Solar has transformed into solar-plus-storage: What will net metering become?
New rate designs to replace solar’s foundational policy leave solar-only behind.
When distributed solar becomes more of a stress than a service to the grid, it transforms into solar-plus-storage and begins again the struggle to build economies of scale to drive its price down to levels competitive with traditional generation.
That transformation happens when distributed solar penetration levels approach the point where the system can no longer benefit from new daytime generation. That happened in Hawaii. Growth trends show that penetration level is coming in California, Arizona and Massachusetts.
Net energy metering (NEM), the policy that solar has long relied on to drive its growth, was no longer tenable in Hawaii. It is facing the same circumstances and the same fate in California, Arizona and Massachusetts. But NEM, too, is being transformed. Policymakers are trying new rate designs intended to drive solar-plus-storage growth the way NEM drove solar.
That explains the new policy debates emerging between utilities and solar advocates at state legislatures and utility commissions across the country.
The Center for Energy Efficiency and Renewable Technologies (CEERT) was among the renewables groups that pushed for California’s original renewables mandate and for its trend-setting increases. But California now has large deployments of renewable and distributed resources and its goal of "just building MWs" must change to be of service to the grid and help meet the state's climate goals, Executive Director V. John White told Utility Dive.
“We are seeing a shift away from incentives for deployment to incentives that encourage these resources to add value to the grid and do work or provide services the grid needs,” he said.
Two examples of this shift — time-of-use rates and three-part rates with demand charges — have emerged in recent policy actions across the country.
The “dirty little secret”
New numbers from the North Carolina Clean Energy Technology Center (NCCETC) Q1 2018 50 States of Solar show solar policy debates are accelerating. There were 149 legislative and regulatory actions on solar last quarter, up from 134 in Q1 2017. NCCETC's annual update cataloged 249 actions in 2017, up from 212 actions in 2016.
Where penetration levels and growth trajectories for solar remain unthreatening, contention continues over a variety of solar-related issues cataloged by NCCETC, including fixed charges and NEM levels and caps.
“But the dirty little secret of solar is that the more we add, the less it’s worth,” CEERT’s White said. “We are now seeing new tariffs that do not encourage rooftop solar by themselves."
Where there are higher penetrations and growth trajectories, policymakers are designing rates and incentives for solar-plus-storage. And they are designing them with a precision intended to protect solar-plus-storage from a future of never-ending battles between solar advocates and utilities and their allies over cost shifts and caps.
The right rate designs and incentives can do this by finding a way for solar-plus-storage to be so valuable to the electric distribution system that utilities will choose it over traditional solutions, CEERT’s White said. “The challenge is to use portfolios of renewables technologies that combine distributed solar with storage and other distributed energy resources (DER) to provide system needs.”
The big picture
The new NCCETC report shows Q1's 149 policy actions were in D.C. and 40 states. Many were familiar utility responses to changes or anticipated revenue losses from flattening load. The 59 utility requests to increase monthly fixed charges or minimum bills on all residential solar customers are in that category.
Many of the 39 actions on distributed generation (DG) or NEM policies and 21 actions on examining the value of DG or the costs and benefits of NEM were in anticipation of new tariffs to replace NEM.
And many of the 18 actions on community solar, along with 8 actions on third-party solar ownership laws or regulations, and 4 actions on utility ownership of distributed solar were also aimed at finding new ways to use solar to meet grid needs.
More than 50 of the actions cataloged were legislative efforts on compensation, valuation or penetrations of DG, NCCETC reported. More importantly, many went beyond solar to address DER, according to Autumn Proudlove, NCCETC senior manager of policy research and the report’s lead author.
"More and more states are doing value of DER studies and looking at new rate designs for customers with solar, energy storage, electric vehicles and other DER," Proudlove told Utility Dive.
The shift toward rate designs and incentives that work against solar-only to drive the growth of DER is not immediately apparent, but seems to be emerging, Proudlove said. Two key drivers are electric vehicles (EVs) and “the solar-plus-storage revolution,” she added.
"A number of states are considering whether solar-plus-storage is eligible for NEM or how it should be compensated," Proudlove said. "They are also asking how these technologies fit together and how policies and rate structures can coordinate them."
An example is the design of a pilot in New Hampshire to test the use of distributed resources as an alternative to new distribution system infrastructure, she said. "They are debating whether to limit it to DG. If it includes all DER, storage will probably get more attention than solar."
Two prominent policy action actions last quarter involved rate designs that could similarly work against solar-only but drive a more innovative use of solar-plus-storage, Proudlove said. The less controversial one was time-of-use (TOU) rates. The very controversial one was three-part rates with demand charges.
Time of use rates
TOU rates impose higher per-kWh charges for periods when demand is higher. The intention is to shift consumption away from high demand periods through a price signal mechanism telling customers that they can save money by using electricity during off-peak hours.
TOU rates typically help storage and EVs, but only help solar if the peak demand period where they are implemented aligns with solar production, Proudlove said.
California is scheduled to fully implement default TOU rates for all customers beginning in 2019. In the last few months, the state’s investor-owned utilities have been moving their peak charge periods to later in the evening. Southern California Edison’s peak period is now 4pm to 9pm.
"It creates a small incentive to face rooftop solar west, to maximize production from the setting sun, but it mainly rewards customers with solar-plus-storage systems," Proudlove said.
The TOU rates and the new peak demand period are not intended to harm solar-only customers, but to alleviate California’s daytime solar over-generation, she added.
