Inside the new approach to finding the true value of solar
A new SEPA-NREL paper says VOS program design could be a way out of net metering, fixed charge battles
While solar use continues to boom, a crucial question remains unanswered: What are its true costs and benefits to the electricity delivery system?
The lack of an answer is not due to a lack of studies on the question. Researchers across the country commissioned by regulators, utilities, and solar advocates have and are looking for the best method to calculate a value of solar (VOS) rate. A new study takes on a less examined aspect.
“This paper is about program design methodology instead of the rate design methodology,” explained Solar Electric Power Association (SEPA) Research Manager and study co-author Miriam Makhyoun. “The question that comes out of this research is whether value of solar might offer a more comprehensive strategy to address some of the cross subsidy issues that some utilities are addressing by implementing fixed charges.”
Most studies focus on VOS rate design, but “very little broad-based analysis has been conducted on the design of a VOS program,” according to Value of Solar: Program Design and Implementation Considerations, the report from SEPA and the National Renewable Energy Laboratory (NREL).
Program design and rate design
North Carolina is a real world example of how difficult it can be to design a VOS program and rate. Both solar industry advocates and Duke Energy recently told Utility Dive that a study by Crossborder Energy, a widely recognized expert on VOS, had been determined by the North Carolina Utilities Commission to be inadequate for use in rate making.
Design of a VOS tariff, or rate, is “about finding the sweet spot that balances the prices utilities and customers are each paying,” Makhyoun said. “There are few practical examples. Everyone is considering it and thinking about it and playing with it, but Austin Energy is the only one that has done it.”
In a VOS program design, one of the first considerations is whether the levelized cost of solar (LCOE-PV) in the market for which it is intended is greater, about the same, or less than a calculated VOS tariff (VOST).
Utilities and other stakeholders working on program design and implementation can draw on experience with other programs that support solar, such as net energy metering (NEM) and incentive and rebate programs, for important insights, the paper reports.
But, to create and sustain “a robust solar market that is fair and equitable to all parties and that moves solar from a position of price-support to price-competitive, VOS programs will require sufficient design and implementation flexibility,” it concludes.
Four vital VOS factors
There are four key factors in program design, Makhyoun said: Transparency, predictability, a standardized VOS calculation methodology and a LCOE-PV.
The widely-respected rate calculation methodology proposed in the Interstate Renewable Energy Council (IREC) regulator’s guidebook is needed, the new paper explains, because of the lack of consistency and transparency in other calculation methodologies performed for use in policies like NEM, fixed-rate feed-in tariffs, or incentive programs.
Transparency begins with open rate making proceedings by state regulators, Makhyoun said, and can be furthered by clear explanations from utilities to policymakers and their customers.
Predictability is vital, she said, because it reduces the risk associated with owning solar and makes bank loans possible.
“Reducing risk reduces cost and that makes solar projects more attractive to investors and therefore more financeable," she said.
Predictability is difficult because the VOST must respond to changes in retail rates. But good program design would allow for adjustments to be made on a pre-determined schedule and “would have a floor for any given year.”
Austin Energy's VOS tariff, for instance, is adjusted annually according to market rates.
“Once the initial incentive is set, there are a variety of ways to both trigger a reduction and to determine the amount of the reduction,” the paper explains. “Time intervals provide predictability, but if the market shifts more rapidly than planned, such as through a rapid solar panel cost reduction period, incentives may be larger than needed to encourage new projects.”
Establishing known time periods for re-evaluation of the VOS tariff could reduce the less predictable impact of the market’s LCOE-PV, installed solar capacity, and installed solar price.
“The ideal would be a standardized open-source VOS calculation methodology,” Makhyoun said. But a simple or easy-to-understand methodology might not be acceptable to utilities that want the many configurations of rate design to be considered. An example, she said, would be a VOS methodology with the value of real-time pricing included. It might not be simple to incorporate.
