Oct 2016

Value of Solar Letter to a Muni Manager

A few months ago, I had a chance to write to a current municipal utility manager in Massachusetts. He was considering changing net metering rates. I wrote to explain the option of using a value of solar analysis to support the compensation rates under net metering, and a few other thoughts.

Here is the letter:

Dear Mr. X:
Thanks for the background about your utility and the issues you are considering.
Let me start by disclosing that I am the author/inventor of the Value of Solar tariff.
We had been using a Value of Solar calculation methodology at Austin Energy (a large muni in Texas) for some 6 years (before I arrived there) to benchmark several programs. I was the VP for Distributed Energy Services there. I ran world-class energy efficiency programs, distributed generation programs, EV infrastructure deployment, weatherization, and other efforts.
Basically, we wanted to know what value distributed solar brought to our system so that we would know what rate to compensate or procure it. I was managing a growing distributed solar market and program in a utility that wanted to do more solar.
This is important - if you don’t want to do more solar, a muni has a lot of tools -
1. Don’t provide fair compensation
2. Make interconnection difficult and expensive
3. Make processes take a long time
4. Make permitting difficult and expensive
On the other hand, if you want solar to develop in a orderly manner that ultimately becomes a “self-sustaining market” and if you don’t perceive it as a business threat, but rather a management challenge, then it really makes sense to find out what it is “worth.” And it makes sense to compensate - set the offset credit - at that value. That also helps you benchmark incentives, self-build options, etc.
This is almost exactly like the PURPA avoided cost process, but instead of measuring avoided costs at the power plant busbar, you measure it at the meter. Since that is the point of energy injection. And instead of only considering wholesale value (because that is the jurisdictional authority of the federal government), you also look at the full benefits and costs down to the retail level.
I used the value of solar calculation to come up with a defensible number that used sound ratemaking principles to find the “indifference value” - basically the full avoided cost. I wanted to know the number at which either I could provide it (as the utility) or the customer could, and I wouldn’t really care which. That means really unbundling what the delivered kWh does, what costs it represents, and what costs customer-generators could help me avoid, and what costs they created. (This process is what we used in the telephone industry years before - and is still used to allocate costs and credits for local and long distance and other cost elements.)
The first thing I realized is that net metering customers don’t “avoid” any charges at all. All customer-generators are fully billed for 100% of their consumption. The only real issue, and this is also important, is what offset credit we should give them for generating a kWh that we did not have to. And it was NOT just a kWh at the wholesale node, and helped avoid other costs we would normally incur, in the short run and over the full lifetime of the solar system. The accountants only see the net revenue, so they think that customers are “avoiding” costs. But really, you have a full charge for full consumption - which is entered on the revenue side.
Then you are “paying” an offset credit - that has to come from somewhere. Where it comes from is savings - what do you save when you don’t have to make and deliver the kWh that the net metering customer makes.
I also realized that excess kWh was easy - it flowed immediately to the nearest load, through a meter, and we collected the full retail rate for it! So we were kept 100% whole on that kWh and maybe even “profited” during peak periods when the market prices were higher than retail. We made special note that even if our system peak was at 6 pm, our system costs and fees were set on the system peak - and solar was on then. And we used an Effective Load-Carrying Capability analysis to calculate a capacity “credit” - since annual capacity factor told us nothing useful.
Bottom line - we looked at the solar customer generation system as a resource. And we used resource valuation techniques to measure its worth, on a 25-year levelized cost of energy basis. After we did the analysis and repeated it for many years, we learned several things.
We were free to do all that because we were a municipal electric utility, and if customer investments in distributed solar saved money, that would be a good thing. And since our board, the City Council, wanted us to be responsible in every sense of the word, having analysis was vital to earning and maintaining credibility.
We learned that the wholesale price is basically not right and far too low - since it did not account for several value components relating to transmission and distribution, reduced environmental costs, protection against price volatility, reduction in our annual capacity charges, etc.
We were also aware that distributed solar, like energy efficiency, was a much more valuable source of jobs, local economic development, spending multipliers in the community, tax base improvements, property value, etc. We accounted for those benefits in a separate study that informed policy but did not show up in rates.
We used a consultant to develop a methodology that could run on a simple spreadsheet. We learned - with data - that the value of distributed solar generation was higher than the retail rate, if you take a 25-year levelized cost/value of energy approach.
