Sky-high fossil fuel prices aren’t just pounding American pocketbooks for fueling up cars; they’re also impacting costs for producing electricity. Power plants burning natural gas (primarily consisting of methane gas) have seen fuel prices jump significantly, and utilities are passing these extra costs onto customers. Solar energy, like most renewable sources without fuel costs, can help protect consumers against volatile fossil fuel prices. In some places, policies used by utilities to compensate solar owners for the energy they produce actually takes this hedging value into account. These “value of solar” policies work to protect electric customers from natural gas price volatility, and that protection even extends to gasoline price protection, as more Americans purchase electric cars.
Before diving into a specific example of Minnesota’s value of solar policy, here’s some brief context on natural gas prices. The following chart from the Energy Information Administration (EIA) shows the price of natural gas for power plant use from 2002 to the present, with the recent 5-6 years an unprecedented period of relative calm and low prices. The giant spike in February 2021 is the result of the Texas Freeze (itself due to that state’s regulators’ failure to require weatherization of natural gas facilities ten years earlier). Prices that have hovered between $3 and $5 per million btu of gas are now over $5, with the EIA predicting that prices won’t come down at least through the end of 2022.
One way to mitigate the impacts of these high natural gas prices is to deploy more solar and to pay solar producers for that value, such as through Minnesota’s value of solar policy. Minnesota uses this policy concept to price solar energy produced by community solar projects. State law outlines how, by buying solar energy instead of from fossil fuel power plants, utilities save money on the cost of pollution, fuel purchases, and operations and maintenance. The following list shows what share each of these components played in the price the state’s Public Utilities Commission set for solar energy in 2022:
- 35% avoided environmental cost
- 21% avoided fuel cost
- 20% avoided generation capacity
- 19% avoided transmission and distribution capacity
- 5% avoided operations and maintenance
For an excellent and in-depth overview of Minnesota’s value of solar policy, check out this January 2022 Local Energy Rules podcast with Gabriel Chan, associate professor at the University of Minnesota’s Humphrey School of Public Affairs in Science, Technology, and Environmental Policy.
The approved 2022 value of solar tariff requires the utility to pay 11.78 cents per kilowatt-hour of solar electricity produced by community solar projects, the sum of these separate values. The chart below shows the history of the value of solar calculation, from 2015 to the present.
The purpose of this pricing model isn’t to make electricity cheaper today but rather to incentivize the installation of solar projects to reduce price volatility in the future. Here’s a simplistic example. Let’s pretend that Minnesota electricity customers buy 1 million units of electricity generated by burning natural gas. If the price of gas doubles from $3 to $6 per unit, electric customers collectively see their fuel bill double from $3 million to $6 million, since the utility passes on fuel costs to customers. (This is oversimplified for illustration as some costs of electricity, such as plant maintenance and transmission of electricity, would not change with fuel costs.) The more that solar energy can displace the use of gas-fired electricity, however, the less price volatility will impact customers. For example, if solar electricity can provide 10,000 of the 1 million units of electricity for Minnesota customers, it will blunt the impact of the natural gas price increase. Instead of bills doubling, they’d rise from $3 million to $5.7 million. That’s $300,000 in savings! The more solar, the smaller the impact of price fluctuations. Note: any kind of solar energy production that reduces fossil fuel use will reduce fuel costs (such as solar produced via net metering), but only the value of solar links solar compensation to the avoided fuel costs.
The flipside of the value of solar is that the price paid to solar projects does not change over the solar power plant’s lifetime. A solar project built in 2022 will receive the equivalent of $0.1178 per kilowatt-hour for 25 years. Each year, the value of solar price will be adjusted to account for changes in the electricity market, but only for newly built projects, not existing ones. The cumulative impact is that Minnesota customers will be less exposed to costly fuel price volatility the more solar energy is built, since energy from community solar farms won’t fluctuate in cost.
Assuming natural gas prices remain high, we can expect the value of solar to rise significantly in 2023. Minnesota’s annual value of solar price actually uses data from the prior year due to the timing of the regulatory process. For example, the gas prices used in the 2022 value of solar tariff were based on futures prices from mid-2021. By April 2022, gas prices had increased so much from the calculation baseline in 2021 that avoided fuel costs would have been 73 percent had the value of solar been calculated with current data, and the entire value of solar would have risen by 15 percent, to 13.56 cents. If natural gas prices remain high, the value of solar will rise, providing an incentive to install more solar and to reduce customer exposure to gas.
Although it’s less direct, solar energy also helps hedge against gasoline prices. As Americans buy electric vehicles, they’ll shift their fuel source from refined oil to electricity. With the value of solar policy, grid electricity prices will become more stable, protecting drivers from price shocks related to geopolitics. Americans can also invest in rooftop or community solar themselves, producing their own vehicle fuel!
Although solar energy can’t undo how much customers have to pay due to their utility’s heavy investment in natural gas plants, over the long term it can sharply reduce how much utility customers will be exposed to price shocks. With the value of solar, we can induce better investments in clean electricity that will make electricity more affordable for everyone.