Hourly Electricity Pricing Boosts Value of Distributed Solar by 33%

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Update Feb.2: A reader comment revealed that I underestimated the value of solar because I had miscalculated PG&E’s tiered pricing. For the revised figures, see this post on Energy Self-Reliant States.


What if electricity cost more when the sun was shining?

Many utilities are using new electronic “smart meters” to adjust the price of electricity as often as every hour, to reflect supply and demand.  And charging more when electricity is in short supply can be good news, increasing the value of solar by 33% or more.

Time-of-use (TOU) pricing is a different billing method for electricity, where the customer pays based on the time of day of using electricity rather than a flat rate per kilowatt-hour consumed.  The premise is that electricity is more expensive when in high demand (e.g. by air conditioners in the afternoon on hot, sunny days) and that pricing accordingly will help reduce demand.

For example, customers in San Francisco on a TOU pricing plan pay more for electricity during peak hours (12 PM to 6 PM).  In the cold months (November through April), the peak rate is 11.1 cents per kilowatt-hour (kWh), compared to 8.3 cents during non-peak hours.  But in the warm months (May through October), electricity used from 12 PM to 6 PM costs 31 cents per kilowatt-hour (kWh), while off-peak electricity is 7.9 cents per kWh.

This pricing scheme can act as an incentive to go solar, because solar panels tend to operate at their highest capacity during summer months.  The following chart shows the solar radiation falling on San Francisco during the “winter” and “summer” seasons (as defined by the utility).  The average insolation during the summer is 6.42 kWh per sq. meter per day, compared to 4.46 in the non-peak season.

Solar panels also tend to have higher output during the peak hours of the day.  In fact, the California Public Utilities Commission found that solar tends to have a 60% capacity factor (produce 60% of its maximum) during peak electricity periods.  The following chart from SolarStik illustrates:

The Economics of Time-of-Use Pricing for Solar

So what will a time-of-use pricing plan mean for the economics of solar in San Francisco? It means solar customers save more money.

Just over a quarter of a solar panel’s output comes at the summer peak period, when the value of electricity is over 30 cents per kWh.  A further 18% happens during the winter peak, when prices are a third higher (at 11 cents) than off-peak rates.

But this is just the start.  These rates (and those in the chart) only reflect the rates that PG&E charges for using up to ~250 kilowatt-hours (kWh) per month (their “baseline” or Tier 1 rate).  But baseline rates only apply to the first 3,000 kWh consumed per year, one-third the U.S. average.  Very few customers use so little electricity.

Rather, most customers will consume electricity in Tier 2, which applies to consumption from 3,000 to 6,900 kWh per year, or even Tier 3, which applies to consumption up to 14,500 kWh.  And the electricity rates in these tiers are substantially higher.

For electricity used in Tier 1 (the baseline) during peak times, a customer pays 28 cents per kWh.  But once they’ve used up their baseline amount, each peak kWh will cost 29.6 cents in Tier 2.  If the customer hits Tier 3 rates in a summer month, their peak electricity will cost 44.6 cents per kWh!

A solar array provides two benefits under this scenario.  First, it produces electricity during peak periods, and second, it also reduces overall consumption.  Thus, the electricity offset by a rooftop solar array is the most expensive, and it also can push the customer into a lower usage tier, reducing the rate paid on grid electricity.

A few examples:

  1. A customer uses 3,000 kWh per year (the Baseline) and has a 2 kW solar array.  The solar array provides 97% of the annual household consumption, and the value of the electricity produced by the solar array (based on the cost of grid power at the time it produces) is 22% higher than under a flat rate plan.
  2. A customer uses 6,900 kWh per year (Baseline and Tier 2 power) and has a 2.5 kW solar array.  The solar array provides 53% of the annual household consumption (but nearly all of the Tier 2 electricity), and the value of the electricity produced by the solar array (based on the cost of grid power at the time it produces) is 36% higher than under a flat rate plan.
  3. A customer uses 10,000 kWh per year (Baseline, Tier 2 and Tier 3) – the U.S. average – and has a 2 kW solar array.  The solar array provides just 20% of the annual household consumption (but nearly all of the Tier 3 electricity), and the value of the electricity produced by the solar array (based on the cost of grid power at the time it produces) is 253% higher than under a flat rate plan.

The following chart illustrates the good matchup between solar and time-of-use rates (the rates shown are for summer weekdays).  The bars show the pricing by hour, as well as the higher prices in higher tiers of consumption (for Residential Schedule E-6).  The green line shows the percent of daily solar output that falls during a particular time-of-use pricing period.

Overall, solar power is a pretty good fit with time-of-use pricing, a policy that should be used in more locales to improve the economics for local solar power.

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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John Farrell

John 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.

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