What Is the Value of Solar? — Episode 148 of Local Energy Rules

Gabriel Chan:

That’s a great question. You know, I think about this sometimes when I’m late at night looking at these spreadsheets and I’m like, is this really worth it? And thinking about it, I think that it really could be. And, and I’m not sure a hundred percent one way or another, if this has all been worth it. But I think this is how it could be is that we’re headed towards a world of a lot more distributed energy resources, you know, EVs, distributed solar, but also, you know, demand side management technologies like smart thermostats and smart water heaters and a lot more energy efficiency devices too. We’re gonna have a lot more of this. And what this means is that where the capital in our electricity system is, is gonna shift from primarily owned by utilities, to now a much more balanced utility and customer kind of way.

John Farrell:

What is the value of solar energy? We all know it can generate clean electricity from rooftops, create jobs, and reduce pollution, but can we price those benefits? In November 2021, Dr. Gabriel Chan, associate professor at the University of Minnesota’s Humphrey School of Public Affairs in science, technology, and environmental policy joined me to talk about Minnesota’s value of solar policy. We explored the attempt to develop an accurate methodology to reflect the value of solar energy and the trade-off between getting it spot on and finding a number that encourages solar power to grow. I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance and this is Local Energy Rules, a biweekly podcast sharing powerful stories about local, renewable energy. Gabe, welcome to Local Energy Rules.

Gabriel Chan:

Thanks so much for having me, John.

John Farrell:

Well I want to start people off with trying to help them understand a little bit about the value of solar, but before I even get into that, I just have to ask what got you interested in this. This is like way into the weeds of clean energy policy to try to understand like how you calculate the value of a solar electron, what made you decide to spend time trying to get familiar with how this works in order to add some intelligence to the conversation?

Gabriel Chan:

That’s a great question. You know, going back now, I think it’s probably been, well, maybe five years since we started to take a look at the value of solar in my research group. And I think it really came from being curious and just saying, what is this docket all out where people are arguing about really technical things and seeing this docket as being a place where people are talking about fairness and also at the same time talking about voltage regulation. And it’s like, okay, this could be a place to really, there’s enough here to dig into. And it seems like it really matters for how we’re thinking about the future of our energy transition.

John Farrell:

I love that. What a great context, in the same place they’re talking about fairness and voltage regulation, I’m there. Yeah. <laugh> so maybe you could start off then by explaining a little bit what, what was the purpose of this concept of the value of solar? So it’s a, you know, Minnesota passed a law back in 2013, creating this calculation of the value of solar, walk us through, like, why was it that we wanted to have something like that? And then how did we put together that component? What, what is the, what is the value of solar?

Gabriel Chan:

So the value of solar as originally conceived is an alternative tariff and it’s an alternative to net energy metering or NEM, which I think has been discussed on this podcast in many other places. It’s the most common way that distributed generation is valued, essentially valuing the outflow, any electricity set back to the grid at essentially the retail rate and value of solar is an alternative to this. And it takes the, the idea of instead of, uh, reimbursing any outflow of solar energy back to the grid based on the retail rate instead actually value calculate what is that energy sent back to the grid worth and then reimbursing at exactly that value. And so conceptually the value of solar is designed to eliminate any concerns about cross subsidy. It’s designed to be fair to the utility and non-solar customers by providing compensation that’s equal to the value of that energy. Now, practically is the value of solar higher or lower than the net meter rate? A lot of studies have come back and said it’s higher. And a lot have come back and said that it’s lower. And so the real, the devil is in the details about what impact the value of solar actually has on the overall growth of solar in one place.

John Farrell:

So let’s talk about that idea. You mentioned the term cross subsidy. I’ve also heard this as like a cost shift. It’s giving me PTSD because I’ve heard it in so many places, uh, often raised by utility companies and often in defense, as they say, at least on its face of low income customers who may be less likely to be able to put a solar panel on their roof. So let’s give, we’ll use myself as an example. So I’m a middle class, white person. I got, I own my house. I put up solar panels in, in the place. I am, my utility does net energy metering. So I’m rolling my meter backwards basically when my solar energy. Uh, so I’m producing solar energy for my panel and sending it back to the grid. What is the cost concern here about me doing that? It seems like, Hey, I’m just reducing my energy bill. What’s the big deal.

Gabriel Chan:

Yeah. I think maybe just to back up one second then to get to this, you know, the utility system is filled with cross subsidies and in fact, a lot of folks have argued the very purpose of an electric utility is to create cross subsidies. If we all had to pay for what’s called the fully distributed costs, we had to pay for all of the assets needed just to provide our service, we’d be paying a lot more for electricity that instead working together and sharing the grid. And we share that grid. And there are a lot of formal processes by which those costs are allocated back down to us. Those costs, particularly the fixed costs like the, the poles and wires and the capital cost of power plants. Those don’t vary with our consumption. And so we have a lot of formal processes that are highly regulated in investor utilities to figure out how to allocate those costs equitably.

