We Have “Value for Solar,” But Should We Use It?
Originally posted at ilsr.org.
Earlier this year, Minnesota became the first state to formalize dozens of studies by adopting a “value of solar” formula that would fundamentally change the relationship between solar energy producers and their utility. It’s designed to have the utility accurately compensate solar energy producers for the value of solar electricity to the utility, its customers, and society. And by separating solar production from consumption, it also ensures that all electric customers are paying for their share of the electric grid. So far, no Minnesota utility has adopted the voluntary formula.
But do we really want utilities to adopt value of solar? (share your thoughts in the comments)
The Case for Value Of Solar
In an extended post in May 2014, I made a strong case for the economic rationale behind the value of solar (as compared to net metering). I also highlighted the political consequences of ignoring the increasing gap between the cost and value of solar, and between those figures and the retail electricity price. That issue was captured in this slide from my Future of Solar presentation:
The issues raised in that post and the above chart remain true because net metering is an accounting policy, not an engineering one. It allows customers to pay the net between their solar production and on-site electricity use, even though much of the energy off their solar panels will spill back onto the grid. So even though much of the electricity produced doesn’t actually offset on-site use (because, for example, people use electricity at 9pm when solar production is virtually nil), customers with solar arrays reduce their bill as though they do offset their energy use.
Utilities suggest this the above chart illustrates a big problem, but their solution – big fixed charges on electric bills – hardly encourages any socially desirable behavior. Rather it’s a great ploy to defend a business model of a monopoly utility that’s rapidly going out of date in an era of smart grids and distributed renewable energy.
What Change to Choose?
We have better options than cementing a utility’s grid monopoly, but all options aren’t equal.
Alternative 1 – Value of Solar
Value of solar is a compromise position. It says that compensation should follow the electrons, with producers paid for what they produce and consumers paying for what they use. When well designed, value of solar is an economist’s dream: transparently setting prices on the basis of all necessary costs and benefits.
But what if we believe that customers have a right to generate their own power and to offset their own energy consumption, and should not be compelled to sell their output to utilities? Or what if we believe (as discussed more below) that power supplied at the retail level should be compensated at the retail price? Or what if we feel like it’s the utility’s job to come up with a palatable alternative to net metering and not the advocates of a distributed renewable energy future?
Alternative 2 – Net Metering + Value of Solar
Another option would be to combine the best of both policies, using net metering to credit customers up to their monthly bill total (allowing them to zero out their bill), and paying them the value of solar price (instead of a generic avoided cost or the retail electricity price) for net excess generation. This is a pretty small tweak, since many net metering customers don’t actually produce more than they use, but it would respond to the criticism that solar produced for the grid be paid a price commensurate with its grid value, not the delivered retail electricity price.
This policy could also be applied cumulatively. If the solar energy produced by all customers on a local distribution feeder stays local, it’s paid at the net metering rate. When solar energy spills back onto the larger grid system (a wholesale rather than retail transaction), any excess generation (spillover) would be paid at the value of solar price.
Alternative 3 – Actual On-Site Production + Value of Solar
Alternatively, we could require that solar energy produced on-site only reduces the electricity bill if it’s used on-site. Thus, if a customer wanted to “net meter” they would have to store noon-time energy in excess of their on-site use (e.g. in a battery) to use later in the day. Excess power sent to the grid would be compensated at the value of solar price.
This is a fundamental change that’s also economically inefficient. We have an electric grid with a multitude of energy sources, and often plenty of nearby demand that a rooftop solar array can serve. Why balkanize the grid with millions of solar + energy storage systems unnecessarily?
Alternative None – Stick with Net Metering
A solar producer whose energy spills onto the grid is replacing a utility’s retail delivered power to nearby load. And if that’s the case, then why shouldn’t that customer be paid the same price the utility is paid – the retail rate – for every single kilowatt-hour put onto the grid?
Are we seeking alternatives simply because the utility is losing market share? Is it because utilities don’t understand the value of the trade––solar energy instead of cash for service?
