Arijit Sen, Sabin Center Summer Intern
On June 30, 2015, Maine became the third jurisdiction in the United States to approve Value-of-Solar (VOS) pricing for distributed solar generation.[1] Governor Paul LePage had vetoed the legislation[2] on June 26, 2015, citing concerns that the legislature had passed the bill “hastily,” leaving “the Maine people…disenfranchised and without true representation.” Maine’s Democrat-controlled House of Representatives overruled the veto 119 to 28, and the Republican-controlled Senate voted 32 to 3 to override the veto.[3]
The VOS bill is intended to provide long-term guidance to the distributed solar segment in the state. According to bill sponsor Rep. Sara Gideon, “it acknowledges that net metering works…in the near term…but…at a certain penetration point, net metering will be replaced by a mechanism that is more market sensitive.” VOS was the subject of an extensive study by the Maine Public Utilities Commission, and the study was presented to the Joint Standing Committee on Energy, Utilities and Technology on March 1, 2015.
Net metering is the preferred way of integrating distributed solar power systems to the electricity grid, and 44 states in the United States have adopted mandatory net metering regulations for their utilities. Net metering credits distributed solar generators at the retail rate of electricity for every unit of solar electricity that is generated, regardless of whether the electricity is used for at the generation site or sold back to the grid. For example, if 100 units of electricity are obtained from the grid and 36 units of electricity are generated by the distributed solar system, the consumer would be required to pay the retail rate for 64 units of electricity.
The VOS approach, as discussed across multiple technical studies, analyzes the per unit rate of solar electricity based on a comprehensive cost-benefit approach. In Maine, the following factors were considered in determining the value of solar:
- Avoided energy cost: Avoided wholesale procurement cost of electricity during solar generation hours.
- Avoided generation capacity and reserve cost: Avoided procurement cost at the New England Forward Capacity Market and avoided cost of reserve planning.
- Avoided natural gas pipeline cost: Avoided cost of building future natural gas pipelines to natural gas power plants for meeting additional electricity demand.
- Solar integration cost: Additional cost due to deployment of operating reserves required to handle fluctuations in solar output.
- Avoided transmission capacity cost: Transmission cost reduction due to coincidental solar peak load reduction.
- Avoided distribution capacity cost: Similar to transmission cost reduction.
- Voltage regulation: Placeholder for new interconnection standards potentially allowing inverters to control voltage and provide ride-through to support the grid.
- Net social cost of carbon, S02, and NOx: EPA estimates of social costs, reduced by compliance costs embedded in wholesale electricity prices.
- Market price response: The temporary reduction in electricity and capacity prices resulting from reduced demand.
- Avoided fuel price uncertainty: Elimination of long-term price uncertainty for fossil fuels displaced by solar.
The Maine Study calculated the 25-year levelized[4] value of solar at 33.7 cents per kWh, which is considerably higher than the average retail rate of around 12 cents per kWh that is paid to distributed solar generators under net metering regulations. The VOS can be broken down into 13.8 cents per kWh for avoided market costs and 19.9 cents in terms of societal benefits (essentially the social cost of pollutants, market price response, and avoided fuel price uncertainty). However, electricity tariffs are generally set based on predictions of energy values for the next year, rather than farther into the future. The value of solar for the next year is lower than the levelized value for the next 25 years, since solar generation is likely to become more competitive in the future. The one-year value of solar turns out to be 18.2 cents per kWh, with the breakdown of avoided market costs and societal benefits 9 cents per kWh and 9.2 cents per kWh, respectively. The level of societal benefits is contested by some experts, as the quantitative values are approximate at best. That being said, the authors of the Maine Study believe that, even if only avoided market costs are considered, using one-year rates is a short-sighted approach given that solar is a long-term asset. “Using a one-year avoided cost instead of the 25-year levelized avoided cost will always produce a smaller number. But a short term view is irresponsible and inappropriate with long-lived assets with long-lived impacts,” explains Karl Rabago,[5] co-author of the study.
