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Clean Power VOST-Formula1

Published on March 29th, 2014 | by Guest Contributor


Is A Value Of Solar Tariff (VOST) Really Better Than Net Metering?

March 29th, 2014 by  

Originally published on SolarWakeup.
By Yann Brandt

Value of solar tariffs, also known as VOSTs, have hit some level of critical mass; at least with public perception and media. The question to ask yourself, as I did; do you know what a value of solar tariff is? Why does it exist? And should you like it?

After the City of Austin presented their VOST, it created a bit of buzz but how many people went into the details and looked at the market effects it created? Now that Minnesota is on its way to potentially creating the first statewide VOST, I decided to do a bit of research about the MN VOST and decide for myself if I thought they were beneficial to the long-term development of solar markets.

To begin, we have to figure out why the VOST formula report had to be written (read the full MN VOST report) and for that we review the language from MN Laws 2013, Chapter 85 HF 729, Article 9, Section 10. The report cites the reason in part:

Minnesota passed legislation in 2013 that allows Investor-Owned Utilities (IOUs) to apply to the Public Utility Commission (PUC) for a Value of Solar (VOS) tariff as an alternative to net metering, and as a rate identified for community solar gardens. The Department of Commerce (Commerce) was assigned the responsibility of developing and submitting a methodology for calculating the VOS tariff to the PUC by January 31, 2014. Utilities adopting the VOS will be required to follow this methodology when calculating the VOS tariff

The key part of the reasoning is in the first sentence, “alternative to net metering.” So let’s take a closer look at what the VOST formulation does right, what it really means to solar and if it is beneficial to solar market development. Above all, any policy needs to maintain the right and opportunity for consumers to self-generate using solar and make clear any hidden tax effects a new policy would have.

What does the VOST formulation get correct?

The VOST takes a long-term look at the value of solar energy generated by distributed PV. In Minnesota’s draft report, the view is 25 years, though some docket comments have already begun to push for 20 year calculations.

VOSTs create a formula for assessing the per kWh benefit of distributed solar energy as it is placed on the grid and takes into account technical, environmental and societal benefits to the utility infrastructure.

VOST Formula

Solar has more benefit that the pure energy value offset and at some point we should value this and it generates benefits far longer than the initial return on capital calculation so many customers focus on. A VOST approach to full benefit of distributed solar should be a great way for regulators to counter the argument utilities use in net metering debates.

VOSTs = FiT?

Minnesota’s VOS legislation mandates that, if a VOS tariff is approved, solar customers will be billed for all usage under their existing applicable tariff, and will receive a VOS credit for their gross solar energy production. Separating usage (charges) from production (credits) simplifies the rate process for several reasons:

  • Customers will be billed for all usage. Energy derived from the PV systems will not be used to offset (“net”) usage prior to calculating charges. This will ensure that utility infrastructure costs will be recovered by the utilities as designed in the applicable retail tariff.
  • The utility will provide all energy consumed by the customer. Standby charges for customers with on-site PV systems are not permitted under a VOS rate.
  • The rates for usage can be adjusted in future ratemaking.

The emphasis is mine, but anytime 100% of the energy output from a solar installation is sold to the grid, that is a feed in tariff. You can call it something else (VOST) but the financial model effects are the same. The revenue is not savings and most likely will be considered taxable ordinary income. Some legal opinions also make the case that a customer using a VOST would not be eligible for the ITC.

I understand why the term feed in tariff is nowhere near this report, and why the proponents of this policy are using VOST as the acronym; but between us solar advocates, VOSTs = FiTs.

Are VOSTs good for the long-term solar market?

Feed in tariffs had their purpose to generate interest and comfort in the solar energy markets. What worked in Germany over the past decade has not been what created the solar market in the US today. The top solar markets in the US now exceed the German capacity being deployed and many German solar customers are now using their solar production as opposed to selling it to the grid under the feed in tariff.

Moreover, VOSTs are calculated by the regulatory board. Keep in mind that the initial policy passed 3-2, meaning one swing vote can kill the solar market. From the report:

Each year, a new VOS tariff would be calculated using current data, and the new resulting VOS rate would be applicable to all customers entering the tariff during the year. Changes such as increased or decreased fuel prices and modified hourly utility load profiles due to higher solar penetration will be incorporated into each new annual calculation.