The Issue of ‘Fair Share’
The crux of all these policy options is the notion of whether solar energy producers (who rely on the electric grid for energy at night or when it’s cloudy) are similarly supporting the maintenance of the electricity system as customers that don’t net meter. Given utility “solutions” that include taxes/fees on solar producers and fixed charges, it’s clear that they believe a fair share has to be a set-aside––if you don’t send the utility some money every month, it’s not “fair.”
But numerous studies show that solar energy producers provide something of value to the utility, often in excess of their compensation. Even if a solar producer pays zero for electricity bill, the utility has received something of value, just not cash.
Nor is there anything holy about using fixed charges to cover fixed costs. There’s no cover charge at Starbucks, but there are enormous fixed costs in keeping locations open, lit, and operational. What makes a utility system any different? (and if utilities have major rate design problems, why is it only the advent of widespread solar adoption that’s motivating a change?)
Net Metering: a Proxy in the Battle for a Democratic Energy Future
Utilities rightly see the end of an era, with technological change revolutionizing their business. Value of solar (if properly calculated) is a terrific, economically efficient policy for addressing customer and utility concerns about fair compensation.
On the other hand, it’s a drop in the sea change happening to the electricity business model.
There’s $364 billion in revenue from electricity sales in the U.S. every year, and much of that is up for grabs due to the opportunity from widespread, distributed renewable energy. Residential and commercial rooftop solar alone accounts for 17% of new power plant capacity in the first three-quarters of 2014; the entire paradigm of the electricity system is shifting.
The question to ask is not whether value of solar or net metering are the best policy for compensating on-site solar energy producers, but which policy will lead to a better energy future. Which will unlock more of the potential for communities to capture their energy dollars and empower individuals and communities to be their own power company?
On the issue of economic purity, value of solar makes a lot of sense. But it also cements the notion that all people are utility customers, even if they are producing power to sell to the utility. Net metering may be imperfect, but in allowing people to offset their energy use with their production, it supports a philosophy of energy self-reliance. Today’s transformation of the electricity system could accommodate utility market power or upend it. And the policy we choose for solar compensation––value of solar or net metering or something else––will play a role in that outcome.
This article originally posted at ilsr.org. For timely updates, follow John Farrell on Twitter or get the Democratic Energy weekly update.
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All the provided alternatives are tweaks to a broken system. I would like to propose a fourth more radical alternative:
Break up the utilities in transmission, distribution, production an retail parts.
Put a proper price on pollution, i.e. price externalities.
Open production an retail to the free market.
Let the consumer prices to import or export to the grid vary in time according to the spot-market price.
This way the price will serve a signal if it is better to use your own production, sell to it to the grid or to store it to sell or store it later.
I like this model. This allows utilities to be fairly compensated for the components where they add value. Based on this, customers with residential solar installed could reduce the “production” and “transmission” components of their bill while still paying for distribution…with any consumption beyond that coming in at normal retail rates (after balancing over production/consumption).
We’re clearly moving to that model but solar isn’t quite cost competitive yet so it would delay solar right now.
Pricing externalities can be done by a carbon tax as has been proposed for years with slow but growing acceptance. Power generation is already partly separated out with independent producers so just need to finish that off entirely (no small task). That will mean a charge for being connected to the grid of roughly 40% of the current avg. bill but as long as that affects everyone equally it won’t affect the price signalling you mention.
This should appeal to free market enthusiasts, if they are being logically consistent – a big “if”.
The unsubsidized price of utility scale solar is now under 6.5 cents per kWh.
Let’s make a list of all the other ways to bring new capacity to the grid that cost 6.5 cents or less. I’ll start.
Wind.
CCNG (if the price of gas is down sometimes it is higher)
Your turn. I can’t think of any others.
Include the currentcost of storage to make it reliable and recalculate.
No one (including you) is more pro-solar and wind than I, but even by the chart in the article above it isn’t quite yet competitive for all uses. It will get there, but for now it is a component of an overall energy portfolio.
Wind at 4 cents. Solar at 6.5 cents. Stored wind/solar for 12 cents.
