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Published on August 9th, 2011 | by John Farrell


Clever Accounting Lets Utilities Cash In When You Go Solar

August 9th, 2011 by  

I recently got a copy of a utility bill for a Minnesota business that has a 40-kilowatt (kW) solar PV array.  I wanted to learn how quickly he’d pay off his array with the electricity savings.

I was shocked.

Payback time was 30 years.  Even if the business owner had received a generous $2.00 per Watt rebate on top of federal tax incentives, it would still take 22 years for her to recoup her investment.  It all came down to the way utilities account for solar power under “net metering” rules.

A quick tutorial.  Net metering essentially lets a utility customer run their meter backward if they have an on-site electricity generator (like rooftop solar).  So, if I’m a commercial customer who uses 10,000 kilowatt-hours (kWh) a month but my solar panel generates 4,000 kWh, I only pay for the difference: 6,000 kWh.  This is supposedly a great deal, because rolling back the meter at the retail rate typically beats getting paid the utility’s “avoided cost” wholesale power rate — the rate the utility pays for more power from nearby power plants.

But the trick is how the meter rolls back.  You might think that your electricity bill has simple math: total electricity consumed times the rate per kWh used.  In the case of this business owner, that would have been a rate of 21 cents per kWh and a payback period for their solar array of just 9 years.

If you thought it was simple, you’d be wrong.

In this case, 12 percent of the electricity bill is taxes and fees.  And of the remaining 88 percent of the bill, 60 percent isn’t an energy charge per kWh, but a “demand charge,” which the solar PV array doesn’t affect.  So, the customer can “net meter” with their solar power array, but it only affects 35 percent of their total electric bill.

So, instead of rolling back their meter and saving 21 cents per kWh of electricity, this commercial customer actually receives about 5.4 cents per kWh, reflecting the energy charge portion of their bill (divided between an energy charge (41%), fuel cost charge (57%), and (tiny) environment improvement rider (2%)).  And net metering at that rate means a payback period of 30 years.

Net metering doesn’t do a whole lot for the customer’s bill, but it sure makes the utility happy.

With net metering, the utility treats solar PV electricity generation exactly the same as it would conservation or energy efficiency (with the exception that solar usually gets a more generous rebate).  And since both of these strategies are significantly less expensive than PV for reducing electricity demand, the customer loses out.

The customer loses, but the utility wins.

That’s because the energy charge doesn’t necessarily take into account the additional value that solar provides to the utility.  When working with the Palo Alto, CA, municipal utility, the CLEAN Coalition — a California renewable energy organization — found that solar PV was worth nearly 75 percent more than typical “brown power” because of its time of delivery (peak), avoided transmission access charges, renewable energy credits, and additional local value.  Similar calculations were also made in Ft. Collins, CO.  That means that instead of the 3-4 cents that utilities claim they pay for an additional kWh from a cheap coal or natural gas plant, solar is actually worth far more.

Accumulating solar PV and other distributed generation sources can also allow the utility to defer infrastructure upgrades and reduce stress on the distributed grid, especially when spread over a wide geographic area.

There are a few caveats.  The energy charge that individuals and businesses pay on the utility bill (5.4 cents in the case of the Minnesota business owner) may exceed what the utility pays for the power (there’s a markup in every business); even so, the structure of net metering means that the utility isn’t paying for the advantages of additional electricity generation, but only for delivering a bit less electricity.  The particularly poor economics for folks who go solar in Minnesota are also a factor of the state’s rate structure.  Minnesota has relatively low electricity prices with no time-of-use rates or consumption tiers that would allow solar PV to offset marginally higher rates.  Other states, like California, have rate structures such that net metering values are 15 to 20 cents per kWh, rather than 5 cents.

There’s much more to net metering rules than the price, but in Minnesota, and likely other states, it’s a rule that offers a lot to utilities and very little to ratepayers.  We can do better.

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance’s New Rules Project.

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About the Author

directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development.   Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (energyselfreliantstates.org), and articles are regularly syndicated on Grist and Renewable Energy World.   John Farrell can also be found on Twitter @johnffarrell, or at jfarrell@ilsr.org.

  • Solar absolutely cuts your demand charge by shaving your peak. To your last point that implies California is”doing it right, the California tiered pricing model is designed to be punitive and is completely counter to all laws of economics (ignoring that GDP and electricity use are linked — how strange that the CA economy is in freefall). For the typical household, their marginal (next) kWh’s cost the utility less than the first few kWh due to A&G and other fixed costs of the distribution system being built into the price of power. If the failed logic of a punitive pricing system doesn’t sound rediculous in the power business, try another example: We apply punitive damages to cases like fraud, should we pay out a same-sized reward to companies who don’t engage in fraud? Further, it’s not sustainable. If everyone installed solar, where does the 20 c/kWh come from? If solar is so good for utilities, why aren’t they excited about it? PV systems get a free benefit of transacting their account’s imbalance on the grid and their neighbor has to pay for that.

    • a few points:

      – on GDP & electricity use being linked: you imply a causal relationship that seems more than ambiguous (more electricity use = more GDP). i think much more likely would be more GDP = more electricity use. think about it. – solar is a deal in the long term. if you look at the first year alone, you are obviously going to come to a diff conclusion than if you look at the full 30 years or more lifespan of the solar panels.
      – i have seen several utility company CEOs talk about solar in a very excited way. hate to burst your bubble there.
      – PV has some extraneous costs, but it’s got many more extraneous benefits. look into it: http://cleantechnica.com/2011/06/26/true-value-of-solar-power/

  • Xcel says they adjust the demand charge seasonally. So my questions would be…

    1) has this adjustment been done, post-solar? and
    2) does the customer have significant demand at night?

    If not 1) then I’d like to see an update when it’s done. And if yes to 2), well, isn’t the ability to provide that peak demand a fixed cost, unrelated to any solar production during the day?

    This doesn’t strike me as clever accounting; it’s just what it is.

    Oh, and the utility probably DID pay for about 1/3 of the array, as well. It’s not a bad start…

  • Ryan

    I disagree with the article — demand charges should be helped by solar too. The article points out that solar is more valuable because it occurs during peak times. The demand charge is based on whatever your maximum usage was for the month. This constitutes a peak and so usually occurs at peak times. For a resident, that’s in the hot afternoon when they run the air conditioner. For a business, it’s also in the afternoon, the middle of the workday. Since solar usually produces the most in the afternoon, it should reliably reduce your peak, and thus reliably reduce your demand charges.

    • Jfarrell

      I agree that demand charges should be helped by solar, but for this customer it did not seem to make a difference.

  • Gomer

    OR these people could go completely OFF of the grid altogether and the power company would not make a dime!

  • Anonymous

    Then the owner bought an electric car. . .

  • A

    or, you can get off the couch and intervene in the GRC. rate structures should encourage investments in EE and self-generation. if they don’t, i.e. through fixed charges, you can change them.

  • I’m not sure I understand this. Why doesn’t this work exactly the same as with residential customers? I know several people who have zero monthly bills. Businesses should have the same advantages because we need them to WANT to do this.

  • Anonymous

    This is how electric billing works for most non-residential customers. The demand charge its the peak usage throughout the month. Decreasing their peak power usage (kW) will bring the demand charge down.

    The residential, consumer facing rate (between 10 and 12c/kWh) includes demand charges based on various assumptions.

    I think it would be better if they recognized demand coincident to peak power usage (e.g. at the month’s coincident peak power, what was your demand? if its negative, the utility should pay you!).

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