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Minnesota’s Value of Solar

| Written by John Farrell | 16 Comments | Updated on Apr 9, 2014 The content that follows was originally published on the Institute for Local Self-Reliance website at http://ilsr.org/minnesotas-value-of-solar/
mn value of solar cover

In March 2014, Minnesota became the first state to adopt a “value of solar” policy. It may fundamentally change the financial relationship between electric utilities and their energy-producing customers. It may also serve as a precedent for setting a transparent, market-based price for solar energy. This report explains the origins of value of solar, the compromises made to get the policy adopted in Minnesota, and the potential impact on utilities and solar energy producers.

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The Value Of Solar Concept
comparison of net metering and value of solar in MinnesotaThe basic concept behind value of solar is that utilities should pay a transparent and market-based price for solar energy. The value of solar energy is based on:

  • Avoiding the purchase of energy from other, polluting sources
  • Avoiding the need to build additional power plant capacity to meet peak energy needs
  • Providing energy for decades at a fixed price
  • Reducing wear and tear on the electric grid, including power lines, substations, and power plants

Value of solar is not like net metering, where producing energy reduces your electricity bill just like turning off a light. Fig. A illustrates the difference between net metering and value of solar in Minnesota. It also highlights a few key features of the adopted value of solar policy, including the 25-year contract, and the use of bill credits rather than a separate cash payment.

Minnesota’s Value of Solar
As adopted, Minnesota’s value of solar formula includes all of the basic components of the theoretical policy. The following chart (Fig. B) shows the relative value of the various components, and the total value, based on early estimates filed during the proceedings at the state’s Public Utilities Commission.

preliminary estimate of value of solar in Minnesota

A Caution
Although Minnesota’s value of solar policy is a national precedent, the adopted policy had some good elements that were lost in the legislative process, elements that other states may want to revive. The following table (Fig. C) illustrates:

Minnesota value of solar adopted v proposed

The Impact on Utilities and Customers
pull quote environmental value of solar Minnesota ILSR reportThe environmental value may be the most precedent setting, because it means that when buying solar power under Minnesota’s value of solar tariff, a utility is for the first time paying for the environmental harm of its fossil fuel energy generation.
Value of solar offers something for everyone. For utility customers, a 25-year contract at a fixed price makes solar financing much easier, and as the cost of solar continues to fall, quite lucrative.

For utilities, the transparency of the market price means no concerns about cross-subsidies between solar customers and non-solar customers. It means a payment for solar energy uncoupled from the retail electricity price.  It may also mean a potential for cost recovery on payments made to solar producers, something not allowed with net metering. In Minnesota’s case, it also means free access to solar renewable energy credits, at a substantial savings compared to credit prices in states with competitive credit markets, i.e. New Jersey, Pennsylvania, etc.

Will Value of Solar End Battles Over Distributed Generation?
If Minnesota utilities report favorably on the value of solar, it may change the debate in other state battlegrounds over distributed generation.

state policy battlegrounds over net metering and distributed generation 2014-0321

The value of solar delivers a transparent, market-based price for solar. It solves problems for utilities and for utility customers around compensation for distributed renewable energy generation. But its ultimate success lies in whether electric utilities can be convinced that accommodation of customer-owned power generation is in their best interest, or whether any concession of their market share is a deadly threat to their economic livelihood.

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About John Farrell

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. More

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  • Jackie Janes Loveless

    assuming the report wasn’t published by people with an agenda… then this is a good thing.
    unfortunately, just about everything from cartoons to sitcom to elementary school books seem to all have an agenda.

  • John Ihle

    I think there are some bona fide short term issues or concerns with vost, e.g. the legal opinions, relating to the investment tax credit and whether or not one can utilize it with a vost structure. Since the itc represents 30% of the system cost it’s a pretty big concern until it expires. Another related issue is the apparent taxes due on revenue from vost. There weren’t these issues with net metering.
    Sure. Every one has an agenda. Is that a bad thing? Even the utilities, obviously, who apparently favor the vost, have an agenda. They see their market share potentially dwindling significantly because at some point solar pv will be cheaper (and cleaner) than business as usual.
    I like the vost in some respects. It pays for the value of distributed generation as well as provides some value for carbon. But I think that all the social benefits should be paid for in a direct link to rates rather than the indirect links we now have. Such as healthcare costs, etc.

    • http://www.ilsr.org/ John Farrell

      John, I’ve not heard of any potential conflict between the ITC and value of solar. Could you explain further?

      • John Ihle

        I’ve read in different places that there was controversy, especially over the last few weeks since the MPUC decision.. here’s the most recent link which I thought described it pretty well with several comments. http://www.greentechmedia.com/articles/read/A-Rising-Tension-Within-the-Solar-Industry-Value-of-Solar-Versus-NEM
        However, it may be best to acquire the opinion yourself, talk to your or the tax attorneys, etc. and make your analysis. Since I’ve not read the opinion myself I’m not 100% convinced that the vost precludes itc availability as well as the taxable income from revenues that may be due from vost payment, etc. But this is definitely an issue which has importance going forward. It would be difficult to sell or invest in a solar pv project, for example, if part of the economic analysis is embroiled in controversy.

      • John Ihle

        and from that blog

        “That generation sold creates “taxable revenue” for the system owner, Smart explained, and according to a legal opinion cited in a recent TASC regulatory filing, potentially makes system owners “ineligible” for the 30 percent federal Investment Tax Credit.”

        Minnesota vosts were, apparently and according to the article, were designed differently and may not be subject to the same rules and tax treatment as other vosts. And I’m not clear on why that is or how that works.

