An Enormous Question for ‘Solar Choice’

Date: 9 Apr 2014 | posted in: Energy, Energy Self Reliant States | 10 Facebooktwitterredditmail

Two weeks ago, Minnesota’s Public Utilities Commission ratified the first-ever statewide policy for setting a fair and transparent price on solar energy. This week, a coalition of companies that provide leasing contracts for solar to home and business customers declared war on this “value of solar” policy, and pretty much every financial model for compensating solar energy producers that isn’t net metering.

As I’ll outline below, this position by “The Alliance for Solar Choice (a.k.a. solar leasing companies like SolarCity)” leaves one enormous unanswered question.

What’s Happening Right Now

Distributed solar power production is under fire. In nearly 1 of 3 states, utility companies are trying to undermine policies that make it economical to produce energy from a solar panel instead of buying it from a utility.

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

In nearly every case, the utility offensive is aimed a single policy: net metering.  This policy mixes interconnection rules (a technical and administrative set of requirements for connecting to the grid), with economics of billing (net energy metering). Net metering policies typically make it much easier to connect a solar array to the electric grid.

Why Net Metering Matters

The most important piece of net metering is the billing policy that simply compensates solar owners for their energy generation. It spins the meter backward during the day when there is excess solar generation, for example, and forward at night when household energy consumption is higher than solar production. It treats on-site renewable energy production like any other method for reducing energy consumption, by having customers pay for their “net” energy usage (total use less on-site production) on their electricity bill. The following video 101 explains:

Net metering may also reduce extraneous utility charges for “backup” or “standby” power, since such services are typically already covered by a utility’s existing energy reserves.

Without net metering, you’d probably need a battery along with your solar panel. Otherwise, most of your awesome solar energy would be sold to the utility for peanuts while you’re at work. So it’s not the same as being self-reliant.  It’s an accounting measure, letting the customer swap their solar electrons for some from the utility, but still pretend that they’re offsetting their own energy use. Real self-reliance (or grid independence) would require a battery, to store surplus solar energy for use at another time.

It may differ from self-reliance, but net metering has been a great investment for ratepayers. When retail electricity prices were low, solar producers were giving valuable peak energy to utilities (and their neighbors) at a substantial discount to its value (see: Minnesota’s Value of Solar). Non-solar customers (e.g. most utility ratepayers) got a good deal. It juiced up thousands of local jobs while driving down the cost of solar like mad. And it’s responsible for a helluva lot of the 13 gigawatts of solar energy powering U.S. homes and businesses in 2014.

What’s Different about Value of Solar or a Feed-In Tariff

The basic idea behind these other policies is to maintain the growth in distributed solar power, but to make it even easier to go solar. In Minnesota’s value of solar policy (and in similar “feed-in tariff” programs in Vermont, Germany, Gainesville, etc) customers don’t spin their meter backward, they sign a 20-year (or more) contract to sell their power to the utility at a fixed price.

That contract can make financing and owning solar a lot easier, because a contract like that is much more attractive to a bank than saying, “I should be able to save a lot of money on my electric bill as long as the utility (or legislature) doesn’t change net metering and as long as utility rates continue to rise.”  Net metering has been a pretty safe bet, but a contract is a safer one for a risk-averse financier.

Why Does Policy Matter?

Right now, the differences in policy are pretty small because the spread is pretty small between the (per kilowatt-hour) cost of solar electricity, the value of solar to the utility/ratepayers, and the retail energy price.  It means that, taxpayer-funded incentives aside, there’s very little transfer of benefits between solar producers and non-solar customers, and the profits in going solar are relatively small. (Note: the spread varies by region and utility service territory).

But that’s going to change in a big way. In the next five years, the cost of grid electricity is likely to keep rising, the value of solar will remain relatively steady, and the cost of solar will continue falling. In that scenario, under net metering, a solar producer gets compensated for solar electricity at a price that’s much higher than its cost to produce and that exceeds its value to the rest of the utility customers. (Note: the time of arrival of this scenario varies by region and utility service territory).

The Big Question

So TASC’s solar leasing companies need to answer this question: what’s the appropriate price premium for solar energy? How much more than what solar is worth should non-solar ratepayers have to pay? A penny per kilowatt-hour? 3¢? 5¢? 10¢?

The following slideshow illustrates the forthcoming challenge:

Decisions about solar policy change shouldn’t be made rashly, and net metering shouldn’t be discarded simply because an alternative exists and until it’s causing a problem. But we have an option – the value of solar – that, if implemented properly, prevents oversized payments for solar electricity with a fair and transparent price for solar energy.

If we aren’t going to change net metering, then we’d better have a good answer. Otherwise it won’t be long before the skies darken on popular support for a rooftop solar revolution.

John Farrell
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John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power.

10 Responses

  1. Henry88
    | Reply

    Hi John

    Couple of questions… 1. Do you have to sell all of your production back to the utility? 2. Will the revenue from VOSTs be taxable? If the revenue is taxable doesn’t that make having solar a business enterprise? If so, wouldn’t the PV system be depreciable? 3. Does the 30% ITC still apply?

    • John Farrell
      | Reply

      Great questions, all.
      1. Yes, although in the Minnesota law it is clearly just a bill credit not a “sale”
      2. It depends on program design. In theory, yes, but if the law is designed like Minnesota’s with a bill credit, perhaps not. If there is a sale and it is taxable, I think one could make an argument for depreciation. 3. I’ve yet to see a compelling argument why the ITC wouldn’t apply, but I’ve got a few stories in my file to review.


  2. Eric Sandeen
    | Reply

    Actually, as I was hanging my clothes out on the clothesline[1], I think I realized the flaw in my reasoning and analogy. Sorry for thinking out loud on your blog, I think I need to go away & contemplate this for a while longer.

