Kentucky has joined several other states in engaging a conversation about the value of solar energy, to ask how much customers who install solar projects on their rooftops are providing to other grid customers. The Institute for Local Self-Reliance has participated in numerous value of solar conversations, including helping to shape the first statewide framework in Minnesota. The following letter to regulators in Kentucky shares ILSR’s experience, including the key categories of value to assess, the importance of a utility-independent methodology, the tension between accuracy and usefulness in setting prices, and what to expect from previous exercises in other states. It concludes with several recommendations for the state to arrive at the most accurate valuation that captures the full range of benefits of distributed solar.
Re: PSC Case Number 2019-00256
My name is John Farrell and I direct the Energy Democracy initiative at the Institute for Local Self-Reliance (ILSR), a national nonprofit with expertise in the economics and policy of distributed energy resources. I was one of the key authors of the value of solar concept adopted into law in Minnesota in 2013, a presenting stakeholder at the meetings used by the state Department of Commerce to develop the methodology, and an annual intervenor in the commission proceedings to approve the calculations by Xcel Energy, the state’s largest investor-owned utility. I am the author of a 2014 report on Minnesota’s value of solar policy, explaining its development and components.
My comments address the key categories we included in Minnesota’s value of solar methodology, the crucial role of transparency and separation of responsibilities, and the challenges associated with developing a value of solar output that is useful for both proper valuation and solar market development.
Minnesota’s value of solar policy had the benefit of development on the heels of successful value of solar policies in other jurisdictions, primarily Austin, Tex. The included components were written specifically into the enabling legislation based on the advice of experts from municipal utility Austin Energy, Clean Power Research, and clean energy economists. The language, quoted below, comes from Minnesota Statute 216B.164, Subd. 10, with emphasis added to the value components:
(f) The distributed solar value methodology established by the department must, at a minimum, account for the value of energy and its delivery, generation capacity, transmission capacity, transmission and distribution line losses, and environmental value. The department may, based on known and measurable evidence of the cost or benefit of solar operation to the utility, incorporate other values into the methodology, including credit for locally manufactured or assembled energy systems, systems installed at high-value locations on the distribution grid, or other factors.
(g) The credit for distributed solar value applied to alternative tariffs approved under this section shall represent the present value of the future revenue streams of the value components identified in paragraph (f).
An illustration of these components in action can be seen in the chart below, taken from the Institute’s 2014 report and based on the initial calculations.
The lion’s share of distributed solar value comes from its offsetting power generation from other power plants––particularly those with variable fuel costs––as well as reducing capacity needs in the transmission and distribution systems. Health and environmental benefits are also significant, often uncaptured, values of non-polluting power generation.
An Independent Methodology
In addition to the legislation that specified the necessary components of the value of solar, Minnesota’s legislation also called on the state’s Department of Commerce to develop the specific methodology used to calculate each of the component values. The use of the independent department was essential to guarantee three necessary outcomes:
- Getting a value of solar calculation that was consistent between utilities
- Getting a value of solar calculation that was consistent from year to year
- Having transparency in the calculation process, so that legislators, commissioners, and stakeholders could see that the value of solar calculation was done in good faith and included the necessary elements.
The methodology was completed in early 2014 with significant input from stakeholders and with the assistance of Clean Power Research, a firm with national experience in solar valuation and utility cost structures. The methodology is publicly available on the Minnesota Department of Commerce website.
The methodology developed by the department includes detailed explanation of the assumptions and techniques used to calculate the value of solar energy in the seven categories that were derived from the state law. It’s worth noting that two categories highlighted as potential costs of solar––voltage control and integration costs––were ignored in the methodology development because they were seen as insignificant.
Tensions Between Accuracy and Actual Use
One often overlooked challenge in proper solar valuation is how it will reflect the ability of customers and third parties to finance and construct solar projects. Solar valuation can serve several purposes:
- Provide understanding of the cost and benefits of distributed solar resources for utility companies
- Clarify for regulatory commissions the presence or absence of any cost shifts, either from solar customers to non-solar customers, or vice versa
- Provide an alternative to net metering or other compensation models for producers of distributed solar electricity
A proper solar valuation can serve all three purposes simultaneously, but to work in the last case it also has to be simple enough to provide certainty to prospective solar producers that will allow them to secure financing. Solar valuation in New York, for example, sought pinpoint accuracy on the value of solar, including discrete locational value and time-variable value. The result is almost no distributed solar development under this framework, because the lack of certainty makes project financing nearly impossible.
In Minnesota, in contrast, the value of solar is offered to developers on 25-year, fixed-price contracts. This certainty has led to over 600 megawatts of community solar development. If the Commission’s value of solar exercise is meant to create a compensation scheme for use in the solar market, it must balance accuracy with the certainty needed by developers to secure financing, just as the Commission provides such certainty for regulated utilities in their power plant acquisitions.
What to Expect
The history of value of solar studies suggests that net metering based compensation has often undervalued distributed solar. In a 2015 report by Frontier Group, a compilation of solar valuation studies showed that most calculations resulted in solar valuations that far exceeded the retail electricity rate in that state. The following chart from the report summarizes the survey of valuation studies. It should be noted that who writes the study makes a significant difference in the results, as the three lowest valuation analyses all came from utilities.
That the low valuation studies were conducted wholly by utilities should come as no surprise. In a 2014 study by the National Renewable Energy Laboratory, authors found that the impact on customers of significant distributed solar deployment (10% of all customers with solar arrays) amounted to a 2-3% increase in electricity rates, whereas the impact to investor-owned utility earnings could be three to four times larger. The following chart summarizes the study’s findings.
In other words, be aware that there is a strong financial interest for many utilities in suppressing the value of solar given the apparent impact on utility earnings.
The history of value of solar calculations in other states and its practical application in Minnesota suggest that the value of solar, if properly calculated, can provide valuable guidance on the relative costs and benefits of distributed solar to utility customers, the utility, and state residents. The crucial elements in the analysis include:
- Identifying all of the potential categories of distributed solar value
- Developing an independent and transparent methodology for calculating solar value that includes significant stakeholder input (that allows equal footing for electronically or paper submitted comments)
- Requiring the calculations of distributed solar value be done using the approved methodology and also in a transparent manner
- If using the value of solar for project compensation, balancing accuracy with certainty so that distributed solar projects can effectively be developed
- Being aware of utility conflicts of interest related to their market share or earnings potential that may or may not align with the public interest
Director, Energy Democracy Initiative
Institute for Local Self-Reliance
Featured Photo Credit: John Farrell