Value of Solar(?) - Midwest Renewable Energy Association

In our last blog post, we discussed the levelized cost of energy from a solar array, as well as the financial benefits of solar for a household in realistic terms. But what’s the value of solar to other stakeholders like utilities, ratepayers who don’t have solar, and the grid at large?

Let’s start with the basics. In most of the U.S., state regulations require utility companies to credit customers who generate their own electricity. In general, this is referred to as Net Metering or Net Energy Metering (NEM). Your solar array produces power when the sun is out, and your electric meter measures how much power is produced. When the sun goes down, and you still use power, the electric meter measures how much you consume from the grid. At the end of the billing period (a month, typically), the utility sends you the bill if you used more than you produced, or a credit if you produced more than you consumed. In either case, your bill is reduced thanks to the power produced by your solar array. This is the essential function of NEM: to allow electricity customers who own solar to offset the cost of power drawn from the utility.

The amount of power your solar array produces in excess of the power your home consumes is called “excess generation.” In many cases, utilities assign a different value for excess generation than the retail rate, which is the price customers pay for electricity normally. The value for excess generation is commonly pegged to the “avoided cost” rate, which is effectively the wholesale price of power. Where I live, in Milwaukee, the retail rate for electricity is ¢13.7/kWh, and the avoided cost rate is around ¢4.2/kWh.

What does it mean for a utility to pay 4.2¢ for a kilowatt- hour produced by a solar homeowner, but charge that same homeowner 13.7¢ for a kilowatt- hour? There’s an assigned value embedded in the price.

The excess power produced by a residential solar array goes to the nearest load: nearby homes or businesses. It’s power that doesn’t need to come from a power plant, and doesn’t require fuel to be purchased and burned at that power plant. Can it really be said that the value of a kilowatt- hour produced by a residential solar array is equal in value to a kilowatt- hour produced by a coal fired power plant somewhere far away? How do we determine the true value of solar?

The National Renewable Energy Laboratory said, “Currently, 43 states have some form of NEM; only two jurisdictions have adopted [Value of Solar] alternatives: Austin, Texas (2006) and Minnesota (2014).”

Value of Solar is different from NEM in that rather than crediting customers for their energy production at the retail rate as in NEM, Value of Solar credits them at the actual value of that energy. The challenge lies in determining the actual value of the energy.

On an episode of the excellent Local Energy Rules podcast by the Institute for Local Self Reliance, John Farrell and Gabriel Chen discuss this issue at length. To summarize, utilities often claim that solar power exported to the grid is worth less than the retail rate , and argue that non-solar customers unfairly cross-subsidize solar customers. Others claim that solar power exported to the grid is worth more than the retail rate of electricity, and Chen points out that, irrespective of solar, the energy system is rife with cross subsidies and wouldn’t exist without cross-subsidies.

Methodologies for establishing Value of Solar vary, but Chen emphasizes that consideration should not be given solely to the value of solar to the utility; rather, the value stack should also include the broader impact on society, like local air pollutants and greenhouse gasses.

As of this writing, Minnesota’s Value of Solar tariff takes into account the following factors in the following proportions (reviewed annually):

35% environmental (including local air pollution greenhouse gasses)
21% avoided fuel costs
20% avoided generation capacity
19% avoided transmission and distribution
5% avoided operations and maintenance and reserve capacity

According to Chen, this methodology myopically reflects the grid of today, without consideration for the grid of the future. Specifically, additionality of solar and other renewables displaces some of the dirtiest fossil fuel energy sources, and that displacement is valuable (if you value a habitable planet). Relatedly, it ignores the volatility of fossil fuels, natural gas in particular. Because renewables have predictable energy output, they serve as a hedge against the volatility of fossil fuels. Ironically, in the Minnesota methodology, because the value of solar is staked partially to the value of natural gas (21% avoided fuel costs), it is subject to similar volatility. But since the actual energy production from solar is so much more stable, the value of solar should reflect the benefit of insulating ratepayers from these price shocks.

If you’re interested in learning more about Value of Solar methodologies, a good place to start is MREA’s Grow Solar initiative. We worked with Clean Power Research several years ago to develop valuation methodology recommendations for a few midwestern states. That information is here: https://www.growsolar.org/technical-assistance/value-solar-methodology/

When home and business owners install solar, their solar arrays reduce demand for electricity at peak times. By reducing peak demand, they also reduce the need for the utility to build new generation. Remember, the utility business model rewards building new generation with guaranteed profits paid by ratepayers. A growing number of electricity costs studies are showing that a Distributed Energy Resource (DER) optimized grid that helps produce electricity where it is used and reduce electricity use during peak usage saves all ratepayers money. So the more we can do as individuals and businesses to reduce justification and dependence on new large-scale generation, the more stable we can expect utility power prices to be.

A number of utilities have attempted to squelch the rise of distributed solar largely for this very reason. For example, our utility here in Milwaukee, investor-owned We Energies, attempted on two separate occasions to impose additional monthly fees on ratepayers who had solar. Their PR campaign framed the issue around asking solar owners to “pay their fair share.” However, in a study commissioned by We Energies themselves in 2009, Clean Power Research determined that, “the estimated value of PV for We Energies over the PV system’s 30-year lifetime was approximately $0.15 per kWh.” That’s greater than the retail rate of electricity here, which is $.137/kWh, and far more than the avoided cost rate they pay for excess generation, which is $.042/kWh. Had they succeeded, the additional monthly fees We Energies proposed would render most customer-sited solar financially non-viable. Luckily, groups like The Alliance for Solar Choice were able to prevent this from taking place.

Today, We Energies takes a different approach. They recently proposed a rate hike for customers, tied to shutting down coal plants and building solar + storage. According to the Citizens Utility Board of Wisconsin,

“Costs linked to solar and energy storage projects as well as natural gas plants the utilities are proposing to buy or build are key drivers for the request….

Costs linked to coal plants being shut down would still be billed to customers for years to come under the proposal, and the utility would be earning double-digit profit on those plants long after they’re shuttered. That includes the South Oak Creek coal plant in Milwaukee County and the Columbia coal plant in Portage County.

Several years ago, We Energies committed to refinancing costs linked to its former Pleasant Prairie coal plant to a lower rate, a move that produced savings for customers. CUB will press hard to make sure that the utilities aren’t earning high profits from plants that have no role in keeping the lights on or businesses running.”

It’s worth noting that in contrast to the manufactured controversy about solar, ratepayers are expected simply to accept the bill for investor profits on retired coal plants.

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