team is charged with agreeing on the assumptions and determining the tariff value, I think this could very well be the best system around for paying solar producers what they deserve. What do you think?

Images: money, pollution, solar panels & money via Shutterstock; chart and tables via sources linked above.