Customers who have already entered into the tariff in a previous year will not be affected by this annual adjustment. However, customers who have entered into a tariff in prior years will see their Value of Solar rates adjusted for the previous year’s inflation rate as described later.

Commerce may also update the methodology to use the best available practices, as necessary.

Going back every year to justify, plead, and beg for a VOST that hopefully make the solar market survive for another 12 months is crazy and instantly takes away any long-term investor from coming into the market. Getting rid of a strong net metering policy for a 12-month window of survival is a very short-sighted view by those trying to get in and get out. Let’s take another look at VOSTs and see that NEM policy is the backbone of what got solar to where it is today, not a short-term regulation.

(Author’s Note: It’s been pointed out that the last paragraph is confusing. The VOST tariff rate between the utility and site host is fixed for the term of the agreement. The threat to the industry is the potential cliff at each regulatory review which I seek to point out in the last paragraph.) 
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  • Peter Gray

    Thanks for an exemplary top-notch Cleantechnica post and discussion. Zachary Shahan, are you listening?
    How did this happen? I’d say:
    1) The author did some homework and took some risk to think for himself, instead of simply cutting and pasting someone else’s article or press release.
    2) The author paid some attention to comments. I know CT posts are voluntary and maybe we can’t expect too much, but I’d like a requirement that writers follow up in the comments and at least respond to a few of the more cogent ones.
    Others’ mileage may vary, but I’d happily give up some quantity for more quality.

  • SolarPod

    The solutions (on balance) need to be simpler than the problems. Otherwise the system collapses under its complexity. Net metering is simple hence its beauty.

    • Peter Gray

      I’m tempted to agree, but there’s no law of Nature that supports this. Some problems are more complicated than they first appear, and some of the best solutions need to be even more complicated than that.

      A complicated calculation, even if the inputs are updated annually, might yield simple results. E.g., “Your monthly 25-year finance cost for a rooftop solar system = $A. At a guaranteed $/kwh rate from the utility, your monthly payment = $B. If B – A > 0, you should do it.”

      The simplicity of net metering is in the eye of the beholder, and it could easily be made too simple to really work. Simplest of all would be to treat PV owners the same as coal-fired plants, and pay the same wholesale rate to both. Maybe with a discount for solar’s real or imagined intermittency. Is that what we want?

      As I understand it, the potential beauty of the VOST is that if it properly accounted for environmental costs, it could be self-moderating over time, helping avoid boom/bust cycles that benefit nobody. I.e., after a year of excessive regional solar installation (yes, there could be such a thing), the VOST would go down slightly, slowing the install rate. And vice-versa.

      • SolarPod

        Nature is very complex. Just when YOU THINK YOU understand it, a new one emerges. Example: Fukushima. Nature (Sun is a component of nature) is always more vigorous. The next big event is BIGGER than the previous. Value trying to model such complex nature is an exercise in futility.

        I know data analysis especially solar energy generation very well. The VOST (reference MN VOST) takes in one number for the solar energy generation. This one number adds a 10% error to the long term VOST calculation. If one number adds 10% error when you have 9 more such factors, the error in the calculation will be larger than the PREDICTED VALUE.

        I like the intention. But intention sometimes have to be measured with outcomes.


        • Peter Gray

          Huh? If there’s a point in there, I’m having a hard time seeing it – and PUTTING YOUR ASSERTIONS IN ANNOYING CAPS does not make them more convincing.
          I didn’t claim to understand Nature better than anyone else, so you seem to completely misunderstand my point about not being aware of any Law of Nature that says simplicity is always better than complexity. If you can educate me on that, please do.
          If you know data analysis, you should know that statistical error is unavoidable, and pretending to avoid it us usually unhelpful. In what world are ten independent 10% errors likely to go in the same direction instead of roughly canceling each other? And if they did, so what?
          It’s a fundamental (maybe fundamentalist?) mistake by the extreme enviro movement to deny that we can put a value on health, clean air, and clean water. All those things come at a cost, and none has an infinite value, to you or to anyone else. We implicitly put a dollar value on those things even when we try not to – but when we try not to, we tend to make worse decisions.
          For a thoughtful, perceptive take on all that, I recommend reading The Climate Casino by William Nordhaus.

        • Bob_Wallace

          Avoid the all caps. It’s a social disease.