  • Eric Sandeen

    So the VOS looks like around $0.14/kWh now, for Xcel. If Xcel were to choose to use that, and offer me a multi-year contract, does that mean I’m locked in at $0.14/kWh for the duration of the contract, or is VOS recalculated every year, even under contract?

    I ask because while $0.14/kWh looks nice now, that’ll be pretty bad compared to retail cost in 5 or 10 years. Net metering looks much better in that scenario.

    If this is a buy-all sell-all arrangement, do I pay taxes on both?

    Net excess is forfeit to utility? Is that per billing cycle? Ugh, that sounds problematic.

    Overall, it sounds like if the utility chooses to use VOS, the owner of the array will lose quite a lot: More taxes, less avoided cost, and forfeited excess production. What am I missing?

    • http://www.ilsr.org/ John Farrell

      Eric,

      In reverse order:
      1. The PUC ruled that for the community solar gardens program, net excess is NOT forfeit but it paid at the same rate as the rest of the energy. That’s a good sign for VOST.
      2. It’s not really buy all / sell all, because what you get are bill credits. I’m not a tax lawyer, but the bill credit system was designed to avoid tax liability on payment for solar energy under value of solar. 3. Your contract price will be fixed, or may adjust with an annual inflation adjustment. The annual recalculation of the value of solar will not impact the prices paid to those already under contract.

      Good questions.

      • Eric Sandeen

        Thanks John. The first 2 answers sound encouraging, but the last still sounds like a giveaway in the long run. I guess I’m glad I’ve got a net metering contract for now. :)

        • http://www.ilsr.org/ John Farrell

          Eric,

          In the short run, net metering is probably better all around, but in the long run there is a problem as the spread between net metering and the cost of solar gets very large, which I wrote about here: http://www.ilsr.org/enormous-question-solar-choice/

          Sincerely,
          John

  • Grant Bergman

    Sitting in California and knowing something about how our rates are set, I don’t see potential for VOS here. For better or worse, our utilities do not own the power plants. That means rates are set in a relatively arms-length (but heavily regulated and supervised) fashion, so there is a known purchase price the utility pays for power generation. Every KWHr generated by home solar is a KWHr the utility does not have to buy from the power plants they contract with at these known prices. Beyond their own usage (i.e., net metering) home solar customers are paid the utility’s blended rate. This basically puts every home solar customer on the same footing as just another power plant that the utility buys from. (Other laws and programs in California already favor renewables very strongly, so there’s not much rationale for adding yet another incentive into these rates.)

    It’s not perfect, but it is simple and clear. VOS explicitly prices externalities, like environmental mitigation, but a lot of that is built into the generating facility’s rates already: they have to pass stringent emissions standards for each plant’s design just to break ground.

    None of this is to undercut the VOS rationale, which I support in general. California just has a strange regulatory history over the last 15+ years that ends up providing a different, simpler way to look at this. And we do still have our own controversies about connect fees and limits, so in this regard we still belong on the map for having “Freedom to Generate Under Fire.” But we’re not a part of the same VOS conversation.

    • http://www.ilsr.org/ John Farrell

      Grant,

      Thanks for the thoughtful context on California. My question is the whether there’s a difference between the net metering rate and the “known purchase price” utilities have when they go out for power. My understanding is that the marginal retail rate for a customer can be as high as 30-40¢ per kWh (which they can avoid with solar), and surely utilities don’t pay that much for their marginal electron.

      • Grant Bergman

        Yes, there is a difference: retail price vs. supplier’s wholesale cost. Utilities sell at retail and buy at wholesale. The prices they pay customers with rooftop solar follow that logic. Through net metering the dial “spins backwards,” literally, in the case of older meters. Using a KW Hr then putting one back on the grid is a net-zero cost because the dial went back to where it started. Put less back onto the grid than used, and you pay for the difference at retail, i.e., the part you put back was credited at retail. OTOH, spin the dial farther back than where it started (last billing period) and the homeowner only gets reimbursed at wholesale cost for the difference. The utility is forced to buy the excess power generated, but at a cost commensurate to what they pay for unforced purchases.

        The marginal rate customers pay does not matter here, as they’re really reimbursed KWHr for KWHr, not dollar for dollar, up to the amount they use. On an average basis I think our residential rates in San Diego come out to about 17 cents per KWHr, but “Tier 4 rates,” for large users, may go as high as you say. (I barely make it into Tier 2 most months.)

      • Greg

        John-

        Where can I stay abreast of decisions impacting the ITC as related to CSG’s in MN. My low cost model to attract capital is dependent on the ITC through 2016. If it won’t be ruled on definitively for a while it impedes my ability to raise necessary CSG capital. Maybe I’ll just have to financially remodel the investment to not include ITC dollars? A more pure way to be sure.

        • http://www.ilsr.org/ John Farrell

          Not sure I completely understand, Greg. Are you referring to renewal of the ITC past 2016 or legal issues with being able to monetize the ITC with community solar gardens projects?

  • FM

    John, you project a huge forward thrust for Solar PV in the years to come and I agree. But as the efficiency and design of solar panels improves over the coming years, what about the very low-efficiency panels sitting on our roof-tops? Most likely, we would like to replace them to benefit from more efficient ones. If this happens, what is the world going to do with all the huge debris of antiquated solar panels. Is a new type of ecological crisis in the making?

    • http://www.ilsr.org/ John Farrell

      A very important question, and one I’ve not wrestled with much. That being said, due to the longevity of panels, I’d assume that we’ll see a relatively robust second-hand market for panels (maybe even as charitable donations) before we see a lot of panels headed to the scrap heap.