Several states have voluntary limited or pilot TOU rates, "but the trend is towards TOU rates as a default option" to reward customers for reducing their electricity consumption when demand is high, Proudlove said. "It is a very slow trend, but that seems to be where we are headed."
Xcel Energy Minnesota proposed an opt-out TOU rate pilot in December designed by Strategen Consulting Senior Director Lon Huber. His intent was a rate "scalable into a high renewable energy future," he told Utility Dive at the time.
The on-peak period of 3pm to 8pm will be priced at $0.258/kWh in the summer and $0.226/kWh in the winter. The off-peak periods will be 6am to 3pm and 8pm to 11:59pm and will be priced at $0.121/kWh in the summer and $0.106/kWh in the winter. The super off-peak period will be midnight to 6am and its year-round price will be $0.057/kWh.
"The on-peak price lets customers know when the system is most overloaded and signals them to reduce their use," Huber said. The five-hour peak window was designed to suit customer behaviors. It also directs those with battery storage or EVs to charge with renewables-generated electricity during the low-priced super off-peak period and use it during on-peak hours, he added.
Well-designed demand charges, like TOU rates, can be used to induce customers to shift their consumption. The challenge is to design them well. When poorly designed they can be punitive and seem only to serve the utility in recovering its fixed costs.
Massachusetts regulators made history in January by approving Eversource Energy's three-part rate design. It includes a mandatory demand charge for DER-owning residential customers, and is thought to be the first rate design of this type to be approved for a regulated electric utility.
A demand charge, which is common for commercial-industrial customers, imposes a significantly higher per-kW charge for usage during a customer's highest 15 minutes of electricity consumption each month. For some commercial-industrial customers, that single charge can be as much as a third to half of their monthly bill.
Eversource opponents say the demand charge will compromise Massachusetts' rooftop solar value proposition and significantly disrupt 2017's fifth biggest U.S. residential solar market. Strategen Consulting's Huber explained why.
The best utility cost recovery comes through rates that send smart price signals, he told Utility Dive in January. "The right price signals can help integrate renewables and address peak demand by recovering fixed costs in a way that has additional system benefits. This is just cost recovery."
Can demand charges work?
Proudlove said demand charges can benefit solar-plus-storage owners under the right circumstances. Customers with smart meter technology and the understanding to effectively manage their use can shave their own peak demand period consumption by using stored solar-generated electricity, she said.
The Tesla-SolarCity settlement with Arizona public power utility Salt River Project (SRP) illustrated Proudlove's point.
Then SolarCity filed a lawsuit against SRP in 2015, claiming its demand charges were a violation of anti-trust laws. But when the now Tesla-SolarCity lawsuit was dropped in March, the settlement left the demand charges in place.
In 2015, SolarCity argued the demand charges would destroy the solar-only value proposition. SRP argued that solar-plus-storage could respond effectively to its demand charge. GTM Research energy storage analyst Ravi Manghani agreed.
"SRP will not be the last of the 3,000 U.S. utilities to impose a residential rate structure that benefits solar-plus-storage," Manghani prophetically told Utility Dive at the time. "Any kind of net energy metering reform that reduces the value of solar works in favor of storage." His insight was that if a policy reduces the value of solar-only, it encourages customers to add storage to offset as much of their own consumption as possible.
Tesla is focused on battery storage. The settlement that left the SRP demand charge in place also included two commitments from the utility to accelerate the battery market in its territory. SRP will add a 25 MW utility-scale battery to its distribution system and offer customer incentives for residential batteries.
There are many doubts about mandatory demand charges for residential customers. It is not clear they will have the smart technologies or understanding to make demand charges work, even with storage, Proudlove said.
Regulators remain reluctant to approve them, she added. But they have approved pilots or trials in New Hampshire, Colorado, Arizona, Arkansas and other states.
Beyond the comfort zone
There is a "war on solar," Lynn Jurich, CEO of Sunrun, one of the most important national rooftop solar installers, recently wrote. That war includes an "attack" on NEM, which "has proven to be a simple, effective system to make it possible for Americans to go solar."
"Tariffs are one of the primary tools that regulators and policy makers have to influence how consumers adopt and operate DER," Scott Burger, a researcher with the Massachusetts Institute of Technology Energy Initiative, emailed Utility Dive. "If we get tariff design right, DER will lower power system costs, decrease carbon, increase reliability, and increase customer satisfaction and engagement."
Because solar's value declines as its penetration grows, "tariffs should evolve over time," Burger said. "Moving from today's volumetric rates to more cost-reflective rates will likely naturally slow the deployment of rooftop solar." This is not an attack on solar but a more accurate valuation of it.
Efforts by utilities to impose tariffs that only serve utilities, like high fixed rates, have largely been stopped by regulators. The result is TOU rates and demand charges that often, though not always, evolve rate designs toward the favor of solar plus storage.
If regulators and policy makers leave the wrong tariffs in place, "we run the risk of stymieing vehicle and industrial electrification," Burger said. "This would be bad for the growth of critical industries and bad for the planet."
CEERT's White said the solar industry must understand that rate and incentive designs can no longer be only about adding more solar. "The premise that every kWh of solar that we add will reduce greenhouse gas emissions is just incorrect," he said.
"It is time for the DER industries to step up, to be good citizens of the grid, and to understand that we must think about how the pieces fit together," he said. "Like all the other stakeholders in the climate fight, they need to get out of their comfort zone."