Value of Solar FAQ - Part 1

Since starting Rábago Energy LLC, I find myself actively engaged in consulting around the Value of Solar rate that I designed while at Austin Energy. In just a few months, I have provided advice on legislation in Minnesota and Texas, testified in a proceeding in Virginia, and presented in person and on line to quite a few groups. In those conversations, several questions pop up with some regularity. Until I publish my next article about the Value of Solar, I thought it would be good to address some of the more common questions. So, here we go!

I will keep these here and tweet about updates @RabagoEnergy #valueofsolar as I publish new material and updates.

Remember, you can find my Value of Solar primer article published in Solar Industry Magazine (Feb. 2013) on the home page of this website.

VOS Question 1: What exactly is the VOS rate/tariff?

Answer: The VOS rate is a new approach to compensating and billing customers with solar systems on their homes or businesses. The VOS makes 2 changes to traditional Net Energy Metering (NEM). First, it uses a formula to calculate a true value of solar--the value of solar as a resource to the utility, its ratepayers, and society. This is a forward-looking value, like the utility uses to evaluate all resources they acquire to meet customer demand for energy services. Second, the VOS rate reconfigures the netting process to ensure that the utility recovers the cost of providing electric service to the solar customer and eliminates arguments about cross-subsidies. The VOS rate uses “net billing” - meaning that the solar customer bill is calculated by first charging for gross consumption at the otherwise applicable rate, and then provides credit for all solar generation at the VOS rate. To further protect both the utility and all its customers, including solar customers, the VOS rate is recalculated each year to ensure that the compensation rate is neither too high nor too low.

VOS Question 2: Is the Value of Solar compatible with Net Energy Metering?

Answer: Yes! The VOS rate sits perfectly well along side traditional net metering. After all, VOS is just another way of doing the netting process that we have known since PURPA was adopted in 1978. In Austin, we put all residential customers on the VOS rate, but kept commercial customers on traditional net metering. Best practice is probably to apply the rate to the whole rate class, but one version of VOS legislation in MN offers customers the choice of whether they would rather stay on NEM or move to VOS.

VOS Question 3: How does the value a customer receives for VOS compare to that for NEM?

Answer: Of course, it depends. First, the value with NEM is equal to the retail rate offset up to the point of consumption. After that, there are different values depending on where you live. With some utilities, it is the wholesale “avoided cost” rate. In others, the value equals the retail rate. The monthly value the customer receives for their solar energy under net metering changes by the consumption level. If you use a lot and your solar system is big, you get more value. If you conserve or have a small system, your solar value is less. The VOS approach always compensates for each kWh of solar energy at the same rate. That rate, calculated as the present value of a stream of future component values is going to be a bit more than the average retail rate. The components include energy, capacity, transmission and distribution, line losses, and environmental value to start. Once set, that VOS value is recalculated each year based on the utilities costs and forecasts. Because a net billing method is used, the net value to the customer actually increases with conservation and efficiency, an added benefit of the approach.

VOS Question 4: Is it possible to determine the Value of Solar outside of Austin or Texas?

Answer: Of course, every utility has on file its costs of service, broken into the components used to calculate its rates--energy, capacity (demand), transmission and distribution, line losses, and some indicator of environmental value such as a green power premium charged to green pricing customers. Converting these historical costs into a value calculation requires setting out assumptions about future costs and calculating for a period equal to solar system useful life - 30 years. This is exactly what utilities do when they do resource plans or evaluate offers for power from independent power producers.

VOS Question 5: Can the Value of Solar rate be lower than the average retail rate?

Answer: Theoretically, the rate could be lower than the retail rate, but it is hard to imagine. The VOS rate calculates the credit for solar power at which the utility should be “indifferent” - where the value of the credit is equal to the costs the utility would face if it had to supply a solar or solar-equivalent kWh to the same customer and do the same work. Since the properly set rate sets this value for a kWh of system power, a rough measure of the value of solar is the retail rate plus the cost of making a generic kWh into a solar kWh (carbon-free, more coincident, fixed in price for a long term, etc.)

VOS Question 5.1: But wait, doesn’t the solar kWh displace a kWh from the utility--meaning that the utility loses valuable revenue every time it provides VOS credit?

Answer: This question comes up when utilities try to introduce lost revenues or “stranded costs” into the solar valuation (or in the NEM calculation, or the energy efficiency calculation, etc.). The loss of revenues is real, and certainly would be of concern to utilities seeing declining sales due to the economy. But those costs, recoverable as they may be, are not part of the value of the solar. The value of any investment, properly calculated, does NOT include sunk costs. (See
this great piece by Peter Kelly-Detwiler in So, unrecoverable costs are properly allocated in a rate case, but not against future investment decisions. Under the VOS rate design, solar customers pay their fair share of these costs as well.

--- More Soon! ---