Maine’s VOS bill does not provide that distributed generators be credited at the full 33.7 per kWh rate. Instead, the bill creates an aggregated distributed solar generation system under which distributed generators and an aggregator (referred to as the Standard Solar Buyer (SSB) in the bill) enter into a 20-year fixed price contract. The agreed rate would be somewhere between the retail rate and the VOS identified by the Maine study. A related whitepaper from Maine’s Office of the Public Advocate suggests capping this rate at 20 cents per kWh. The rate would decline over time, assuming the economics of distributed generation improves. The SSB would recover the costs of the program by selling solar energy on the market, and the cost differential[6] would be allocated equitably across the rate base.[7]
Maine’s decision to adopt VOS comes on the heels of a recent report by the advocacy group Environment America analyzing 11 net metering studies determining the value of solar power. The EA Report calculates the median value of solar as 17 cents per kWh and the national average retail tariff as 12 cents per kWh. Advocacy groups such as The Alliance for Solar Choice (TASC) believe, however, that net metering should remain the policy of choice for promoting distributed solar. TASC was co-founded by Solar City, Sungevity, and SunRun – three of the biggest third-party distributed solar system installers in United States. TASC argues that VOS makes system owners ineligible for the 30% Federal Investment Tax Credit (ITC), since VOS requires that generators sell 100% of generated electricity to utilities (or aggregators), violating Federal ITC principles[8]. It will also create additional taxable revenue.[9] Additionally, there is a possibility that the VOS rate will become lower than retail rates as distributed solar scales up, allowing utilities to yield greater profits from solar energy.
Rabago believes that consumers increase consumption of solar energy during the peak solar generation period since net metering severely undervalues solar generation. This is an inefficient behavior from an energy usage perspective and VOS eliminates this perverse incentive. Also, since VOS provides a set value for solar, it eliminates the standard utility argument that net metering cross-subsidizes distributed solar system operators.[10] John Farrell, who advocated for a VOS rate system in Minnesota, believes that the system provides the right incentives to distributed solar system owners as it correctly credits them for avoided cost of energy and infrastructure by using long-term contracts at predictable rates.
The future of retail electricity will need to incorporate innovations such as distributed generation, energy efficiency, demand response, and energy storage. It is essential for regulators to promote an effective rate design strategy. Having a common framework of distributed resource valuation will probably help, although without federal intervention,[11] it is unlikely that all states will agree on such a framework. Equally important, however, is the ability of state utility regulators to determine the feedback loops in rate design decisions. Dargrouth et al. (2013)[12] finds that, should regulators design net metering/solar valuation systems concurrently with time-of-use/peak demand rates, the combined feedback effects will result in a stable pricing and distributed generation deployment regime in the long-run.
California recently made a commitment to shift towards time-of-use retail tariffs and approved plans to aggregate and price distributed resources at the wholesale market. An interesting avenue of further research will be to forecast California’s distributed resource deployment with these two policies in effect and compare it with the current disaggregated net metering and tiered tariff regime. The analysis can provide a useful baseline in determining the efficacy of innovative rate design strategies to ensure the deployment of distributed sources without overburdening either the utility or the consumer.
[1] The other jurisdictions to do so are Austin, Texas in 2012 and Minnesota in 2014. Several other states, including Oregon, California, and New York have commissioned detailed VOS studies or studies that re-evaluate the effectiveness of net metering policies.
[2] See Page 7 for the complete veto text.
[3] The Advanced Energy Legislation Tracker provides a detailed breakdown of the votes.
[4] The levelized cost of electricity is defined as the average annual tariff required to ensure that an electricity project breaks even given over certain time period, given a particular discount rate.
[5] Rabago was also responsible for creating the first ever VOS rate system with Austin Energy and involved in Minnesota’s decision to promote VOS.
[6] The difference between the amount paid to the consumers with distributed solar systems and the amount recovered from selling solar energy at the wholesale market.
[7] The rate base refers to the assets of the utility on which it is guaranteed a fair rate of return as per ratemaking regulations.
[8] Consumers are eligible for Federal ITC at the residential level only if no more than 80% of their generation is used for non-business purposes. Selling electricity to the grid may violate the “non-business” clause.
[9]Under net metering, solar generation is not taxable since the consumer is not directly paid for the solar. Under a VOS system, however, the generation is a source of income and will be subject to income tax.
[10] Since solar production and consumption helps reduce electricity demand on the grid and consequently shave off tiers, the upward pressure on tariffs may adversely affect consumers without solar, who would then face increased electricity bills. A detailed discussion on the issue is in this paper.
[11] At present, federal intervention only extends to wholesale markets in the form of directives from the Federal Energy Regulatory Commission.
[12] Dargrouth,N., Wiser, R., Barbose, G., Mills, A., “Net Metering and Market Feedback Loops: Exploring the Impact of Retail Rate Design on Distributed PV Deployment.” Prepared for Office of Energy Efficiency and Renewable Energy, Solar Energy Technologies Office, U.S. Department of Energy. July 2015.