Create any combination of the above and tell me if you find one that is more expensive than nuclear at 12+ cents. Subsidized. Without including the storage to make it work in the real world.
The need for storage is greatly exaggerated. The IEA (you know them from defending the status quo in energyland) comes to the conclusion that 45% of variable renewables can be integrated in the grid, without any new (storage) technology.
“Include the current cost of storage to make it reliable and recalculate”
I followed your lead.
(Michael’s lead, not Hans’s.)
Sorry, got that one in the wrong place.
The main thrust of this article is on distributed generation. The chart provided in this article clearly puts cost of solar alone above the current cost of electricity. This is what I was pointing out.
You are trying to change the topic to the cost of new generation exclusive of storage. So I completely agree with your data but it is irrelevant to the posting here and tehrefore my comment.
where does your 40% come from?
40% comes from 2nd page of :
http://www.eia.gov/forecasts/aeo/pdf/tbla8.pdf
LACE (Levelized Avoided Cost of Electricity) & LCOE here showing non-dispatchable sources:
http://www.eia.gov/forecasts/aeo/electricity_generation.cfm
More readably summarized here:
http://en.wikipedia.org/wiki/Cost_of_electricity_by_source
Solar PV makes sense in some situations right now. But not everywhere. It will eventually but it will take a few more years. Until then it needs subsidies in some situations – not all.
I expect some will claim the data is old and out of date but that is the official US DoE data as of April 2014 with projections through 2019.
It doesn’t do any good to claim solar is ready “right here, right now” to replace all other forms of electricity generation when it isn’t. It lowers the speakers credibility and by association, that of everyone else advocating renewable energy production. Not saying >you< made such a claim, but some do.
Hans, it is possible for the break up of electricity provision into generation/distribution, etc. to improve things. But it has to be done very carefully otherwise things can go like they did in Australia where I pay about 26 US cents per marginal kilowatt-hour of electricity or 33 US cents with supply charges. And this is in a country where It costs about 3 US cents a kilowatt-hour to generate electricity.
What went wrong in Australia? Is the break up done in a half-hearted way? Are there still monopolies or oligopolies in production and/or retail? Are the transmission and distribution operators only separate from production and distribution on paper?
A great many things have gone wrong in Australia with the waves of privatisation that have shifted us away from a centralised state based system. One huge problem, the one that has the most to do with why I pay so much for grid electricity, is that distributers were (are) allowed to charge consumers whatever expanded transmission cost, plus a generous amount of profit, regardless of whether or not it was needed or used. So, faced with a situation where distributers would loose potential earnings if they didn’t build enough transmission to meet demand and no loss if they built too much we ended up with far too much transmission capacity which we are paying for through our electricity bills.
So what is the electricity price there now after the carbon tax was removed?
I’m hearing lots of talk about Australia investing in nuclear power in SA.
The electricity price is the same as it was before the carbon tax was removed, of course. There was a suspicious delay in electricity price increases when the carbon price was removed as if to say, “Thank you my faithful cur, here have a slight delay in further increases as a political reward.” But basically that was it. It was less than 3% of my electricity bill and when you’ve had more than a 200% increase in electricity prices over the past half decade or so, a 3% difference is not something one really notices.
There has been a politician who has called for an inquiry into the cost of nucular power, but that was only to get idiots to shut up about it by showing that its cost is way too high.
And people are going to invest in nuclear power in South Australia? A state where an exisitng paid off coal power plant has trouble making enough money to stay open all year and in which over 400 megawatts of paid off gas capacity is going to be retired in the next couple of years because it can’t make a profit? A state that on occasion generates electricity equal to all its consumption from wind and solar power or just wind alone? Some people are fond of dreaming, aren’t they?
So you have a natural monopoly in the hands of a commercial company?
In “my”* proposal distribution and transmission should be in the hands of a public authority or strictly controlled by such an authority.
*not really my own idea
I can’t say it’s turned out well for us. However, we were promised that it would be more efficient and save us money and now every winter we take out those promises and hold them to our faces for comfort as we huddle around the wireless router for warmth.
