Feature

What net metering will do to the utility business

A close look at rooftop solar's impact on utility earnings and rates

Customer-sited solar photovoltaic systems have very real impacts on utility rates and returns, according to a major new study from the Lawrence Berkeley National Laboratory. But those consequences are very different for ratepayers and utilities.

But there are things utilities can do to balance the impacts of customer-sited PV and resolve some of the passionate regulatory debates over net metered solar across the country.

“Our hope was to dial back some of the heat and hysteria in these debates by showing two things,” explained Researcher Andrew Satchwell, one of the lead authors of Financial Impacts of Net-Metered PV on Utilities and Ratepayers, released earlier this month. “One, these are complex issues involving lots of trade-offs; and, two, in most jurisdictions there is time to figure this out in a thoughtful and deliberative way."

What you need to know

The most important specific conclusions of the research are:

  1. Customer-sited photovoltaic (CS-PV) solar use equal to 2.5% of a utility's retail sales would cause an estimated 3.9% reduction in earnings for a prototypical vertically-integrated southwestern utility and a 4.5% reduction for a prototypical wires-only northeastern utility. 
  2. That 2.5% solar use would cause an average retail electricity rate increase of 0.1% or less for the southwestern utility and 0.2% for the northeastern utility.
  3. Shareholder impacts are significantly greater than ratepayer impacts for both types of utilities across all variables, including load growth, rate structure, ratemaking processes, and utility cost growth.
  4. The southwestern utility’s return on equity (ROE) would decrease only 0.3% under 2.5% solar use. The northeastern utility’s ROE would decrease 4.7% due to higher assumed O&M costs and the fact that the northeastern utility in the study does not own generation units.
 
 

The report’s clear distinction between the integrated southwestern utility and the wires-and-poles northeastern utility makes an important point.

“First and foremost, the discussion needs to have nuance," Satchwell told Utility Dive, "because the impacts to the utility and to ratepayers really depend on the specific physical, financial, and operating characteristics of the utility.”

Solar PV currently accounts for only about 0.2% of total U.S. electricity generation and no more than 2% in most states. But there are states, like Hawaii, where the penetration of customer-sited solar is contributing to increased pressure on regulators and utilities. At solar's current growth rate, other states could soon see similar impacts.

Beyond statistical estimates of the impacts of 2.5% customer-sited solar PV penetration, the paper offers a detailed cost-benefit analysis of ways to mitigate impacts as CS-PV reaches 10% of a utility’s retail sales.

“Even at penetration levels significantly higher than today, the impacts of customer-sited PV on average retail rates may be relatively modest," the paper concludes.

More importantly, “incremental” mitigations, such as decoupling revenue from electricity sales, providing an adjustment mechanism, creating shareholder incentives, or altering regulatory timetables and proceedings, offer ways to change the impacts of CS-PV on utilities’ rates, earnings and returns.

 
 

What’s not in the report

“We shied away from grand conclusions," Satchwell told Utility Dive.

Instead of pronouncements about “the utility death spiral,” he explained, "the report shows there can be wide variations in the size of the impacts and interdependencies between impacts. What that means for the actions of the utility is beyond the scope of this report.”

The infamous cost shift, which some argue is caused by net metered solar, is also beyond the report’s scope, Satchwell said, though it is an important area for further study. “You have to be able to model both participating and non-participating customers and you have to make assumptions about the level of costs for the utility and how to fairly and equitably allocate those costs," he said. "You can’t just make one assumption.”

The impacts of customer-sited PV are greater for shareholders than for ratepayers—but that does not pit utilities against their customers, Satchwell said. Instead, utilities, regulators and customers need to understand the tradeoffs between incentives and mitigations.

 
 

Adding variables and mitigating impacts

The contentious issue of solar’s total value highlights the way a variable can have “divergent implications for ratepayers and shareholders,” Satchwell said. “The higher the value of PV, the higher its ability to defer capital investments, which leads to potentially higher negative financial impacts for utility shareholders, due to lost earnings opportunities.”

As customer-sited PV reaches higher penetrations, its shareholder impacts can be mitigated with some of the same measures used by utilities to offer energy efficiency to customers. Though both reduce a utility’s electricity sales, both can still benefit utilities.

Things like decoupling mechanisms and lost revenue adjustment mechanisms (LRAM) address revenue erosions that can lead to deferred investment and lost earnings. Decoupling allows utilities to add a customer charge or credit, usually less than 2% of total sales, to balance total lost or gained revenues. The LRAM provides a similar adjustment for revenue changes specifically resulting from energy efficiency or from customer-sited PV.

Shareholder incentives can even encourage utilities to invest in CS-PV, despite reduced earnings opportunities, by making it more like any other capital investment. An example might be Arizona Public Service's proposed move into rooftop solar ownership, Satchwell acknowledged.

Under the mooted scheme, APS would provide 3,000 customers with a monthly bill credit. That would diminish earnings, but APS has asked regulators for the opportunity to rate base program costs. That would mitigate lost future earnings opportunities created by CS-PV.

“Our mitigation analysis shows you can mitigate impacts, but something that didn’t necessarily come through in the report is that several of these mitigations can be combined to find more a comprehensive approach,” Satchwell said.

 
 

A mitigation of shareholder impacts through decoupling might result in the exacerbation of ratepayer impacts, he explained. That could be combined with allowing CS-PV to count toward a utility’s renewables portfolio standard (RPS) obligation. “In the way we modeled RPS compliance, counting CS-PV toward the RPS has no impact, positive or negative, on shareholders," Satchwell said. "But it reduces the average rate.”

Several approaches can be combined to develop a more comprehensive way to address trade-offs between shareholders and ratepayers, Satchwell said.

 
 
Filed Under: Generation Solar & Renewables Regulation & Policy Corporate News
Top image credit: Flickr; Energy.gov