But of course that’s extremely hard to do. And we end up doing a lot of averaging in the process of trying to set rates. And so what means is some people are paying way above their fair share, and some people are paying way below their fair share. But the general idea is by working together, we’re all paying less than we would be if we were working separately. So to get to your question right now, if you are, for example, a night owl, you’re probably way over paying for energy as electricity is really cheap at night. And so when you install solar, you’re also deviating from your average class cost of service, but that’s, you know, that’s a cross subsidy that needs to be put into the context of all the other cross subsidies that we live with in the electricity system, and that are necessary to drive cheap power.

So I think when we say cross subsidy, it’s important to separate out the good cross subsidies from the bad cross subsidies. And to make sure that our analysis is really comprehensive of what the system looks like overall, specifically to your question about a middle class person installing a solar panel on their house. I think the, the first part of the question is we have private individuals who are putting in their private capital to grow a clean energy system that on its face is really good. I think, you know, we need a lot of capital for this energy transition and if people are willing to put in their own capital to, uh, help accelerate that, that’s great because, uh, raising capital is really, you know, at the heart of what we’re doing in the energy transition. And then how we value that. I think we need to be thinking about what are our incentives and then what are our values? And then, uh, being really clear about all of that. So moving our conversation back to value of solar, I think value of solar helps to create a framework to be really clear about what’s the value and what’s the incentive. And as we move forward, that framework of thinking about the, the kind of equitable value that value of solar tries to establish. And then on top of that, incentivizing – on top of any fair value, I think that’s really how we’re gonna get to the fastest and cleanest energy system.

John Farrell:

I think it’s fascinating that you talk about the sort of separation using the value of solar to get a good conceptual sense of what its value is it from the incentives that we provide. I, I mean, I can just say as someone who was involved in the legislative process for Minnesota’s value of solar, that’s exactly what we were talking about was this idea of, you know, there’s a policy that was used in many European countries to encourage distributed solar called a feed in tariff. And the idea there was that they would just pay what it was worth to make people do solar, cuz they wanted solar. Like you said, there was a social value of let’s get people to do solar. And if they’re willing to spend their own money to do it, then let’s support that by setting the right price.

And we thought, okay, well let’s, in Minnesota, Maybe we could do the same thing, but we break apart what the value is to the system from the incentive. So people understand it. It hasn’t stopped utilities from talking about cross subsidies, just the, that we have created this value of solar conversation, but it’s useful to understand that this conversation of cross subsidies is actually much deeper than just solar. So utilities might be bringing it up about solar customers, but the truth is, as you say, the subsidies are riddled throughout our electricity system. And we really just need to be thinking about what’s a good subsidy, what’s a bad subsidy instead of focusing just on one particular kind of customer that’s installing solar.

Gabriel Chan:

Exactly. You know, I think the cross subsidies are riddled throughout the system. You know, utilities and regulators focus a lot on the cross subsidies at the retail level, but it’s there throughout the entire system. I think the federal government has been very involved in setting up our electric system. So there’s a cross subsidy from taxpayers to utility shareholders and to rate payers and there’s cross subsidies riddled throughout wholesale markets as well. So the whole system is in fact, you know, one big collective system where we have a lot of private interest in private and we have to figure out a way to do cost allocation, but that doesn’t mean that cross subsidies are bad. In fact, we would have no electricity system without cross subsidies.

John Farrell:

So let’s hone back in on the value of solar specifically and let’s use Minnesota’s as this example. Could you touch a little bit on the history of Minnesota’s value of solar? Like what are the components in the legislation? When did it pass? What is it being used for here?

Gabriel Chan:

So Minnesota wasn’t the first jurisdiction to develop value solar, as you mentioned. Austin Energy is a municipal utility in Texas that really led the way in developing a value of solar framework. Minnesota was the first state, though, in 2013, adopted legislation. And then in 2014 developed the methodology for the value of solar closely following the Austin Energy example. In that legislation, there was also the establishment of a community solar garden program for the customers of Xcel Energy, the state’s largest utility. And in that legislation said that the value of solar would be the compensation for those gardens after a, you know, two year or so trial period. What the value of solar under, uh, statute says, it’s an alternative tariff that compensates customers through a bill credit mechanism for the value to the utility, its customers, and society for operating distributed energy resources. And in that legislation, it says, the general parameters link that parts to reiterate its value to the utility, to its customers, and to society. And I think that that, that language really, I think helps start spinning the wheels about how to think about the framework of value of solar.

Actually we could flash backwards another, almost 40 years to the early days of energy efficiency incentives where in California, way back in the day, they were thinking about how to value energy efficiency, another kind of distributed energy resource. And in those days of thinking about energy efficiency, there was a similar kind of thinking about a distributed resource might have value to the person adopting that technology, to their neighbors who are also on the retail end, to the utility, and to the full system and to society.

