With the federal tax break for solar now assured into the early 2020s, the business opportunity it presents to utilities has never seemed bigger.
Most utilities are already signing power purchase agreements for central station solar, or are building it themselves. But are they missing out on an opportunity to grow solar on their customers’ rooftops? Or is that a poor value proposition for utilities and their ratepayers?
The difference between the two solar segments will become clearer as the coming boom spurred by the tax credit extensions forces policy decisions about distributed solar, Senior Solar Analyst Cory Honeyman, lead author of GTM Research’s definitive U.S. Solar Market Insight Reports, told Utility Dive.
“As debates veer off into complicated questions about net energy metering [NEM], Clean Power Plan compliance approaches, and the value of distributed solar in higher penetrations,” he said, the result will be a "more fractured landscape" that will offer companies with different competencies different opportunities.
Utilities prepared to engage proactively in such policy debates may well find opportunities in the distributed solar space, analysts told Utility Dive, especially around the customer relationship. But whether rooftop solar becomes as popular as central station arrays for utilities looking to add generation — either by themselves or in partnerships with third parties —will depend on a number of factors, including cost differences between the solar sectors and mounting questions about the value of distributed generation.
Solar valuation and cost differences
A key factor in many policy decisions is “the proper value of distributed solar generation,” according to North Carolina Clean Energy Technology Center Policy Analyst Benjamin Inskeep, co-author of a quarterly catalogue of U.S. solar policy decisions.
“If a state isn’t proposing a value of solar study or something similar to account for the costs and benefits, it is probably studying it," Inskeep said. "If not, it is a matter of when, not if."
Value of solar (VOS) studies date to at least 2006, according to Pace Energy and Climate Center Executive Director Karl Rabago who, as an Austin Energy executive, led one of the earliest VOS implementations.
Refined calculations now make VOS a “forward-looking approach that recognizes that the ad-hoc use of the retail rate for NEM was rough justice and analysis is appropriate,” Rabago explained.
“Minnesota Commissioner Nancy Lange called VOS 'the future' because it is a way to analyze value and set rates through analysis," he said. "allowing regulators to escape being caught between utilities and solar advocates.”
But solar valuation questions could also split the solar industry between distributed and utility-scale sectors.
For instance, studies by the Department of Energy’s Lawrence Berkeley National Laboratory and the Brattle Group show the wholesale price of utility-scale solar is much lower than the price of distributed solar.
Much of that cost advantage comes from economies of scale, siting and racking that make utility-scale arrays more productive, sector analyst Peter Kind told Utility Dive. Kind was the author landmark 2013 "Disruptive Challenges" paper for the Edison Electric Institute, and recently updated published a new paper, "Pathways to a 21st Century Utility," with the clean energy nonprofit Ceres.
“The starting point for the value of solar should be the cost of the most efficient product in the marketplace and that is utility-scale solar," Kind said. "Then add some of the things in the VOS studies.”
Kind said he wasn't opposed to distributed solar, but that "the price should be set so the utility gets the lowest cost and everyone pays fairly."
“Some argue the value of distributed solar is high because it uses less transmission and distribution," Kind said. "Give those savings to the customer. But start with the lower utility-solar costversus the retail rate NEM credit for distributed solar. Then let the market decide.”
The wholesale price of utility-scale solar is a better value that utilities could likely bring to the marketplace, Kind said. “Whatever the factors are, you could drive a truck through that price differential.”
Utility-scale solar also avoids the cost-shift debate plaguing current net metering battles playing out in many states, Kind said. Utilities argue that net metering subsidizes rooftop solar users who don't pay their fair share to maintain the grid. By contrast, "all customers pay equally for utility-scale solar," Kind said.
The numerical value identified in various VOS studies is not what's important, Jeff Guldner, senior public policy vice president at Arizona Public Service (APS), told Utility Dive. APS and solar advocates are currently involved in a regulatory proceeding on the costs and benefits of distributed solar, ordered by regulators after months of contention between the parties over net metering and cost shift questions.
Rather, the important question is “the difference between the values for distributed solar and the values for utility-scale solar,” he said.
Utility-scale solar “is much cheaper for customers and has many of the same benefits,” Guldner said, referencing a study from the Brattle Group commissioned by utility-scale solar developer First Solar.
Utility-scale solar generation costs the utility no more than $0.05-$0.06/kWh in Arizona, while the retail rate NEM credit for rooftop solar can cost the utility two to three times more, Guldner said. In utility planning, "assets that are built or bought for the lower cost are chosen."
The Brattle study shows the other benefits advocates attribute to rooftop solar can be obtained from utility-scale solar as well, he added. “Why would you pay $0.12/kWh for a resource you can get for $0.05/kWh?”
The distributed solar response
But Court Rich, attorney for The Alliance for Solar Choice (TASC), sees the issue differently.
“The choice between customer-sited solar and utility-scale solar is a false choice," Rich, a frequent participant in regulatory proceedings on behalf of TASC, told Utility Dive.
