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

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.

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.

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.

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.

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.

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.

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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?

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?

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.

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.

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?

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.