And so similarly value of solar takes like what’s called in the efficiency world the societal cost test, the value of solar, Minnesota takes a full society perspective. And so what that means is that when the methodology was being developed in 2014, stakeholders really emphasized that what needs to be included are those values first to the utility. So any kind of avoided fuel purchases or generation, new capacity or new transmission capacity, et cetera, but it also needs to take into account the broader impact on society. And so a really important part of the value of solar is its valuation of environmental attributes, namely local air pollutants and greenhouse gases. And so all of those add up together and what’s called the value stack and the final methodology and the value of solar, a number of those components about eight components.

John Farrell:

You mentioned that the language in Minnesota, the value to the utility, its customers, and society mirrors some of those earlier conversations about how we think about these resources. And I think it’s what I, I really appreciate about the connection between this and what we were saying earlier about just because I see an individual benefit in installing solar on my home doesn’t mean that it doesn’t have these broader benefits for other people, right? Like hopefully we use less dirty energy and, and the grid writ large because I’m using more that’s from this solar panel that produces clean energy. Do you think there’s anything that we’re missing in the big picture when we talk about the components of the value of solar and, I don’t know if it’s useful, maybe just to actually list out the ones that are part of Minnesota’s methodology? But yeah, are, are there things that we’re missing? Are there things that we’re counting that we should not be counting in terms of the value of solar? How are we doing in Minnesota in terms of picking the right things to do this solar valuation calculation?

Gabriel Chan:

Yeah. First, you know, the value of solar is updated, uh, once a year in Minnesota. So looking at the, the current filing from Xcel energy for its 2022 value solar, not yet approved, but soon to be reviewed, the current value of solar stands at, uh, the levelized value of it stands at 35% environmental, which includes local air pollution and green in house gases. 21% avoided fuel costs, 20% avoided generation capacity, 19% avoided transmission and distribution capacities, mostly transmission, and then 5% for avoided operations and maintenance and reserve capacity. So that’s how it’s currently breaks out. I think that there are a number of these components and missing components that we’ve talked about in some of our, uh, filings in the docket. And if I had to hone in on what I think the most important missing piece here is that the current methodology, I think, reflects the grid of today and not the grid that we’re headed towards.

And the grid we’re headed towards is a really different grid. And particularly as we’re deploying solar right now and the most solar facilities are, are scheduled to last for at least 20 years. And over the next 20 years, the grid is really, really gonna change. And I think that some of the really important parts that are missing that don’t reflect the change in grid are first of all, that right now, as we are putting on solar onto the grid, we’re actually in the process of taking off the dirtiest generation in coal plants. Many coal plants here in the Midwest are now operating on a seasonal basis and are actually operating like marginal fuels, but we’re not treating them as such, which means that as we put on more renewables, that incremental amount of new renewables onto the grid is actually pushing off some of the dirtiest generation, but it’s not being valued as such. It’s being based off of natural gas, which is closer to the average these days in a lot of places and not reflective of that true value.

And then also related to this as we’re changing the grid, we’re also gonna be relying, I think, a lot more on transmission and distribution. Now, transmission and distribution is the highest fraction of all in electricity costs than has been before. But some of the methodology details about how that’s valued, I think also, um, have a, you know, quite a bit of room for improvement. And then, you know, also tying into this, there’s a lot of volatility that we’re seeing in natural gas markets right now, and natural gas prices have spiked, uh, over the last three to six months in a way that we haven’t seen. For quite a while we’ve known natural gas prices are volatile. They’ve been relatively stable recently. And one of the really perverse effects of a value of, of the value of solar and really, I think this is a methodological challenge that is quite deep, is that right now solar is, is the solar’s value… The value of solar is based off of avoiding natural gas based of prices registered in futures markets, but natural gas futures markets are really thin as we all saw during Texas, there’s not a lot of natural gas storage out there. And so the price of natural gas in the future is highly reflective of natural gas prices right now. And the ability of markets to forecast these big swings is really poor. As we’ve seen natural gas prices spike over, over the last few months, that should be reflected in the value of solar, but it shouldn’t be reflected one to one because what solar’s really doing is it’s making all of us less vulnerable to those price shocks. As we rely less on natural gas regeneration, because we’re relying more on solar or other renewables, there’s less volatility and individual customer’s bills, but there’s a perverse effect going where now solar energy is seeing that volatility because the value of solar is going up and down as natural gas prices fluctuate, when instead solar should be creating a value when prices go up and down because providing that kind of hedging. So there are a lot of things like in the weeds that really, I think, uh, matter for how we think about reforming the value of solar, but right now it is designed to be as comprehensive as possible.