What our transmission system is is complex. In Queensland the government was going to sell the physical poles and wires, but they got kicked out before they could because people had eventually learned that that trick never works. You know that trick – “Hey proletariat! What me pull a social benefit out of this privatisation!”
The disparity between distributed generators and utilities is too great for individual rooftop PV. Indidual PV users most collaborate for best performance and to get their needs met. Otherwise, we will see the utilities grab more monopoly and market share. Its happening now in smart meters, utility sponsored solar, and EV chargers. Monopoly hampers horizontal markets. Whats need is an a small generators association.
Another way of looking at this conundrum is through market design. Suppose you split generation rigorously from transmission, as the UK and Texas. The monopoly grid operator is then institutionally neutral between different sources of generation. (It may have a slight bias against distributed generation because of the nuisance factor of managing large numbers of sources, but this has to be set against the fun factor – their trade has got more interesting – and the added resilience.) A neutral grid will tend (a) to set fair prices for different sources, including (b) fair recovery of its own operating, capital and integration costs.
SFIK exorbitant backup charges haven’t been an issue in the UK or Texas. Where they have been, it’s in jurisdictions with integrated silo utilities like Arizona, Under such a great conflict of interest, solar prosumers can’t trust the utility and must fight it through the regulator.
That is what I said, at least what I intended to say. 😉
We all know retail electricity is an average rate, the wholesale has a large range. How about this, since solar produces electricity at a peak rate, why now compensate at that rate 🙂 The Utilities are getting a generate source they have now built and do not maintain, and complain when they have to reimburse at what one could say is a discounted rate compared to the time it is produced, the average retail rate. My rate has gone from .15 per kWh in 2012 to over .23 this February. About .06 is transmission, almost the rest generation. The peak must be well above .25 close to .30 or above, when solar is producing. The way I see it, the Utilities have a good deal. They can reduce the demand for expense Peaker Plants output by using solar during peak times. It is more about control than economics.
Solar competes against the least efficient (highest fuel use per kWh) gas peakers in meric order systems. In those pricing systems wind is taking nighttime prices very low so the average cost is highly driven by daytime costs.
For utilities that contract prices solar offers protection against the volatile cost of natural gas. There is value in being able to predict costs into the future and insurance against potentially soaring fuel costs.
Thanks Bob, you second paragraph I get completely, and as solar comes down it just keeps looking better and better.
Curious about you first statement and how wind plays into the cost structure. Does the range peak to off peak get larger with wind? Does it drop the average cost, and could that mean the Utilities are getting an even better deal with net metering, since the gas peakers would be even higher, in my case well north of .30 cents a kWh?
Wind has no fuel cost and very low variable operating costs. In a bidding war (merit order pricing) wind can bid in at a very low price, forcing coal and nuclear to take a loss and CCNG to shut down,
If wind is receiving a PTC they can bid at almost zero, the subsidy covers their opex.
Coal and nuclear go from breaking even or making a small profit during off peak to taking a loss. And that allows solar becomes the killer. Solar has no fuel cost so it starts lowering the price ceiling when thermal generators would like to be making back their losses and some profits.
And I suspect NG is in big trouble as well. EOS is offering its zinc-air batteries price such that they claim 10 – 12 cents, total price, for moving power on a daily basis. Purchase late night wind or extra solar and sell it into morning and afternoon times when wind and solar typically produce less.
If gas loses market then they will have to raise prices some to cover their capital and fixed opex costs, but those are small compared to fuel costs. Furthermore, as CCNG prices rise it just makes more room for storage.
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Net metering. I just don’t see a future. If a large number of buildings install solar then sunny-time electricity becomes very cheap. Utilities would have to pay back with more expensive stored or NG power. Trying to charge non-solar owners enough to cover the spread would simply drive more to solar. I suspect utilities are going to install a lot of solar.
What needs to happen, IMHO, is for utilities to pay a fair price for end-user power. Or if utilities are going to install their own solar then end-users need to install only what they can directly use and see if storage makes sense down the road.
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That was a long ramble. Did I answer your question?