Clean Power

Published on August 26th, 2014 | by Daryl Elliott


Retail vs Wholesale Energy Pricing: 1 Reason It’s Easy For Rooftop Solar To Be Cost Effective

August 26th, 2014 by  

Solar on House - Google - No License - Commercial Use Ok

Utility-Scale Solar Energy Pricing

In the media, when solar energy pricing is discussed as being cost effective or not, they are typically talking about utility-scale solar projects and how they compare on cost to wholesale prices from coal or natural gas power plants. Wholesale energy prices are of course lower than retail prices, so it’s not as easy for utility-scale solar projects to be cost effective in this case. (Though, solar projects have been underbidding fossil fuels in some locations, such as Texas and Minnesota in the US, and especially in many developing countries.)

Residential Rooftop Solar Energy Pricing

When residential folks are putting solar on rooftops, we only have to beat the price that we pay on our energy bills, which is the retail price. Consumers of course pay the higher retail rate, not the lower wholesale rate, which makes it easier for rooftop solar to beat the price paid to the utility company. This is one big reason why so many of us are putting solar panels on our roofs.

Net Metering Pricing

Net metering is when the utility company pays the energy producer for excess energy that flows into the grid and reverses the electric meter, thus reducing the electric bill and in some cases making the electric bill positive, causing the utility to pay the resident. In locations where net metering is legal (most of the United States), the utility company has to pay for the electricity that they receive.

Usefulness of Retail vs Wholesale Energy Pricing Distinctions

These pricing distinctions may be useful when making a decision to get rooftop solar. This info might reduce the possibility of confusion along the way.

Editor’s Note: This is pretty basic stuff that regular CleanTechnica readers should know, but it’s true that the matter is widely misunderstood and confusingly discussed in the media. Comparing the cost of rooftop solar power with wholesale electricity prices almost never makes sense, yet people do it over and over again, which of course turns other people (even less informed) off. And as Daryl noted in an email to me: “I’ve seen this info mentioned briefly in [CleanTechnica] articles on occasion, but I haven’t seen a short, straightforward article address this topic thoroughly.” So, help out educating the masses about this important matter by sharing this piece!

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About the Author

I have followed and supported solar, wind, geothermal since the 1970s. After discovering its strong environmental benefits, became vegan in the late 70s. Go green.

  • Good point. I like your view on this.

  • halslater

    I think that describing net-metering as “selling electricity” back to the grid is inaccurate and leads to the tea-bagger argument that it is unfair to non-solar customers. With net-metering, nobody sells anybody anything. The homeowner “lends” power they don’t need to the utility and gets it back when it is easier for the utility to provide it.

    • Bob_Wallace

      Solar lending works great for both home owner and utility when solar hour retail prices are high and non-solar hour prices are low.

      Utilities take in power from homeowners, sell it on to other customers at the current high retail price, then pay the homeowner back with inexpensive off-peak electricity.

      But that exchange can break down with only modest amounts of solar on the grid as we’ve seen in Germany.

      Look at the price data in the first graph. This is from before Germany had much solar. A utility wold be getting expensive power and paying back with a mix of some expensive and a lot more less expensive.

      Now look at the price data in the second graph. This is Germany with modest amounts of solar on a sunny day. The value of sunny hour electricity has plummeted. A utility would be taking in cheap electricity and paying back with expensive power during the remaining price spikes.

      We need to design a system which is fair to all.

      • Vensonata

        Yes, feeding into the grid as a virtual battery only works until 25% of the houses are doing it. Then reality hits…you overproduce in the summer and underproduce in the winter just like a real pv/ battery/generator model (otherwise known as off grid!) On grid the generator is 20 miles or a 100 miles away. Off grid the generator is 20 feet or 100 feet away.

        • Ha, clever/insightful way of putting it.

          It’s also important to note that a lot varies based on region/climate. A solar engineer in Abu Dhabi told me that if they visit Europe in summer they get burnt. One reason is the extremely long days. (Another reason is they have natural sunscreen also called dust down in Abu Dhabi.) In a more balanced climate (sorry, Germany — I know you like to think that you’re balanced), you’re not going to get the same seasonal roller-coaster that you get in Europe.

          • Ronald Brakels

            In Australia spring and autumn are when solar provides the greatest portion of total generation though the day. (It was powering maybe 40% or more of electricity use at noon on Saturday in South Australia.) In winter people are using electricity for heating, and in summer, while the days are longer, our air-conditioning load is huge. In the US I think that every state except Alaska has a summer peak, although some are close. And I think most Canadians live in areas with a summer peak.