John Farrell:

We’re gonna get into a little bit more some of the weeds about these specific categories. I just want to repeat a few of them though. I think that it’s really the interesting, the way that you categorize these. So I think one piece that’s fascinating to me is this idea that we are valuing solar based on the grid of today, not the one we’re moving toward. And I think this has some really interesting implications around this idea of like, as people can do solar and solar continues to get more cost effective. Now people can add them like energy storage to their solar array. Now we’re gonna electrify more of the things that we use, like starting with cars and then also with things in our homes and businesses, that grid is gonna have a lot more like local demand for electricity. And so having more local solar seems like it’s particularly valuable, but we don’t seem to be counting. That is what I’m hearing you say.

Gabriel Chan:

There’s an ongoing process that we’re involved in to try to figure out some of that locational value of solar as it’s called, you know, this could be reflected potentially in the avoided distribution capacity, meaning how much less needs to be invested in the distribution grid because you have local solar. That’s a really hard question.

There’s actually a really interesting case that we’ve looked at out in SMUD in California, the Sacramento municipal utility. They have a really interesting approach to how to think about how to value solar when you have a lot of, I think, heterogeneity on the distribution grid, but things like storage and EV charging that makes solar in a specific place, on a very local basis, more valuable than another specific place on a very local basis. The way they’ve thought about that is to say, well, we know that if we put solar in this one place, maybe it’s near some EV charging or it’s near a substation that is just at its maximum capacity because there’s been a lot of, you know, condos developed in the area or something. We know solar’s gonna have different value in different places for these specific things that we can quantify. Let’s go ahead and add that to the value stack, but also solar generally in the future is also gonna help us prepare for, it’s gonna give us a little bit of extra space to add some new load, or it’s gonna make it easier to build out EV charging and some, some, some places in the future, but we don’t necessarily know that, but we know on average it will.

And so SMUD’s approach has been to conceptualize a specific avoided distribution benefit and then a more, uh, average or stochastic or unspecified benefit as well. And I think that that could be a really helpful approach to think about preparing for this more hetero grid, with specific little pockets of, uh, supply and demand that are growing everywhere. That also think about the uncertainty that we’re headed towards as well.

John Farrell:

I think that’s fascinating. I absolutely love this example because what I hear you saying is that it’s sort of dealing with two ways of understanding the grid and the future of the grid. One of ’em looks at the grid as it is now and says, there’s this pocket or these pockets like different neighborhoods basically where people are really investing in other distributed energy resources that solar could be a supplier for. So we wanna pay extra for people to put solar in those places because it has grid values that we know today are important, right? Like we may have to do an upgrade on this distribution system unless there was more electricity production there. So we will pay more to encourage people to do solar here, cuz it meets a need. We identify right now based on things people are doing. I just love that other way of looking at this.

So, and saying the whole grid is gonna move that way eventually. Right? We know people are gonna electrify things, not because there’s a bunch of hippie climate people telling them to do it, but because it actually is cheaper, right? Like I’m looking at my electric cars, for example, as gas prices have been going up and speaking about, you know, gasoline here and not the gas for power plants, I, I keep paying the same amount to fill up my cars, you know, to 10, 11, 12 cents a kilowat hour to fill the batteries. It’s like a dollar a fill to do my Nissan Leaf. And we know that people are gonna keep doing that. And we even probably based on adoption profiles for other technology could make some pretty good guesses about where that’s gonna happen. So we have a chance to plan for the grid of the future by saying, okay, people will install solar. Now we should encourage them to do that because we know that the future grid is gonna need that power probably in those same places. I just think that’s fascinating. And the idea that we could even do some predicting around it is also just really exciting.

Gabriel Chan:

Precisely. Yeah.

John Farrell:

We’re going to take a short break. When we come back, we talk about net metering, how value of solar acts as a “boundary object” for good discussion, what it means to be a “marginal fuel,” and why Darth Vader was a symbol for a value of solar policy gone wrong. You’re listening to a Local Energy Rules interview with Dr. Gabriel Chan, associate professor at the University of Minnesota’s Humphrey School of Public Affairs in Science, Technology, and Environmental Policy.

MIDWAY PITCH

John Farrell:

I guess one other question I just wanna ask you about this. So there are a lot of these, uh, this example, I think highlights for me like some of this marginal valuation question, right? Like how do you encourage people to put solar where it’s useful now? How do we think about how to capture the value of solar that’s installed today based on what it might be able to facilitate tomorrow?

I guess one question I have about Minnesota’s value of solar in particular is that part of the justification for this whole conversation, part of the reason I was advocating that Minnesota should do a value of solar, was utilities across the country were saying net metering is broken, it way overpays solar producers. And you kind of already touched on this further. You said, actually, there’s been a lot of studies done by a lot of different folks. Sometimes they say it’s higher than the retail electricity price. Sometimes it’s lower than the retail electricity price. I guess my question is, is it really worth all this specific and detailed calculation in Minnesota where it turns out the value of solar is about a penny a kilowatt hour different from the retail rate, at least for a residential customer. Could we just instead focus on some of those like marginal benefits and where to best put solar or do you see there as really still being a value in the value of solar and, and knowing some of this information about, uh, the way that it works for the grid system?