Finally, a good VOS program design would include a consideration of LCOE-PV. That might be the easiest of the important factors because public tools, like the NREL System Advisor Model (SAM) used for the paper, offer comprehensiveness and transparency. Utilities, however, more often rely on the RFP bids they receive.
“LCOE is often used by developers to calculate the bids they submit,” Makhyoun said, “though LCOEs have aligned with those bids pretty well over the years.”
The controversy of 'buy-all, sell-all'
The most controversial aspect of the paper is likely to be its use of the phrase “buy-all, sell-all“ to describe how a VOST is used.
“There are several ways to design the transaction," the report reads. "Under the design used by Austin Energy, typically called a buy-all, sell-all transaction, self-generating customers buy all of the electricity they use at the applicable retail tariff and sell all of their PV generation to the utility at the VOS rate. The purchase of electricity for use on-site is completely decoupled from the sale of the solar generation to the utility.”
“I am a little concerned about the legally imprecise and slightly muddled use of the ‘buy-all, sell-all’ phrase,” noted Pace Energy and Climate Center Executive Director and former Texas utilities commissioner Karl Rabago, who helped originate Austin Energy’s VOST and co-wrote the IREC paper.
Solar industry opponents of VOS have argued its “buy-all, sell-all” structure makes it comparable to a feed-in tariff (FIT). With a FIT, rooftop solar owners are subject to income tax for what they receive from utilities for the electricity their systems send to the grid. A FIT could also put solar owners at risk of losing the federal investment tax credit (ITC).
But considering a VOS to be a FIT is an incorrect conclusion, Rabago – who should know—insists. “A plain reading of the tariff in Austin and the law in Minnesota reveals that neither involves a legal sale of energy from the solar customer to the utility.”
“There can be a net-metered VOS where it is only the excess energy that is trued up at the VOS rate instead of selling all the electricity produced by the system at the VOS rate,” Makhyoun agreed.
Solar industry VOS opponents who prefer NEM emphasize an opinion memo from Skadden, Arps, Slate, Meagher & Flom LLP. A VOS can be interpreted to mean that “gain from the sale of electricity in this context constitutes gross income," the attorneys found.
Both the Skadden memo and the NREL-SEPA paper, Rabago said, “recognize that rates can be structured to incorporate value of solar analysis and still preserve tax and other benefits associated with netting methodologies.”
The paper’s use of the “buy-all-sell-all” phrase “is not well-advised but can be understood as a rate design labeling error in a program design paper,” Rabago noted. “An actual Buy-All, Sell-All rider from the Fayetteville, AR, Public Works Commission stands in contrast.”
A way out of the net metering debate?
“Much of the discussion has been about net energy metering and fixed charges,” Makhyoun said. “Value of solar could be a responsible way forward because it can get more at the behavior of prosumers.”
Customer-sited solar generation will play an increasingly important role in the energy mix for utilities and consumers, and NEM policies promote that deployment, SEPA officially decided in 2013.
But, Makhyoun said, “NEM and rate design, inherently linked, need to evolve to transparently allocate costs and benefits, compensating all parties for their value contribution. This transition will only be effective when utilities, the solar industry and customers collaborate to create a sustainable solar distributed generation market place.”
Many of the most heated recent debates about solar focus on utilities’ concern with a cost shift. When solar allows its owners’ volumetric energy consumption to go down, the portion of their bills that covers transmission and distribution (T&D) infrastructure is proportionately reduced. If solar does not equally reduce the cost for T&D infrastructure, the burden for it is shifted to non-solar owners.
Utilities have begun asking regulators to remedy this by increasing the fixed charges required of all customers, regardless of their volumetric consumption.
“Policymakers certainly have an interest in insuring that utilities get payment for the services they provide and part of that service is maintaining the grid,” Makhyoun said. “VOS is not explicitly designed to prevent cross subsidies but it takes into account all of the costs and benefits of solar to the grid, its pluses and minuses.”
“As long as the costs to the utility of integrating the PV system and providing T&D services are included in the VOS rate,” the paper explains, “this structure can keep the utility 'whole' and significantly reduce or eliminate cross-subsidization.”