When utility customers add solar to their rooftops, the amount of revenue they pay to their utility declines. Much of this revenue is required to cover a utility’s fixed costs. Without this revenue, others must then cover the fixed costs that these solar customers had been paying. Across the country, fights have broken out over the best way to recover these costs from solar customers.
The question is: How critical are these rates to the health of distribution companies and what is the best mechanism for utilities to recover their fixed costs from customers who elect to install solar?
When a customer installs solar on their roof, they change the relationship they have between the utility, themselves and their neighbors. Most solar advocates think that changing the relationship with the utility is a great thing to do, and whatever they can do to stop paying the utility anything is the best thing, short of forcing the utility to pay them. What they tend to ignore, and even avoid talking about is the impact on their neighbors.
While at 1% or 2% of buildings, homes and small businesses with a kilowatt or two of solar on the roof, have been installed for decades. Now the movement to 10 kW, 15 kW and even 20 kW on residential roofs is a new and rapidly growing trend in some areas. The owners of these buildings are not trying to just lower their bills but to get money from the “system.” These larger installations are a very different proposition from everyone installing 1 kW on their roof to lower overall system demand, a concept which I highly advocate. When people put enough solar on their roof to over-generate for their own needs at the time of generation, they push energy back on the grid and, in many cases, use far more infrastructure than they did before.
So, who pays for this? Their neighbors of course, the person down the street, or two blocks over who is too “stupid” or “broke” to do the same thing, advocates will tell you.
In reality, it is the people who rent, lease and live in condominiums or homes where the association bans solar on the roof that end up paying the extra costs. It is not the utility shareholders in most cases, but rather the neighbors who end up paying. When it was a small number of buildings doing this, the result was insignificant when it was socialized to the bills, but now, those costs are rising in a number of areas. In some cases, we are seeing utilities have to increase the capacity of specific parts of the grid to absorb solar, in other instances, transformers have to be replaced. In still others, the grid operators have to look for places to use or put solar; and in some extreme cases, we are already spilling (dumping) excess solar energy, because there is no good way to transport it to a place it is needed. This is only going to get worse.
This reduces the value of other generation, because solar, like wind, has a must-run tag, so other generation has to cut back to accommodate solar. In the case of combined cycle plants, moving them off the most efficient point of generation can use as much fuel to make much less power than if they were run at the optimum point.
Back to the question at hand. How critical to the health of the distribution companies will this be? For municipal utilities that rely on city taxes to cover any cost overruns and local capital needs that go beyond the rates, this is a huge deal as the number of rooftop solar installations increase. It is also critical for electric cooperatives that depend on the money of their shareholders, the actual connected customers.
For investor-owned utilities, it will be a rate case with the state commission. The state commission is obligated, in most cases, to provide enough in the way of tariffs to cover distribution costs. So it will be the neighbors who will be the ones hurt.
If the commissions want to keep the costs reasonable to customers, then they need to think about who causes the costs to occur at each portion of the grid: distribution, transmission and generation. The rates need to reflect that. It is hard to change a cost mechanism that worked for a couple of decades when distributed solar was small and the average installation offered little in the way of exported power.
Is it important? Yes, if you want to be prudent with the allocation of costs, it is critical; we have as a society a social compact that some people would like to ignore for their own gain.
It is fair to say this issue will be in transition for a long time. If one recalls, PURPA passed in 1978 (qualified facilities and their energy received by utilities at the utilities' avoided costs) that took a long time to reconcile until the advent of markets (still evolving). Pricing for telecommunications and cable have evolved as well over the decades, and we can learn from that parallel. Let me try to address the question short term then long term.
In the short term, solar is a small player with some localized exceptions (e.g., California). Therefore, we do not need the final outcome on pricing by next Thursday, and there may be some limited term anomalies of cross-subsidies (which, by the way, already exists today to some extent among the varied consumer classes). We have many state regulators looking at this pricing mechanism and some are very creative in their vision of the future grid. We should learn from these state-by-state actions (some would say experiments) to discern best practices for the long term.