Gabriel Chan:

That’s a great question. You know, I think about this sometimes when I’m late at night looking at these spreadsheet, like, is this really worth it and thinking about it? I think that it really could be, and, and I’m not sure a hundred percent, one way or another, if this has all been worth it, but I think this is how it could be is that we’re headed towards a world of a lot more distributed energy resources, you know, EVs distributed solar, but also so, you know, demand side management technologies like smart thermostats and smart water heaters and a lot more energy efficiency devices too. We’re gonna have a lot more of this. And what this means is that where the capital in our electricity system is, is gonna shift from primarily owned by utilities, to now a much more balanced utility and customer kind of way.

And we need to figure out a way about how to navigate the ways in which we value and compensate for, incentivize ultimately capital that’s on the distribution grid. And the value of solar, I think gives a preview into thinking about this because I really do think this is… we’re still very much in the early days of thinking about how to think about tradeoffs and incentives across utility owned capital and customer owned capital. And when we start to really think through how are we going to treat these on what ultimately needs to be, I think, a level playing field. I think we need to, we need concepts like the value of solar. And I think what value of solar does is it tries to conceptualize the full societal value of distribution sided resources. And that fundamental question is opening up all these other questions. Like how do we think about, like, we were just talking about our priorities on the distribution grid for locational developments, location specific development of resources, but it also opens up all these other questions about, do we even have enough data to be thinking about what’s needed on our distribution grid?

It’s also opening up spaces to actually have hard conversations about what is our marginal fuel? What is the environmental value of solar? It’s creating all of this new information. And I think really could become what we in academic circles called a boundary object. It’s this kind of conceptual tool that sits in the middle of parties with really different interests. You know, you have distributed energy developers, utilities, customers, environmental advocates, consumer advocates can all look at this one box of analytic tools and open up that black box and have a conversation on a, I think, a consistent analytic framework and then actually get to the heart of what really matters here, which is what kind of data and analysis do we have. And do we need to be able to make decisions to fairly value utility owned capital and customer owned capital?

John Farrell:

I wish that more decisions in our society were made on the basis of having such a boundary object where we all come and talk about the facts, as opposed to in the court of public opinion where things like lobby and advertising makes such a difference. So, but let’s take, let’s ignore that for the moment here, because I wanna open up this black box specifically in the context of Minnesota’s VOS and dive into some of these kind of thorny questions that you raised earlier in a more preliminary way. You just talked about this issue, for example, about marginal fuel. And you highlighted earlier, you were kind of explaining like, oh, you know, Minnesota’s value of solar calculation is set up to say that natural gas is the marginal fuel, which is to say if a solar panel produces electricity, we assumed in creating the methodology that it was a gas plant that was going to be sort of dialing down when that solar panel dials up. But what you say you found is in some of your research is actually that might be, that might be incorrect that in fact, what’s happening on the broader grid as solar has been growing, whether it’s utility scale solar or rooftop solar, is that the dirtiest power plants, the coal power plants are the ones that are being turned down. Explain a little bit about first of all, how you came up with that, how you came to understand that. And then second of all, why does it matter in terms of the value of solar? How’s it gonna change its value? If we recognized that there are actually is a different marginal fuel that’s being offset by solar.

Gabriel Chan:

You know, it says in the 2014 approved methodology that the assumption of natural gas as a marginal fuel is a simplifying assumption. And I think it’s also worth clarifying that natural gas is used as the marginal fuel. And it’s also used as the marginal generation capacity. And I think it’s actually worth talking about both of those, because it’s two separate issues. First on the marginal fuel question, we can look at reports that MISO the mid-continent independent system operator, which is our big wholesale market. They put out reports every year, that report on the marginal fuels on the grid in the summer and winter and report that coal is a marginal fuel over 50% of the hours in both summer and winter. And this really, I think, reflects the fact that coal generation has just become expensive on a marginal basis, even taking, putting off the table, any of the, the associated, uh, costs of actually building the power plant, just the fuel and operating costs of coal power plants has just really gone up, uh, relative to other resources.

And that’s pushed it in our wholesale markets to be a marginal fuel. And you can see this reflected in a lot of, I think the dockets that we have in Minnesota that have talked about the seasonal operation of coal plants and there’s even, you know, I think a lot of evidence that’s growing that coal plants may actually operate even less than seasonal meaning operate sort of on an hourly basis and will be dispatched more intermittently. So because of that, as new generation comes on, the marginal fuel is really what should be establishing the value of avoided fuel and environmental impacts. And we have a lot of evidence now from, uh, looking at the MISO reports that actually coal’s very often on marginal fuel and is likely to become a even stronger marginal fuel as it retires. So you can think of it as, uh, coal plants are retiring, they’re moving from base load to, uh, peaking facilities of more marginal facilities and then they’ll retire.