    [1] solar energy I’ll never have to contract for. 😉

    • John Farrell
      | Reply

      This is a complicated issue, and one that I think we’re only just starting to get our minds wrapped around.


  3. Eric Sandeen
    | Reply

    “a solar producer gets compensated for solar electricity at a price
    that’s much higher than its cost to produce and that exceeds its value
    to the rest of the utility customers” – I think the problem with this is that it doesn’t distinguish between production that offsets a home’s use, and production in excess which actually gets paid for.

    If I buy efficient appliances or turn off lights, nobody’s “compensating” me for anything. If I feed some of my house with PV during the day, that’s not compensation either. All of these things simply reduce my grid usage, up to the point where I actually over-produce.

    From what you’ve laid out, it sounds like in the future, I could no longer use solar equipment I buy to reduce my grid draw; now I must only use it to sell to the utility, potentially for a rate which is lower than the rate I buy it back from them.

    I wonder how this works if a homeowner chooses not to take any subsidies from the utility…

    • John Farrell
      | Reply


      These are great questions and issues to address.

      The issue of offsetting your own energy use is exactly the key issue. Net metering has used an *accounting* method to reduce a customer’s energy bill, representing offsetting energy use. But as we all know, much of the daytime power from your solar array may flow to your neighbors, because your own use at that time may be low.

      When the value of your solar energy is far in excess of the retail energy rate (as it has been), this accounting method benefits both the homeowner and the utility’s other ratepayers. The homeowner gets to reduce their energy bill by more than the solar actually reduces their energy use (since a fair amount is excess), and the utility gets solar power at a discount.
      But in the next decade, that changes, because the retail energy rate gets much higher than the value of solar. In that scenario, net metering provides a very generous payment for power produced by solar, increasingly in excess of the value of that energy to the grid and other ratepayers. This happens in different regions at different times, based on the current cost of electricity and the relative sunshine. (the presentation in this post illustrates the issue).

      In that future, if we abandoned net metering, you could still offset your own energy use. It would just mean buying a battery to accompany your solar array, so that you could actually (and not just as an accounting measure) use daytime solar electricity to offset your evening energy use. Or perhaps the utility offers neighborhood-based energy storage as a service. Or we can use the value of solar, which will still be a very generous payment relative to the cost of solar electricity.

      To summarize: what we have now is a very successful policy for growing distributed renewable energy and encouraging local ownership (although federal tax policy has left much to be desired). The key is to adjust that policy to continue the robust growth of distributed generation in a way that remains equitable for solar producers and non solar producers alike. Something has to give, and it’s up to utilities to explain how they will provide value added and up to us to make sure their services don’t impair the ability of everyone to generate their own power.

      • Eric Sandeen
        | Reply

        “It would just mean buying a battery to accompany your solar array,” – ah, your self-reliance agenda is showing. 🙂

        If I were to design things, I might do a hybrid model – net metering to the point of net overproduction, and a VOS payment for any net production. That would seem most fair to me. Honestly, the meters are smart enough that you could do this accounting on very short time intervals.

        For anyone interested, I’ve attached an image that shows the typical ebb & flow of power and energy over a 24h period for a residence with solar (mine, in particular).

        • John Farrell
          | Reply


          Very helpful data and helpful thoughts. I like your idea about value of solar for net production. Would you envision it as getting paid VOST for any power not consumed on-site (based on actual flow of electrons) or just the net excess in a given month (net accounting method)?

          Ultimately, the solution we come up with may hinge on who has the political power in a given state. Ideally, utilities would be forced to come up with a solution themselves. After all, it’s their business model that’s failing, not ours.

          • Eric Sandeen

            My net meter currently shows total delivered by, and total received by, Xcel. Any PV energy directly consumed by my home doesn’t show up on either number; it just looks like any other efficiency measure.

            My last bill, for example, was 339 kWh received and 96 kWh delivered, for a net bill of 339-96 = 243 kWh. I produced 213 kWh, so my house used a total of 243+213 = 456 kWh. Let’s use that month as an example:

            Imagining a scenario where I got a VOST contract for $0.14/kWh, but retail has risen to $0.20/kWh, I’d be billed for $91, and credited $30, for a net bill of $61.

            Under my current net metering contract, I’d simply be billed for my net consumption of 243kWh at $0.20, or about $48.

            An alternate scenario might be that I get billed $0.20 for net kWh received ($68) and credited $0.14 for net kWh delivered ($13) for a bill of $55.

            There’s not a huge difference in these numbers; partly because it wasn’t a great solar-production month that I’m using as an example. But it could have a large impact on the ROI of rooftop solar.

            It would appear that this is all signed, sealed and delivered at this point; not a lot will change, other than the VOST calculation and the retail price. I wish I had gotten involved in this earlier. It will be interesting to see how it pans out, especially if retail rates exceed VOST. If they do, I think it will be a drag on solar installs. I could even see a court challenge and/or technical solutions: If I feed my appliances directly from my solar, do I need to pay Xcel a premium for that privilege? What if I feed a battery, and run off of that?

            p.s. in reference to a prior question: the VOST rate does in fact seem to be fixed for the life of any contract; per the bill: “An owner of a solar photovoltaic device receiving an alternative tariff rate under this section must be paid the same rate per kilowatt-hour generated each year for the term of the contract.”

          • John Farrell


            You’re right about the statute, but the PUC is talking about allowing a contract with an inflation escalator that has an equivalent net present value to the fixed price contract. There’s precedent with our community based energy development (C-BED) tariff.

            I’m going to digest your net metering example for a bit, I love having good solid numbers to look at.

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