In the long term, solar will advance markedly. EIA's annual energy outlook shows solar advancing annually over 7% into the mid-century time frame. Solar will likely advance economically (and technologically) to the point where subsidies will no longer be needed to attract buyers. Enter storage advancements, and solar price points become even more attractive. Following this logic further, aggregators and other business models may see the "law of large numbers" of solar panels (include energy storage and hot water heaters, too) play out to lower price points even further in the larger marketplace providing ancillary services via grid and market operations.
Where does that leave the role of the distribution utility? The grid has value providing, for example, back-up resources and the strength to start motors without interruptions. But the grid also has value to provide access to markets via distribution and transmission to allow business creativity to finance and have an aggregated set of solar play in the broader market (assuming the state vs. federal issue around demand response in FERC Order 745 does not impede this).
So, how do you price grid value? The grid pricing model needs to evolve beyond the volumetric of kWh sales. A full or partial fixed charge should emanate based on true cost (value) of grid service. Without a market and aggregation access element, the simple thought would lean to a fixed charge for most or all of the grid costs, with the energy component the main variable. But think about the value of grid access to the larger marketplace, and it does not become that simple.
Let's experiment. Let's deliberate. Let's not forget the parallels in other industries (e.g., cable has evolved primarily to fixed charges for wires or signal access with the variable for programming and other services). One last thought: the standards by which solar connects to the grid must be enhanced to provide active grid operator access for voltage control with ride-through for faults as do other resources. This will come at a cost, but it should not be high. But that cost should be mitigated if we think about enabling standard access and the "law of large numbers."
In spite of all that has been written, the penetration of solar and other renewables has not reached a point to menace the financial health of many utilities. For the most part, utilities are still able to collect their fixed costs from the base rate in delivery charges for both solar and non-solar customers.
Of course, some day this may change but likely not just because of renewables, but more because of the emergence of the broader notion of distributed energy as the preferred mode of power supply. In this case, the utility business model of today will also change along with what actually are fixed charges and how they are recovered.
Historically, as everything in the power industry, this will take a long time to play out and allow the utilities threatened by a saturation of renewables more breathing room to explore the best way to recover fixed costs. Who knows, by that time technology may advance to a point where today's renewables become obsolete.
Utilities should focus less on the missed opportunities of residential rooftop solar and more on future opportunities of various storage technologies for all customers. The time we spent evaluating the business and regulatory cases for rooftop solar lost our industry the "speed to market" we needed to be competitive. Let's examine the opportunities for storage now and not wait for the perfect pro forma for storage. Our industry needs to be the "energy service provider of choice" in the minds of our customers for anything energy related. We missed it for residential rooftop solar; let’s win it for storage.
In the meantime, we can promote the value of the grid. Our customers need to remember why the current grid is valuable to them. Simply said, the grid is valuable because 1) it's always there; 2) it connects you to the LOWEST cost source of generation; and 3) it allows you and me to "transact" energy business — especially if you have solar and I have storage.
When utility customers install solar on their rooftops, two main issues need to be resolved:
- The utility will need to install some kind of a net metering at that residence so that it can track how much power was delivered back to the grid. Then, based on the tariff, the utility may need to pay the customer to cover the power delivered to the grid.
- The customer will also start consuming less from the utility leading to a reduction in utility revenues.
There are also benefits to the utility from these installations: the rate of load increase reduces, resulting in an increased opportunity for the utility to delay system expansions.
Now, why are these things important to assess?
Under normal circumstances, if nothing is done in response, the utility will see a reduction in revenues from the customers who have installed solar on their rooftops. This is a problem because there are some fixed costs for a utility necessary to support the infrastructure that has been put in place. Per the regulatory compact, the utility expects to recover these costs from its customer base and this is normally done through the rates that it charges them for the energy consumed. When customers add solar to their rooftops, the amount of revenue they pay to their utility declines. The component of fixed costs that these customers had been paying must then be covered by others, who in turn will see their costs go up.
This can become a problem as more and more customers install solar on their rooftops, leading to fewer customers paying for the utility fixed costs and paying more and more.