And so I think more coal is likely to be on the margin as they retire, which means that if we think about how value of solar should evolve, if it’s reflecting market of conditions, probably those environmental cost, avoided cost should go up and then eventually go down because once the grid is a hundred percent decarbonized, there’s no environmental value of new solar anyway, because the grid’s already clean, but we’re not there yet. And I think as we, uh, work on that pathway, that assumption of marginal fuel and therefore the marginal avoided fuel cost and marginal environmental benefit should reflect that.

But then I also mentioned that natural gas is also a simplifying assumption for the marginal generation capacity. And I think also that deserves some scrutiny as well, because as we look at, for example, the long term capacity plans that utilities like Xcel energy are, are putting forward in their integrated resource plan. I think we should look to see what those marginal resources are. And as Xcel has worked through, and stakeholders have worked through revising that IRP, there’s some evidence that natural gas may be that marginal fuel. If you look at Xcel’s original IRP versus revised IRP the, the Delta is a natural gas plant, but also I think there’s a lot of solar that could be on the, on the margin too. But the marginal generation capacity in value of solar is statically fixed at a natural gas plant or a combination of natural gas plants.

John Farrell:

I just have to try to deal with the intellectual quandary you’ve thrown me in there with the idea that solar, the value of solar could be offsetting solar when we’re considering the generation capacity. What exactly would that mean? So I, I, if I understand correctly, in my somewhat limited understanding of the value of solar generating capacity component, we’re looking at that and we’re saying, okay, so if you build a megawatt of solar, you get to avoid the capital cost of building a megawatt of new natural gas. Is that essentially what we’re saying here is that maybe, maybe it’s not the gas plant that’s on the margin. Maybe it is a new solar plant that would’ve been built. And so the number that goes in there should be reflective of that instead?

Gabriel Chan:

Perhaps, right? I think it depends on what these capacity expansion models are showing as that very last unit of capacity that needs to get built, or really the one that would get pushed off if we had more distributed solar.

John Farrell:

And then just back on the marginal fuel thing, I think this is a really interesting point and one that I think a lot of people haven’t thought about in the long run. So this environmental component of the value of solar, or was devised really to recognize something that electricity markets have almost never recognized, which is that fossil fuels have environmental and health impacts and that we should be willing to pay to avoid those. Because right now we pick them up by everybody paying more on our health insurance to take care of people with asthma or et cetera. There’s other, other ways that we’re all paying that cost. It’s just not under –

Gabriel Chan:

Which is a cross subsidy, right.

John Farrell:

<laugh> speaking of cross subsidies. Um, so the idea here is to say, okay, let’s actually internalize that cost. Let’s make sure that the utility, when it pays for solar is paying for those benefits, paying for the reduction in the coal plant power or the gas consumption and combustion. But what you’re saying is, okay, so we’ve been using gas to do this calculation. In reality, it maybe ought to be coal power. That is the marginal fuel. Coal has a lot more pollution per megawatt hour of electricity. And so we really actually ought to be paying higher avoided environmental costs for solar, but that also ultimately as grids get cleaner, so I, you know, I know Xcel, I think, is gonna have, according to their resource plan, a grid, that’s something like 80 to 85% carbon free and largely pollution free by 2030. So that even if you use coal on the margins now, in 10 years, for example, you might have a very low environmental value for solar. Is that kind of where that’s going?

Gabriel Chan:

Yeah, basically I think that’s the thing. I think generally as an analyst, you know, you’d want this to be data based. And I think looking to, you know, what the data is showing it is showing coal on the margin now, and then you look at the forecast, it’s likely to come off the margin, but the methodology is not ready to accommodate that because it has this simplifying assumption of keeping natural gas as the fuel assumed to be on the margin without looking at the data. And so that’s how I would frame it. And, and, you know, I would also just clarify too, that some of the potential cross subsidies from not taking into environmental costs. Yeah. You could think of it in two ways. You could think of it as a societal cost of, as you’re saying, hospital bills from asthma and such, but you could also think of it as utility system cost of regulatory compliance costs. And I think both of those could be really different numbers, but both of those could be relevant depending on, uh, the framework of either a utility system or society.

John Farrell:

So what other components, Gabe, should we take a dive into here? We could talk about, as you said, the gas as the marginal fuel is a simplifying assumption, but there are issues even within that, I think you reflected a little bit on that earlier when you talked about the gas futures market being the way that we’ve been pulling in that price and the fact that that market really isn’t reflective of reality, that I can’t actually buy gas much in advance cuz they don’t, we don’t store gas. So do you wanna dive into that a little bit or is there another component that you think would be more interesting to try to explore a little further?

