Value of Solar FAQ - Part 2

It has been a busy month dealing with Value of Solar issues (follow me at @RabagoEnergy and VOS at #valueofsolar) and other work. Since last posting I had a chance to testify before House and Senate Committees in Minnesota State Legislature on VOS provisions of pending legislation, and to provide advice to Texas legislators in their writing of a VOS bill for IOUs in Texas (yes, there remain a few).

Enough delay - time for the next round of VOS FAQ!

VOS Question 6: How is the VOS rate updated?

Answer: My approach is to update the VOS rate every year, in conjunction with the fuel factor or fuel charge reconciliation process. Since the VOS calculation depends on most of the numbers developed for that process, there will be a recent calculation available. Annual adjustment is an important part of the rate design because it reduces issues of regulatory lag (changes in costs that happen faster than regulatory processes can keep up). With the VOS rate, annual adjustment ends the criticism sometimes applied to Feed-In Tariffs and Performance-Based Incentives, where a single rate is set for long periods of time (5 or 10 years, or more). This means that the utility is compensating the solar generator for the Value of Solar without risk of significant over- or under-payment. It means that neither the utility nor the solar customer gets an undeserved “windfall” from a compensation rate that has not kept up with market conditions.

VOS Question 7: Does the updating process impact ability to finance solar loans?

Answer: The variability impact of annual updating of the Value of Solar rate is not significantly different from that under traditional net metering. Under net metering, the value that the solar customer receives changes any time the base rate, customer charges, or fuel factor is changed. Moreover, those rates are seldom set taking explicit account of solar value. So, if financing is an issue under net metering, it will be a bit less of an issue under the Value of Solar approach. And the reduced regulatory lag actually improves the solar customer’s ability to get fair value for their solar output, and therefore, repay any loan.

VOS Question 8: Solar is an intermittent resource - should the VOS rate be adjusted for this fact?

Answer: This is an easy one. NO! The VOS rate is an ENERGY credit. It only pays for energy. So it automatically adjusts for the intermittence of solar by only paying when energy is produced.

VOS Question 9: Is the VOS rate a subjective exercise--where value is “in the eye of the beholder?”

Answer: No. I actually got this from a utility executive in Virginia. He wanted to do a traditional avoided cost calculation for solar, but not grant any value for the energy being available in future years - the present value of a 30-year stream of benefits and costs. The VOS rate does look forward - just like any utility resource evaluation. But unlike major power plant decisions, the annual adjustment process ensures that there is never over- or under-shoot in the value.

VOS Question 10: What about stranded costs? If distributed solar reduces utility sales, they have plant investments that are not recovered. Should the Value of Solar rate be reduced by the amount of costs that are stranded?

Answer: Quick answer - no. Stranded costs may be a legitimate issue, but it would distort economic efficiency in valuation to assign those sunk costs to future investments. (See question 5 in Value of Solar FAQ - Part 1)

First, let’s agree on a definition. Stranded costs are utility investments that cannot be recovered because sales that the utility expected do not occur. A true stranded cost must first be legitimately incurred--such as from an investment that the regulatory authority has deemed “prudent.” When rates are set, the utility costs (expenses, investments, and profit) are divided by expected sales in order to set a rate. If sales are lower than expected, the utility suffers a stranded cost. Of course, this is seldom an issue with a utility that is a going concern--since sales volumes generally increase and utility programs don’t really impact sales that much. Smart utilities plan for successful energy efficiency and distributed generation programs when they get rates set, so that their revenues do not end up running too far behind their needs. So truly stranded costs are seldom an issue absent a major structural shift, like a move to a competitive market.

Even if the utility finds themselves operating with significantly lower revenues than expected, over a significant period of time, this is a rate-setting issue. A utility is entitled to a reasonable opportunity to earn a reasonable rate of return on its prudent investments.

But, it is bad finance to apply a stranded cost charge to distributed solar system energy or the Value of Solar rate. Under that theory, the utility would send a bill to any customer that voluntarily shut off a light or installed a compact fluorescent bulb, or upgraded to a more efficient HVAC unit. If enough of any of those things happen, the utility should go to its regulator and seek new rates based on a different projection of sales. And rates should be allocated according to traditional rate-making principles of cost causation, economic efficiency, and others.