How Do We Value Distributed Solar?

How do you value solar energy production? That is a question several prominent utilities and Public Utility Commissions (PUCs) are debating across the country as initial Net Energy Metering (NEM) caps are hit or will be met soon.

Almost all utilities and PUCs implemented NEM because it was straight forward and a simple way to compensate distributed generation solar (DG). However, utility companies argue that NEM unfairly subsidizes solar homeowners and burdens non-solar customers with additional costs (higher rates) to maintain the grid, especially during peak demand. Utilities also argue that distributed solar interrupts the grid at certain penetration levels.

On the other hand, distributed solar proponents argue that solar helps lower local utility costs because it reduces operations and maintenance expenditures along with the need for peaker plant investments (expensive, fossil-fuel burning generators that are only activated during times of peak demand). Distributed solar also contributes to reducing global warming, so solar homeowners should be compensated for environmental benefits. Regardless, rate design will be an important industry issue for the next 18 months and could alter solar’s economics.  

In the post-NEM era, DG Solar’s compensation is slightly more complicated. Solar’s compensation depends on how the utilities and PUCs value the costs and benefits of distributed solar and how these entities reflect this value in their rate design. Both solar’s net compensation and rate structure will vary across the country because procuring and distributing energy costs vary across the U.S.; controversially, PUCs and utilities have different methods of evaluating distributed solar’s value. However, most post-NEM rates will depend on the following components:

Time-of-Use (TOU): An electric rate based on the time of day.

Energy Charge: Charges based on electric energy (kWh) consumed

Demand Charge: Rate determined by highest 15-minute average use during a month--a charge for peak usage

Non-Bypassable Charges: Charges on a utility bill for decommissioning nuclear plants, R&D, low-income subsidies, etc.   

Bank/Net Credits & Exports: Saving solar exports from one period and applying them to another period

Avoided Cost: The cost for a utility if the utility purchased power from another source.

Rate Class: A specific electricity rate tariff for solar customers.

Grandfathering: Exempting a solar customer to rate reform if they have already interconnected their system.

Externalities/Societal benefits: DG Solar’s additional benefits to our society and the electric grid.

Value of Solar Tariff (VOST): A policy alternative to NEM that values distributed generation’s contributions to the grid and society;

The new rates have varied significantly (i.e. California and Nevada) and Arizona regulators recently proposed a VOST. This will result in utilities buying excess solar generation at an avoided cost. The price will be a 5-year average of the utilities’ wholesale generation rate. The rate cannot drop more than 10% per year but solar’s compensation will decline significantly. There will also be no netting of solar generation and solar customers will be in a different rate class and there will be 20-year grandfathering.  However, Arizona Public Service Co (APS) is also proposing a demand charge, higher fixed charges, and reduced compensation rates. One of the big complaints solar proponents have is this rate does not consider solar’s long-term benefits--environmental and ancillary services to the grid--and Arizona regulators said a future rate change will consider avoided costs and grid services.

Across the country in New York, regulators believe they can assign an appropriate value of solar’s environmental and ancillary benefits. Last March New York utilities presented the Reforming Energy Vision (REV) proposal, which will transition NEM to a rate structure that encourages distributed energy. REV’s rate compensation is LMP + D + E. LMP = local marginal price or wholesale rate; D = the value of the distributed resource; and E = the external societal benefit. The state will transition to this structure and still needs to value D and E and most likely the rate will be lower than current NEM rates. However, as D & E’s values increase over time, consumers could be credited at a rate higher than retail prices. There was a lot of collaboration between utilities and solar companies in this proposal and also there is a long transition period.

These two examples highlight the different rate reforms. Unfortunately, most utilities and PUCs will not have a rate reform like New York, but PUCs and utilities will not treat distributed solar like a wholesale energy source. Eventually, rate design will also consider energy storage’s value. Going forward it is important that contractors are aware when their area will reach their NEM cap and what the new rate will be. It is likely that new rate structures will include TOU or Demand Charges, so more sophisticated sales proposals will be necessary to sell systems. Finally, under new rate designs, solar + storage will become more attractive as energy storage costs continue to decline.