Instead, the attorney for the solar lobbying group said an independent and objective cost-benefit analysis will show that “a customer’s investment in rooftop solar results in a net benefit to all ratepayers."
The utility claims that when a homeowner installs solar, it creates a cost that has to be made up for by other consumers. But the benefits of solar exceed the costs, Rich said. He cited a 2013 Crossborder Energy study showing every $1.00 invested in Arizona rooftop solar produced a $1.54 benefit to ratepayers.
“No other analysis matters,” Rich said. "If there is only a net benefit, there is no policy justification for modifying existing policies in a way that disadvantages rooftop solar.”
Whether utility-scale solar is a net benefit to ratepayers is a different question, he said. Utility-scale solar may not offer all the additional and unique benefits of rooftop solar like resource diversity, locational diversity, ratepayer investment in generation, and reduced permitting, interconnection, and environmental impact issues.
“Locational value makes sense,” Kind said in response, but he doubted whether it could make up the difference between distributed and utility-scale costs.
Where there is a distribution problem, distributed solar adds value, and its value could be set higher. “An engineer can say how much higher," Kind said, "but my gut tells me it is not a game-changer of a number.”
Beyond the value of solar
“The next wave of the valuation debate has to confront the idea that solar generated at a central station plant creates avoidable costs,” Rabago said in response to the arguments from Guldner and Kind.
To reach that understanding, he added, “utilities will have to understand sub-nodal marginal distribution capacity costs.”
This is a step beyond the locational value question, he said. There are marginal capacity costs at the sub-nodal level and utilities need a fine-grained and dynamic map of their distribution grids to differentiate with much greater precision between costs at different points there.
“Utilities are only beginning to understand that a solar panel on my roof may be less valuable than a solar panel the next street over,” Rabago explained. “When they understand that, they will be able to make more precise valuations of distributed resources to them.”
The most recent and vivid example is Consolidated Edison’s Brooklyn Queens Demand Management (BQDM) Program. The utility decided a $250 million investment in distributed resources like energy efficiency, storage, and demand response capabilities could defer a $1 billion investment in new distribution system infrastructure.
“They understood the value of resources at that sub-nodal location was greater than the value of traditional infrastructure,” Rabago said. “They avoided high sub-nodal marginal distribution capacity costs.”
The cost factors described by Guldner and Kind make utility-scale solar the low hanging fruit right now, Rabago said, but the arguments in favor of utility-scale solar advance the debate in favor of distributed solar as well. By advocating for locationally advantageous central station solar, they recognize the avoidable costs of traditional central station generation.
“Every mile of new transmission is increasingly expensive and getting harder to site,” Rabago said. “The next step is the BQDM.”
The questions Guldner and Kind raise are good ones, Rabago said, because they recognize that solar is cheaper and can be locationally advantageous.
“They are thinking the way I want them to think,” he said. “Now sharpen that tool because the same logic works for smaller and other DERs like storage. If you sharpen that tool even more, you will start doing 10 kW installs.”
But other sector analysts say utilities should not get too excited about the potential advantages offered by distributed solar.
It is often suggested that distributed solar can offset some transmission and distribution system cost and can help make the distribution system more reliable, said Tanuj Deora, chief science officer at the Solar Electric Power Association. But the savings from these advantages are "probably an order of magnitude off from bridging the cost gap.”
But even so, distributed solar offers another, less commonly recognized value stream. Central station solar “is not nearly as engaging for a consumer as putting solar on their own roof,” he said. That can lead to a potentially big opportunity.
Once engaged, the consumer can think about electricity and their bills more deeply, Deora said. “Utilities and third parties can then more effectively engage with consumers about deploying demand response, energy efficiency, and possibly storage.”
Studies from utilities, academics, and experts show that such distributed resources offer big savings, but they have under-performed in the marketplace simply because people are not paying attention and are not motivated, Deora said.
Rooftop solar engages customers in a way not seen before in the electricity marketplace, he said.
“There is huge value, now not being tapped, if you can marry that engagement with the savings potential in energy efficiency and demand response,” Deora explained. “The current debate leaves out the potential value of distributed solar as a tool to enable a big opportunity in energy efficiency.”
'The problem isn’t too much solar'
“There is a role for both utility-scale solar and distributed solar,” Kind said, "but the price has to be based on a value of solar that is determined objectively and is fair to all customers.”
“Wholesale solar is awesome and utilities should be buying tons of it,” VoteSolar Executive Director Adam Browing said. “With the ITC extension, it is going to be, in many places, the cheapest and best option. But you don’t have to kill rooftop solar to do wholesale solar. The problem isn’t too much solar.”
Friction is natural and "there will be issues where companies will be aligned and others where they will be against each other,” Honeyman said. But for the next decade, there will be demand for both so they will co-exist.
“New and innovative rules that accurately account for the benefits and costs of both will be needed,” he added. “That is still a process in its infancy.”