Gabriel Chan:

Yeah, we could talk a little bit about natural gas prices. I think that one of the things that we’ve observed is that actually the way natural gas prices evolves is actually highly relevant for a lot of utility system planning. It’s not just the value of solar that has to contend with what natural gas prices are gonna be moving into the future. For example, energy efficiency standards are also doing a very similar exercise when they’re doing utility cost tests or societal cost tests for figuring out what energy efficiency rebates should be. And one of the things that we noticed was that the methodology calculating natural gas prices into the future was really different in our state energy efficiency standard than in the value of solar. If you just moved over the energy efficiency standards methodology for calculating natural gas prices into the future, into the value of solar, it would increase the total value of solar by 35%, which is quite significant.

And so one of the things that we’ve pointed out is that, well, first of all, no one knows what natural gas prices are gonna be. And if you did, you can make a lot of money trying to guess on that. But natural gas prices are really volatile. We do know that, I mean, we are experiencing that right now. And that volatility is, is certainly a cost that is born primarily by rate payer because in most regular utilities, fuel prices are passed right through to a rate payer. And so, uh, being able to hedge that value is really a value that primarily will be felt by the rate payers themselves and not utilities. And so thinking through, well, how, how would we go about valuing, uh, reduced volatility in prices? I think to be valuable and at the minimum, how do we not create volatility in the value of solar that could potentially be depressing solar deployment. I think if right now, if the value of solar was to be calculated today, the value of solar would be significantly higher. And if people expect natural gas prices to go down, probably would see a big bonanza in building solar projects while the natural gas prices are high, keeping the value of solar high. And that’s not necessarily a good dynamic either because that could mean that if natural gas prices crash again, which is very likely, people would stop developing projects at that time when really what we should be trying to manage for from a societal perspective is how to build projects to avoid the volatility in natural gas prices.

John Farrell:

How do we do that?

Gabriel Chan:

Yeah, well, uh, you know, financial and analyst have developed all kinds of ways to value volatility. So there are off the shelf methods about how, how to place a value on uncertain assets like natural gas. So we can do that. It was actually proposed at the time and removed from the value of solar in 2014.

John Farrell:

Oh, interesting. I suppose in hindsight, as I remember sitting in a auditorium at the science museum with many other folks as the methodology was being proposed, I can imagine that we all looked at natural gas prices at the time, which were stable and have been stable largely over that timeframe and said, oh, you know, why get more complicated if we don’t need to, it looks like this is gonna be a pretty reasonable assumption. I suppose that’s how Texas regulators looked at doing insulation on their grid system too, which was obviously a big mistake. So something we can, it’s good to know. It’s something we can fix. There are some other components that we could try to really touch on into the weeds here. I know we’ve talked about heat rate, but that sort of also gets into this issue of what the marginal resource is, which we’ve already touched on. Are there any other components that you think it would be really valuable to dive into? Otherwise I’m kind of interested in this broader question about how does the value of solar fit into the bigger picture of the transition to clean energy and decarbonization? And I think we touched on this a little bit earlier about how it can be this boundary object, I think was the term you used, but I would love to wrestle with that a little bit more as well.

Gabriel Chan:

Yeah. Maybe I’ll just say like on the component and that I think generally looking across all the components, I think it’s really important to think through the methodology as a kind of a balancing act between exacting complexity and getting it just right and also simplicity and parsimony, because ultimately this is, I think, as I said, I think that the deepest value of value of solar is to create that negotiating space that can be data informed and deliberative. Now, of course, there’s politics that layers on top of all of this. But I think as an analyst, what’s exciting about the value of solar is it creates a space for data to inform how we set tariffs. And I think in order to do the, that, well, there needs to be this, I think, delicate balancing act between getting it exactly right and getting these components closer to the true value and keeping it simple enough so that there can be collaborative feedback and it can be practical to understand what we’re actually trying to measure here. So I think that that balancing act, I would say is probably more important than getting any one component right.

John Farrell:

I’m so glad you brought that up. Cuz I recall looking into this discussion that had happened in New York about what they call VDER or value of distributed energy resources. And they, I think went another length in the direction of accuracy and complexity and the result was nobody would build a solar project cuz nobody had any idea how much they were likely to get paid.

Gabriel Chan:

Yeah. And also stakeholders backed away from, from that process because you know, it was just frankly, it was captured by the technocrats. And so I know some environmental justice advocates want to call this Darth VDER and there’s a great photo of someone dressed up as Darth Vader and two storm troopers protesting, uh, of this move.