Now, this is a problem. What is the solution?
One plausible solution is to decouple the rates into (at least) two major components: (1) connection charge and (2) consumption charge. How would this work?
- Connection Charge: The customer could pay a connection charge just to stay connected to the distribution grid. This charge could have multiple components:
- Normal distribution connection charge: This would be the customer’s component of staying connected to the utility distribution system, which are the fixed costs.
- Solar connection charge: Some utilities are also looking at charging the customer a nominal charge for connecting solar to the grid to ensure that other utility systems such as protection and field crew safety aspects are taken into consideration.
- Grid disconnect charge: Even if a customer wants to completely disconnect from the grid, they may need to pay for a portion of the distribution grid infrastructure that could be computed to cover the tariff calculations.
- Consumption Charge: This is just the energy charge paid by the customer just for the energy consumed. This is component of the charge that would go down if the customer consumes less or goes up if they consume more.
Here also, if there is a tariff for reimbursing the customer if they send energy back into the grid, then they will be paid a different rate for the energy sent back into the grid, assuming if a more sophisticated form of net metering is available.
What is holding us back?
This is not a technical discussion, more of a regulatory discussion. Some states are encouraging their customers to install more distributed renewables on the grid, and they want to make it easier for them and reduce the burden on them. Once one or more states define the right path to covering utility fixed costs, we believe that the issue will get resolved.
and Howard (Edwin) Overcast, Director, Black & Veatch
There seems to be a broad consensus among industry participants that the distribution grid continues to have value and that it should be paid for by all who use it. However, less agreement appears to exist as to the timing and severity of the impact of solar generation on grid cost recovery by electric distribution utilities. These issues of course are most relevant today for utilities in in Hawaii, California, Arizona and even some electric cooperatives with growing solar penetration. And, utilities and energy markets in other parts of the country are also beginning to feel the impact of solar penetration upon grid operations, cost recovery and rate levels. If we agree that the distribution grid is still needed and of value — despite heavy solar penetration — then the question naturally becomes: How can we design utility rates so that all customers are adequately contributing their share of costs to maintain and optimize the grid?
Net metering tariffs in many utilities across the country are currently designed such that solar customers receive credits in excess of the value of fuel and capacity (if any) costs that the utility avoids. Because net metering credits are often based on the full retail price of a kilowatt-hour (which often includes recovery of fixed costs in addition to variable ones), these tariffs can create a subsidy born by the non-solar customers for the benefit of solar customers. It should be noted that some utilities have recently filed for changes to their net metering policies and pricing; however, the acceptance of these changes by state utility regulators is not a certainty.
This issue points us to a term from Ed Zajac, late of Bell Labs, who coined the phrase: “right to the status quo.” Essentially, this question becomes: Now that photovoltaics (solar PV) have been installed under tariffs that allow some customers to avoid fully contributing to the costs of the grid, do these customers have the right to continue to benefit from that subsidy even as utility rates change in the future (i.e., the grandfathering of rate provisions)?
These topics raise a broader question: Does the mere existence of a competitive supply option for all customers change the fundamental dynamic of the regulatory compact? How should customers who become partial requirements customers of a utility be treated to assure that they contribute to the costs of the services they actually use? If the penetration of solar PV on individual circuits creates voltage instability, how should those costs be recovered? The Rocky Mountain Institute e-Lab has suggested that demand charges are critical in “Rate Design for the Distribution Edge.” Will state regulatory commissions, consumer advocates and environmental groups also support this movement toward cost-based rates when, in some cases, they have opposed even modest annual increases in customer charges? This question becomes more difficult when we consider that we may not be looking at a one-size-fits-all situation. Are there critical theoretical, economic and practical issues that would allow us to create a general solution that may be adapted for each utility?
It is our opinion that the very constructive dialogue raised in attempting to answer this question confirms that, although there may be a theoretical consensus on a general solution for grid viability in the face of solar penetration and other distributed generation, a consistent practical response to the rate problem may be more difficult to find without dedicated dialogue and effort amongst us and through state regulatory channels.