Apr 2013
Some Posts on DER Business Model
17/04/13 10:57
Friends,
A major debate and effort is afoot.
A major debate and effort is afoot.
I remain amazed that the canard about poor customers subsidizing solar customers under net metering goes unchallenged. 1. Solar customers pay a substantial share of their plant cost. All customers pay for all utility plant costs PLUS profit. 2. Solar generates electricity at or near load. Central station systems rely on poorly utilized T&D systems that lose 6-8% of energy simply due to resistance. 3. Solar comes on line at highest value periods in cooling-dominated regions. Base load plants have to run even when electricity is worth least. 4. Solar fuel prices never vary. Natural gas is the fuel with most volatile price, requiring expensive hedge strategies or direct fuel factor pass-throughs. 5. Solar improves load factor, resilience, and is modularly sized to match load increases. Solar shades roofs, reducing cooling load. Solar comes with federal subsidies. Solar generates more local jobs. Solar reduces air pollution, which disparately impacts the poor. From "Small Is Profitable," (Rocky Mountain Institute, 2002) through several more recent studies on Value of Solar (#valueofsolar), the empirical evidence is that distributed solar is worth significantly more than the retail price of electricity. This makes sense - since rate making tells us the retail price is what is costs the utility to make and deliver a generic kWh of usable electricity - right? So, bottom line is that distributed solar customers are actually subsidizing the utility and all non-solar customers when all they get is retail value through net metering.
TJ Replied -
I disagree.
A homeowner in Marin County puts solar on their home. They take their monthly bill from ~$750 down to ~100. A top line revenue loss to the utility of $650 per month.
Renter in Richmond California pays ~$125 per month on their apartment. No chance of reduction.
Problem1? The CSI (California Solar Initiative) dings the renter every month to create a fund (~$3bn) so that the homeowner in Marin can put solar on their >$1mm home.
Problem2? The net reduction in revenue does nothing but exacerbate the high cost of transmission O&M and pension support etc etc. Its' just a big sucking sound...
Now add net metering to,the equation as its seen to the renter in Richmond.
While you make good points, a disadvantaged renter or struggling homeowner doesn't care that solar "shades roofs" especially when somebody points out to them they are paying every month on their PG&E bill to shade somebody else's roof. Especially when its a rich guy in Beverly Hills or Ross CA. Now, also take note that often these are people of color -- which can cause a monumental shit storm if one of their advocacy groups picks up on this situation. I would also add that perhaps your thesis would ring true if everybody was seeing rate reductions to correspond with all your stated qualities. We aren't.
Here's my suggestion. The solar industry gets off EVERY form of subsidy ASAP (I could give two shits about gas and oil. Let them worry about themselves) before some "60 Minutes" type expose comes through and decimates the entire industry.
Bottom line. REMOVE the subsidies. The solar industry will explode and become gas and oils worst nightmare simply because you've unlocked an unlimited market.
- Couple of quick points here: 1. The utility needs to serve customers regardless. If they don't facilitate the DER solar, they buy something else. That goes into rates, too. So it is a question of portfolio. 2. Incentives should be reduced as solar industry matures, but getting compensation for solar energy value is a first step, otherwise, prematurely ending subsidies cripples or kills a valuable, but nascent industry. So, the utilities needs a new business that evaluates and values the increasingly diverse range of options for meeting the demand for energy services, and that results in an optimized portfolio. That serves all customers - those that jump start solar by investing at their homes, and those that initially benefit as system members.
- Couple of quick points here: 1. The utility needs to serve customers regardless. If they don't facilitate the DER solar, they buy something else. That goes into rates, too. So it is a question of portfolio. 2. Incentives should be reduced as solar industry matures, but getting compensation for solar energy value is a first step, otherwise, prematurely ending subsidies cripples or kills a valuable, but nascent industry. So, the utilities needs a new business that evaluates and values the increasingly diverse range of options for meeting the demand for energy services, and that results in an optimized portfolio. That serves all customers - those that jump start solar by investing at their homes, and those that initially benefit as system members.
Karl Rabago •also posted
We have an opportunity here! First, demand levels are explicitly accounted for in traditional rate making. After you sum all the prudent costs, investments, and return, then you divide by expected sales to get a rate. When utilities saw ever increasing sales, this allowed them to over-earn by selling more between rate cases. But it sets up problems if demand falls below expectations. Possible fixes -
1. Have more frequent rate cases to account for falling sales. Problem, this exacerbates regressiveness built into current cost-allocation approaches.
2. Shift from historical to future test year in rate making. This holds utilities accountable for planning for the future. Problem, no one has a crystal ball, and simply rewards behavior to shape demand to forecasts (same problem with EEI recommendations in their paper).
3. Stop calibrating profit according to kWh sales. This is the ultimately right answer, but requires some real negotiation and an implementation plan. We need to start now. We could start with the transmission and distribution functions - their costs are driven by customers, kW, and miles. And have less to do with kWh anyway.
Other ideas exist but don't help - higher fixed charges, allocating stranded costs to new market entrants, premature elimination of subsidies to throttle back DER sector growth, accelerated recovery and gold-plating of existing infrastructure to restore old-school earnings. The stuff of the EEI paper, but not the future.
Value of Solar FAQ - Part 2
16/04/13 12:10
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.
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.