    • Bob_Wallace

      Net metering doesn’t work once there is sufficient end-user solar on the grid to collapse the wholesale price.

      When that happens the utility is accepting almost worthless sunny hour electricity and having to pay back with expensive peak hour power.

      Look what happens in Germany on a sunny day. The value of midday electricity plummets.

  • Wayne Lin

    I’m curious about the long term impact of this for consumers assuming that solar continues growing. I can see how separating usage tariffs and VOS credits is good for the utility. They can continue to raise tariffs to keep their revenues steady as more people move to solar and they pay out more VOS credits. Does this then create a two tier energy system? Where those that can afford to go solar, either buying or having access to credit to lease them, go solar and everyone else is stuck with very high rates and skyrocketing bills?

    • JamesWimberley

      Yes. But that’s true whatever the model. It would even be true if you banned solar feed-in completely and rooftop solar was all self-consumption. The only way to make solar households no better off is complete socialisation (rooftop panels are all owned by the utility), which nobody is advocating. The utilities are now stuck with stranded high-cost assets, and their cost will be borne most by all those that can’t reduce their grid consumption.

      However, the new-found concern for social inequality of the utilities is plainly tactical. It’s not actually the case that solar panels are mainly installed by rich people – the top 0.1% care about the appearance of their property, not utility bills. The top 50% certainly. Renters have no access to solar. Progressives should support programmes like community solar and choice of supplier that widen access to renewable energy. Energy poverty should be addressed by programmes that target those who have real problems in paying their energy bills. Solar stamps?

      • Ronald Brakels

        In Australia the poorer half of the population installs more solar than the richer half. And the fairly obvious reason why being poorer people are more motivated to seek out a bargain while richer people are more likely to let things slide. Now I don’t know how thing will go in the US but I imagine it would be the middle class in the lead with the working class catching up when the installed cost drops.

      • Peter Gray

        I’m adding JamesWimberly to my short list of commenters to “follow,” along with Ronald Brakels and Bob Wallace. While far from an expert in any of these pricing schemes, I think the article, and your comment, begin to sketch a fundamental point that might serve us well in considering any of these solutions.
        There’s risk in every investment. A carefully constructed regulation might reduce the overall risk, but it can’t get rid of it. In this case there are three parties who might bear the risk: the utility, the PV and solar installation industry, and homeowners. Each of them would like to have more profit and less risk.
        As I understand it, the original German FiT put the entire risk on the utilities, which badly underestimated how rapidly PV costs would continue to fall – thus the political reaction recently. The MN VOST, if I understand it correctly, puts all the risk on the solar industry, with little or none for utilities or homeowners. This makes sense in terms of a utility strategy to put the long-term brakes on a transition to renewables, and the solar industry is the smallest political target.
        If we want the solar transition to succeed, perhaps we should try from the start to design policies that share the risk among all three parties more or less equally. I see no reason why any of them should bear the entire burden or none of it.
        Going into dreamland a bit, maybe we could also recognize that all 3 parties will eventually bear the costs of climate change. As a point in favor of VOST, it does have an “avoided environmental cost” line. Why not focus on that, as an opportunity to put in a CO2 value? A reasonable estimate there, for a coal-dependent utility, might swamp all the other items.

  • JamesWimberley

    “..between us solar advocates, VOSTs = FiTs.”

    Not quite. A VOST is a species of FIT: FIT>>VOST. German FITS for instance are not calculated by a VOST formula but set by a political decision intended to (a) provide competent solar investors with a reasonable return (b) to keep costs falling (c) – a recent addition – to keep total solar installations in the government’s target corridor.

    The great advantage of an FIT is certainty to both buyer and seller. Even net metering has uncertainty built in, as retail rates will change. In this case the risk is almost entirely to the utility.

    Regular review is inherent to any FIT. A VOST process can still be manipulated, but it constrains the decision quite a lot as against a raw political one.

    Interesting that the Minnesota VOST didn’t include much for despatchable backup, the great talking point of wind and solar opponents. It must be that when you look at the numbers, the need for backup created by marginal solar capacity is roughly balanced by the reduced need for backup that comes from a lower total demand on the grid, basically a wash. This result depends on the circumstances: it won’t necessarily hold for wind because it has a very different form of intermittency, or for much higher levels of solar penetration, or for other regions.

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