A good rate design is hard to find: Experts push utility-solar compromise

Getting rates right will be essential for both utility revenues and the growth of DERs

Conventional knowledge is that the utility industry is slow-moving and resistant to change. But when it comes to reforming their rate designs, power companies have been quick to propose changes to make up for revenue lost to rooftop solar and other distributed resources. 

Last November, Brad Klein of the Environmental Law and Policy Center told Utility Dive that utilities across the nation had opened up 23 rate design proceedings across the nation to raise fixed charges or other fees on customers with rooftop solar or other forms of distributed generation (DG). The trend, he said, emerged after the Edison Electric Institute released a widely-circulated white paper in 2013 that recommended “a monthly customer service charge…to recover fixed costs.”

Now, not even a year on, panelists at the solar industry's biggest annual conference have said that the number of such rate cases has about doubled. 

There are currently 48 to 50 rate cases that propose some kind of new increased residential fixed charge designed to make up for infrastructure costs not being met by existing rates, said Rusty Haynes, a Policy Manager at EQ Research.

The cases span from Maine to Hawaii, and the proposed fee hikes range from almost nothing to 300%, Haynes told the audience at a rate design panel discussion last week at Solar Power International 2015 (SPI).

About three-quarters of the proposals would increase fixed charges 25% or more, and seven — including proposals from KCP&L in Missouri, PNM in New Mexico, El Paso Electric in Texas, Westar in Kansas, and Xcel in Wisconsin — would double or more than double the existing residential fixed charge, Haynes said.

Variations on the fixed charge proposals include efforts to “erode” the benefits of net energy metering (NEM) by imposing new demand charges usually reserved for commercial and industrial customers on residential consumers with rooftop solar or other DG. 

And in some of the rate cases, utilities are asking for both demand and fixed charges, he added.

While it makes sense for states with high DG penetrations to be concerned about revenue losses compromising their ability to recover infrastructure costs, Haynes pointed out that several of the IOUs reside in places with low DG penetration, such as Westar, El Paso Electric, and Xcel Wisconsin.

“In Iowa, utilities have signaled they might do the same, despite low DG penetration,” he said. “In Montana, Montana-Dakota Utilities has proposed a higher fixed charge and a demand charge for net metered systems.”

In states with high DG penetration like California, Nevada, and Arizona, the rate changes are sometimes proposed in separate filings outside rate cases, Haynes added. And several states, notably New York, California, Massachusetts, Rhode Island, Hawaii, and Minnesota, have ongoing “sweeping grid modernization efforts” that include such rate changes.

From the utility's perspective, distributed generation shifts cost for grid infrastructure to customers who lack it.
Kennerly, Sustainable Energy Advantage
 

Good rate design

Many of the proceedings in which rate changes are proposed have devolved into divisive and almost mean spirited debates, but a better understanding of rate design might prevent that, said Sustainable Energy Advantage Principal Analyst Jim Kennerly.

Good rate design does two things, he explained.

First, it represents the utility service’s value, keeping it affordable for the customer and profitable for the utility. Second, it is equitable so that “reasonable alternatives to service” can enter the marketplace.

The key to good design is balancing these objectives, Kennerly said. If rates go too far in the direction of volumetric energy charges — charging customers based on energy usage — utilities might not recover enough of their costs when distributed energy resources (DERs) reach high penetrations on their systems.

But if rates go too far in the direction of fixed charges — not dependent on usage — it could minimize diminish the impact of volumetric charges that give customers the incentive to conserve and to consider alternatives to service like solar and other DERs.

If that happens, “the system might end up with less DERs than is optimal for society and for the grid,” Kennerly said.

Arizona Public Service Regulation and Compliance Director Greg Bernosky agreed.

“A fixed charge is a blunt instrument,” Bernosky said. "Rate design done well sends a price signal and can achieve the same outcome as a fixed charge, which is the recovery of fixed costs. If you can transition to something that has the price signal embedded in the rate, you don’t need to have a fixed charge.”

The debate has become polarized because of sharply opposing beliefs held by utilities and by the solar industry and their advocates, Kennerly said.

“Utilities believe solar creates costs and shifts those costs to customers who do not have solar,” he explained. Solar advocates believe retail rate remuneration through NEM is a fair way to convey value and “may even undercompensate solar owners for the benefits the electricity their systems sends to the grid.”

Much of the contention could be attributed to the fact that this type of rate design discussion is new for many utilities, said Solar Electric Power Association (SEPA) Senior Director John Sterling

Utilities have been filing rate cases since the 1960s and 1970s, Sterling said, “but this is the first time the conversation is changing because of what the load is doing."

"Before, the grid operator would ask large loads to drop off when a peak threatened," he said, "But now, we have the load dropping and sending something else onto the grid. It is a very different discussion for a very old industry to try and understand.”

From the solar perspective, increasing DG penetrations can offer further benefits to the grid while also bringing down customer prices. 
Kennerly, Sustainable Energy Advantage
 

Why good rate design is needed

There are four reasons this standoff between stakeholders must be resolved before it worsens, Kennerly asserted.

First, utility systems will be adding significantly more renewables and DERs in response to the Clean Power Plan’s Clean Energy Incentive Program, which allows the banking of renewable energy credits toward CPP compliance.

Second, the decline of current renewables incentives, including wind’s federal production tax credit, solar’s federal investment tax credit, and many utility and state programs, means accurately valuing these alternatives to service will be “absolutely crucial” to  getting financed and continuing to grow profitably.

Third, new DERs such as storage and intelligent energy management systems are able to combine with DG to create "demand flexibility." As described in a recent Rocky Mountain Institute (RMI) paper, demand flexibility refers to the interconnection of emerging home energy technologies like rooftop solar, home energy storage and smart thermostats to allow customers to shape their energy use in response to variable rates and demand charges, Kennerly said.

Customers’ use of demand flexibility has the potential to both significantly reduce utility load and drive down DER soft costs, Kennerly said, and “rate design needs to not get in the way of soft cost reduction."

“Customers are smarter than we give them credit for,” Sterling said. “If we give them the information and education they need, people are ready and willing to figure out things like demand charges and time of use rates.”

Finally, the standoff must be resolved because the value of solar and DERs change as penetrations increase, and the system gets less benefit from incremental additions.

“There is less peak demand value in solar when there is more solar on the grid because each individual unit of solar has less impact,” Kennerly explained. “Rate design must take that into account.”

Bernosky said that "getting myopic on one type of customer, like a solar customer, is not useful."

“We think about lifestyle rates, not technology specific rates. A lower use customer rate, a seasonal customer rate, an active energy manager customer rate, those are reasonable bands within which to structure rates.”

Getting to good rate design

A resolution between stakeholders must begin with shifting the focus of rate design from the cost of service to the value of that service, Kennerly said.

“The fully-loaded valuation of DER benefits and costs gets close to what should be the economically optimal penetration and what is likely the greatest amount of penetration,” he said.

To get to this refocusing from cost of service to value of service, Kennerly recommended remembering two maxims.

First, stakeholders should focus on interest and not position.

“Utilities should not focus on opposition to NEM, but on their concern about fixed cost recovery," Kennerly said. "Solar advocates should express a concern for solar’s true value.”

Second, he said, stakeholders should remember what Mick Jagger said.

“You can’t always get what you want, but if you try, sometimes you just might find you get what you need.”