No “funny” numbers here - the operations guys actually inputted the data and ran the calculation - they were quite comfortable with the numbers produced for the rate-setting portion of the analysis. And over 6 years before I applied the number in a retail net metering rate (the Value of Solar Tariff), they saw that it tracked with reality and with their expectations.
What can I tell you on short notice? If you had time and budget and data, you would learn a lot about the value of customer solar in your municipality. You would learn:
That the wholesale price is unreasonably low. And that if you were doing perfect cost-of-service ratemaking, and thinking about future costs as well as sunk costs, you would find that your value of solar is probably closer to retail than wholesale, and actually a little higher than retail.
This value squares with common sense - the kWh that the customer generates does all the work that the utility-provided kWh does, and it is carbon-proof, fuel-price volatility proof, privately financed, privately insured, and we only provided a credit if they actually generated energy! Basically, it is “the good stuff” and it is worth more than generic system power that has to be generated and transmitted and distributed at ratepayer/citizen expense.
You would find that over the life of the system, solar will actually put downward pressure on rates. And that fair value compensation will allow solar to happen without a lot of additional subsidies. You would find that there are substantial numbers of customers who would invest a good deal of their own money to basically supplement your system and harvest that value for your entire community.
That opportunity is why the Net Metering Task Force in Mass recommended such a study.
Acadia Center has run some numbers -
Here is the most up-to-date guide on how to assess Value of Solar -
You would probably not see very different numbers from the Acadia study if you did the analysis yourself - but there are some details relating to getting “credit” for upstream issues that do show up with a muni that does not own its own generation. Since I don’t know the terms of your supply and transmission agreements and rates, it is hard to opine. Note that this does not negate the value, only change the way you need to get credit for it.
Generalizing from my experience around the country - and worth what generalizations are worth, I can also tell you:
You will probably experience some well-justified criticism for using a wholesale rate for either the excess or the entire amount of generation. You will not find any real support for that rate in any of the published literature or analysis. Even the most stingy utilities add at least line loss credit, variably O&M credit, fuel price stability credit, and some environmental regulatory risk reduction credit.
We are amassing all the info we can on the topic at our Value of Solar Center of Excellence website - http://voscoe.pace.edu - and it generally supports my generalizations.
I would be pleased to address any of the APPA materials that you have reviewed, if that would help.
I am pretty confident your rate review did not address the value of solar. At best, it probably considered the cost to serve the average residential customer - who by definition doesn’t self-generate. So it indicates what you save on costs - the retail rate - until you perform and actual cost of service study for net metering customers.
Grandfathering is definitely the right thing to do. I wouldn’t get all lawyerly on that issue - and recommend you just do the right thing.
One way to get past the “percent caps” issue is to use VOS analysis - since it captures benefits and costs, it will alert you to whether the penetration rates are creating integration costs. (LBL studies suggest that you won’t even be able to reliably measure those costs below 2.5% and that they are not significant until 10% - 15% penetration rates.
Finally, this stuff all traces back a few decades. We learned in the mid-1990s, for example, that solar looks like a high-efficiency heat pump to the grid, at least up the point of excess production. That solar has measurable capacity value in the grid. That transformers last longer and fail less when they are pre-cooled by solar generation (or demand reduction). That future T&D system costs are reduced by distributed generation. etc.
We documented all this when I was at Rocky Mountain Institute in a book called “Small Is Profitable,” published in 2003. And we explored the additional benefits of prospecting for high-value locations in the grid (against the metric of Marginal Distribution Capacity Cost) in a study entitled “Fuel Cells Are Profitable” (if my memory serves) - which showed that in heavily congested or otherwise expensive location, even very expensive Fuel Cells are cost-effective (published around 2004).
Finally, I will note that the market test that validates what I have described is now appearing in all the smart grid work, DA/DMS investment, and exciting new services offered by businesses like Current by GE (www.currentbyge.com). Looked at as a resource, customer-sited DG could have a lot of value for your utility as well.
I hope this helps a little!

Treating Efficiency (and other DER) as a Resource

I had a chance to hear Tom Eckman speak at an Energy Foundation Energy Efficiency Advocates meeting in Atlanta on September 30, 2016. He mixes humor with wisdom and shares some really profound lessons and insights, gained through decades of work in energy efficiency. He was kind enough to share this piece about treating energy efficiency as a resource. It is well worth a read - and the lessons in it apply to all distributed energy resources.