          • eveee

            Ronald – You are right. Every single state except Alaska has a summer peak. I checked. Don’t have the refs right now. But I am certain. I thought maybe Maine or one of those states might not, but no, sure enough, summer peaks loads. I looked into Australia solar, and found some places had solar variation due to rain. I am sure most Australians would welcome the rain(in modest amounts) even at the expense of some solar. But I can’t help thinking of all the vast expanses of outback with withering sunlight like the American Southwest and very little rain. Yes. The dirty little secret is that even lands north of the border in Canada get as much or more sunlight as Germany. Its a shame Texas has not built out more solar. It would neatly complement the wind diurnal variation and lower the electricity bills for air conditioning. The battle over solar is raging in Arizona. A key high air conditioning state with plenty of solar.

          • Ronald Brakels

            In Australia it works out quite well. Our peak demand is when its hot due to air conditioning load and when its cloudy or rainy we don’t use so much air conditioning.

      • Mint

        While what you say is true, the retail-wholesale difference is a bigger source of losses.

        When the utility “takes in power from the homeowner”, it’s a substitute for wholesale electricity purchase. There’s no reason for the utility to credit the homeowner with an equal amount of retail electricity. Even in your ‘before’ graph, peak electricity is only 60 Euros per MWh, compared with 250 Euro per MWh or more for retail electricity.

        I haven’t heard any good reason why net metering encouraging many rooftop solar installations is preferable to cheaper large-scale solar. If a utility didn’t implement the former and instead put those avoided revenue losses towards financing the latter, we’d have a lot more solar for the same overall cost. You gotta force the utility to do one or the other anyway.

        • Bob_Wallace

          Home-owner/end user solar shifts the capital investment, maintenance, real estate and insurance away from the utility.

          I may not cover the spread between utility owned solar and net metered solar but it would trim the spread.

          • Mint

            If a third party did the utility solar, all those costs are included in the PPA.

            I wouldn’t be surprised if PPAs for utility solar cost half as much per kWh as the utility credits homeowners for rooftop solar.

          • Bob_Wallace

            We know that solar PPAs were running ~ 5c in the SW last year.

            You’re right about contracted solar shifting costs away from the utility. I was thinking about situation where utilities might own the farm.

            Net metering is just unworkable at large scale. I’m not sure there is any pricing structure that is fair other than giving home-owners the time of delivery wholesale price. That won’t help the rate of people putting panels on their roofs, or it might cut the average installation size down to what the home can use direct.

          • Mint

            Cutting down size increases installation cost per kWh, so I’m not sure that works either.

            I don’t know why we even started going down the net-metering path. Solar capacity is cheaper on the ground in large scale, it’ll often have higher CF, and storage is more effective on the grid also. People have accidents going on rooftops, too, as even small rates add up.

            At least we could have done virtual net metering instead, where shares of solar farms are sold to people who want to be green. Even if the utilities tacked on a substantial connection fee, people would still find either 5c/kWh (to pay for the PPA) or $2/W (to pay up front) to be really attractive.

            Actually, that sounds like a good free-market way for utilities to kill net metering.

  • Will E

    Agree with this, howeverSolar Power has become that cheap that wholesale and retail
    prices do not matter anymore. Solar wholesale is cheap and retail is a moneymaker for every owner with solar panels.
    Communities should pay attention to install community solar parks to make money for the town or village.

    • Matt

      Make money? This is one of those messy terms. What rate of return feels good to a home owner verse city/town verse wall street verse …

      By the way I do think that the combination of TOD and Net metering is the way to go. Assuming of course the the TOD cost differences are honest.
      – For a home owner it is the retail rate. Note that many utilities are raising their fix charges/fees on the bill (Dist-Customer Chg, Delivery Riders, Generation Riders) in order to keep the per kwh fees lower (Dist-Energy chg, supplier energy chg). This help keep their Net-metering “loses” low. Also the lost opportunity cost for most home owner are lower. If you are keeping money in the bank it is zero.
      – For a business, peak charges and tier rates. Using PV might push me to a lower tier and/or reduce my peak charges. Might have access to accelerated depreciation. These can be major cost reduction. Way past the wholesale rate. Also there is the lift you may.may not get from be a more green company. If customers come to your site, the positive feel they get about you because the solar over the parking/walk ways keeps them out of the hot sun and rain.

      Just as there are external cost hidden in the “cheap” cost of coal power. There are external benefits in solar, more so for DG solar.

    • Make money.
      There is more than one type of money in a community, I count ten.
      A community with a solar garden park with solar trees and solar sculptures may draw interested, new, like-minded, dollar spending citizens such as myself.
      Go Nelson, BC

  • JamesWimberley

    An additional distinction is between spot or other short-term market prices (such as day-ahead) and long-term contracts. In Germany there don’t seem to be any long-term arm’s-length supply contracts – a market failure – , so “wholesale” refers to the spot market. This matters for perceptions. It’s easy to exaggerate solar subsidies by comparing the administered FITs – 20-year contracts – with much lower spot wholesale prices. The fair comparison would be with 20-year PPAs, which don’t exist.

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