John Farrell:

That’s still among my favorite social media photos of all time. It’s not very often we get to see an intersection of star wars and our nerdy distributed energy work. Let’s talk about this bigger picture, then as you said, this important part of VOS is to do well. There’s a few different things I think we’ve talked about that are important here with the VOS itself. There’s this idea of striking this balance in terms of trying to understand the value of solar, but without overly complicating the calculation to the point where it’s no longer accessible to the stakeholders in the system – ala New York – or where it results in no good, in poor outcomes in terms of the development of solar onto the system.

And then as you said, it also has this benefit of being a, sort of like grounding space for us to understand the value of investments making that we’re making on the distribution grid and feeding back into this larger understanding of all of these cross subsidies that happen on the electricity system. And the fact that solar is not alone, even if it is useful for us to understand the value of solar specifically, how does that fit in with all of, of kind of like this big picture of where we’re going right now, which is, you know, you know, take places like California Hawaii, for example, we call them off in postcards from the future in terms of how our electric grid might develop tens of thousands of people, millions of people even have installed solar arrays. We’re seeing increasing investment in distributed, uh, like energy storage or even seeing some market development that allows companies to get out here, be entrepreneurial network together resources. How does the value of so older fit into that bigger picture?

Gabriel Chan:

I’m not sure if California and Hawaii are postcards from the future. Maybe they’re just postcards from California and Hawaii. I think that actually there’ll be really different institutional forms or different kinds of arrangements and different places. And I think sitting here in the Midwest that I think there are a lot of really interesting ideas about how to move the grid forward. I think fundamentally though, like looking at where we’re headed, I think we are, you know, absolutely headed to a world with more distributed energy resources, part of that’s because we’re decarbonizing. Part of that’s because of economics. I think we’re gonna just have a lot more renewables, and renewables and distributed resources I think go really well together. Some renewables are distributed resources, but you know, even even have utility scale solar that creates a lot more value for reactive load, which means a lot more distributed resources in people’s homes like water heaters and thermostats and all that.

So in any case, I think we’re headed towards a world where it’s gonna be really important to figure out how to deploy a lot more energy system capital in the person’s home. And I think you can do that through smart tariff design, like the value of solar seeks to do. I think you could also do that through a lot more collaborative planning. I think thinking about things like integrated distribution planning, I think also just other models of cooperative ownership, like our electric co-ops, but also, you know, some of our local developers, I think ways in which to think through how can we create more alignment throughout the system, from our power plants on the wholesale grid, all the way down to your refrigerator and thermostat and water heater in your home and your vehicle, how do we get all of that to in alignment?

I think the value of solar seeks to be that kind of boundary object that’s primarily between the two sides of a rate, the utility and the rate payer, but there are other ways to do that too. I think creating collaborative spaces to think through how we are considering the distribution grid in our overall electricity system planning is something that a lot of places are trying to figure out right now, including California and Hawaii, but also here in Minnesota, we have, you know, a pretty active, integrated distribution planning process. And I think there’s a lot of interesting things happening outside the regulated space where actually cooperative and community ownership could also provide a way forward through some of these difficult challenges of really bringing the distribution grid into the world of wholesale markets and real time everything.

John Farrell:

Gabe, if you had a magic wand, whether it’s to do something to the value of solar or in some other ways change the structure of the conversation that we are having, what would you wanna address? You’ve mentioned things around ownership. You’ve talked about planning, you’ve talked about collaborative spaces to have the conversations. You’ve obviously gone very into the weeds on Minnesota’s value of solar and some of the components. If you had a magic wand, it could point in one place, what would really help unstick a lot of the other pieces of this conversation?

Gabriel Chan:

That’s a great question. I mean, I think my specific magic wand, I think it would be to, uh, in a lot of places, just to have maybe 10 to a hundred times more technical capacity at places like public utilities commission, state energy offices and the utilities themselves, frankly, I think particularly for our smaller utilities, using co-ops, but everywhere these problems are becoming much, much more sophisticated and the regulatory system and the utility decision making system of the past, I think is gonna be insufficient for this much more complicated world. And the stakes are really high too. If it’s truly a magic wand, I think it would just be if all the parties could become much more technically sophisticated, I think we’ll be much more prepared to think about these systems where the engineering, I think, has just gotten so far out ahead of the policy.

John Farrell:

Gabe, thank you so much for joining me to talk about a very complex and specific part of the grid and its role in some of our bigger ideas around decarbonization and distributed energy.

Gabriel Chan:

Yeah. Thanks so much for having me, John.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules discussing the value of solar with Dr. Gabriel Chan, associate professor at the University of Minnesota’s Humphrey School of Public Affairs in science, technology, and environmental policy. On the show page, look for links to ILSR’s report on Minnesota’s value of solar power policy, as well as comments filed to the Minnesota Public Utilities Commission by Dr. Chan and the Institute for Local Self-Reliance. On our website, you can also find other coverage of policies encouraging distributed solar energy. Local Energy Rules is produced by myself and Maria McCoy with editing provided by audio engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear more powerful stories of communities taking on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.