Originally published on Rocky Mountain Institute
By Virginia Lacey and Devi Glick.
There’s finally some good news emerging out of the heated debate around net-metering. In California, a previously controversial bill, AB327, introduced earlier this year to reform residential electricity rates, was amended to turn earlier critics from the solar industry into supporters. Among the details, the customer participation cap will be lifted and the California Public Utilities Commission (PUC) will establish a path forward for transitioning to “net-metering 2.0,” a crucial step in minimizing rate uncertainty for existing net-metering customers and growth uncertainty for the California solar industry. The bill also authorizes the PUC to address utilities’ priorities to allow for customer charges up to $10 per month and to revisit the residential tiered pricing structure to reduce the price disparity between the highest and lowest rate tiers.
AB327 signals promising forward steps toward solutions that multiple parties can get behind. That type of collaboration and compromise will grow increasingly important even beyond the net-metering debate, which is one symptom of a larger systemic disruption that’s unfolding in the electricity industry: the decentralization of electricity service.
The expansion of distributed solar into new markets and the continuing decline of solar PV costs towards DOE’s SunShot targets are driving a seismic shift in economics, business models, and operations across the electricity sector. What makes solar analogous to earth shattering seismic activity? Solar PV’s small, modular nature means it can be installed in almost any configuration almost anywhere and for almost anyone—on either side of the traditional utility meter. Even in the most restructured electricity markets with retail options, customer choices have traditionally been limited among retail power providers that source power from large, centralized power plants far from demand (although even that’s starting to change).
Solar enables all customers, including homeowners, to become electricity generators, not simply consumers. In many ways, solar represents a direct challenge to a key tenet that has governed the economic, planning, operations, and regulatory institutions of the electricity sector for over a century—centralized control. Whereas electricity used to be largely a one-way street for the provision of most services, there are a growing number of vehicles sharing the road.
With the introduction of increasing bidirectional service exchange, there is a growing need for evolving pricing structures that enable all service providers, including traditional customers, to be compensated for the value they provide. Consider, again, the issue of retail net-metering.
In the traditional one-way approach to electricity service, when you wanted to power your home or business, you purchased electricity from one electricity service provider or, in restructured electricity markets, perhaps two providers. If you’re like many residential and small business customers, you pay for that electricity service via a per-kWh charge (possibly coupled with a customer charge). That dollar-per-kWh charge is linked to your consumption of energy. However, it is also paying for many different costs and services associated with producing that electricity—the fuel, operations, and maintenance used to run generation plants; the transmission and distribution lines used to deliver the energy; grid support services needed to maintain the stability of an interconnected grid system; and upgrades needed to keep it all running.
When you produce solar electricity that is consumed on site, you displace the need for energy that you would normally buy from your traditional electricity provider. Under retail net-metering, you are credited based on the net energy exchange between that which you produce and that which you consume from the grid. The key questions are: What value does the customer’s solar provide to the grid? What value does the grid service provide to the customer? And is this a fair trade?
UNDERSTANDING THE VALUE OF SOLAR
A good starting point is gaining a better understanding of the value (the net of benefits and costs) of distributed solar PV as it is integrated into the grid. To do so, RMI recently published A Review of Solar PV Benefits and Cost Studies, now in its second edition. In it, we describe the consistently recognized categories of benefits and costs and the approaches taken to calculating them in 16 studies that were conducted from 2005 to 2013.
The range of potential distributed solar PV benefits includes avoided energy costs; avoided generation, transmission, and distribution capacity; decreased congestion on the transmission and distribution system; decreased line losses; and decreased emissions and related environmental compliance costs.
Understanding how each of these components drives the value of distributed solar is essential to determining the value exchange between the solar customer and the electricity grid. The key challenge is that the localized nature of distributed solar means the degree of benefit or cost can vary significantly based on where and when that solar energy is being produced.
MAXIMIZING (NET) VALUE: MOVING FROM THEORY TO APPLICATION
While a growing body of demonstration projects and analyses are providing empirical data that demonstrate the technical viability of optimally integrating distributed PV to support the grid, there is comparatively little analysis to translate that into maximizing delivered value for utilities and customers. With funding by the U.S. Department of Energy’s SunShot Initiative, RMI’s Innovative Solar Business Models project aims to move beyond analysis to practical application, and integrate the benefit and cost drivers of solar PV into value-based price structures and product offerings that both utilities and solar customers can get behind.
What might that look like? New pricing structures could be aligned to reduce cost to the system while also maximizing value to the customer. For example, a rate structure that pays customers a flat rate per kWh would incentivize solar customers to maximize the quantity of energy produced, regardless of timing (e.g., on- or off-peak) and location (e.g., along a feeder with capacity constraints or one with sufficient supply). Thus, new pricing structures could reward solar customers to shape their demand and solar energy export based on the value that their energy provides to the system in times of highest demand and, perhaps, location.
Distributed energy resource bundles that incorporate energy efficiency, demand response, and storage with distributed solar PV would also enhance the value of solar. These resource bundles could change customer load profiles (i.e., when and how they use the grid) and reduce the need for new infrastructure upgrades, creating value for the grid, the utility, and the customer.
California’s AB237 is a promising sign. Key stakeholders can compromise and find policies that will enable these new types of business models to emerge and mature. With the decentralization of electricity services, new business opportunities will continue to develop. What we need are more people and organizations looking to address the challenges that will arise and find solutions.
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