By John Farrell
Originally published on The Institute for Local Self-Reliance
Note: This post was originally published in May 2014. It’s still relevant in light of the ongoing discussion about net metering, which includes the consideration of a minimum utility bill.
“Utility regulation and rates is a contact sport,” says Karl Rabago, and that makes the implementation of a new “value of solar” policy complex. Will distributed solar grow better with a transparent, value-based contract price? How does it differ from net metering? Is Minnesota’s law a precedent to follow?
Prepare yourself for a deep dive in this extended interview with Karl Rabago, former Vice President at Austin Energy and soon-to-be Executive Director of the Pace Energy and Climate Center at the Pace Law School in White Plains, NY. This podcast was recorded via Skype on May 1, 2014.
An Accurate Incentive for Solar
A few years ago, Karl was interested in offering an incentive for solar energy production while serving as the Vice President of Distributed Energy Services for Austin Energy — the municipal electricity utility for Austin, TX — but he wanted to know how much to pay. Concerned about “feast and famine” effects of setting incentives, he wanted an accurate price that would grow the market but also reflect the actual value of solar.
Fortunately, he already had a good number.
Since 2006, the utility had been tracking the “value of solar,” based on a study conducted by Clean Power Research for the Austin utility. In the five subsequent years, the city had continued to track this value of solar.
If We’d Never Had Net Metering
Since the incentive program was new, it was an opportunity to re-think traditional policies for supporting distributed solar. Karl mused, “what would I do if we had never had net metering before — if we were writing on a blank slate?”
Traditional net metering (as implemented in Texas) provided two perverse incentives Karl wanted to avoid:
- Because customers received a much smaller payment for excess power generation, they tended to increase their use to even out consumption and production, even during times of peak demand.
- The retail rate isn’t set based on the value of solar energy.
With net metering already being destroyed by utility lobbyists in Texas, it seemed prudent to find an alternative.
“Solar Customers Know Their Electricity is Worth A Lot”
Although at first a shock, it became clear to the Austin utility and Karl that the value of solar was actual a premium over the retail electricity rate used to compensate net metered customers. In his words, it provided:
- Fuel price volatility insurance
- Insurance against climate change regulation
- Insurance against drought
A Negotiated Shift from Net Metering to Value of Solar
Karl saw a potential negotiation with customers. The utility would pay the value of solar, and the customer would in exchange continue to pay for all of their power purchases, ensuring that they would cover the utility’s cost of maintaining its infrastructure.
“It was better for solar,” says Karl. The rebate costs have fallen by 33%, and solar installations have doubled since he left Austin Energy in mid-2012.
What Does it Cost to Serve a Solar Customer?
One of the biggest issues in the raging state-by-state debates over distributed generation is whether solar customers pay their fair share of the cost to maintain grid infrastructure. The bigger issue may be that no utility has ever actually studied the question:
“I’ve done only a couple hundred rate cases in my life,” says Karl, and “I have never seen a published utility cost of service study that shows how the cost to serve a customer with solar differs from the cost to serve an identical customer without solar.”
“The only real question” he says, is the potential uptake of solar between utility rate cases (if they don’t happen for a long time). And utilities already have a tool they use – a fuel cost adjustment that fluctuates with the price of fossil fuels – they could use. But Karl cautions that such a charge would be premature.
“In the mainland USA (outside of California), no utility has had their financial integrity threatened by the amount of solar that their customers have installed.”
Too Much Power for Utilities?
In the politics of distributed generation policy, value of solar is no different from metering.
“Utility regulation and rates is a contact sport,” says Rabago, and investor-owned utilities “owe a duty to their shareholders to try to maximize profit.”
For any policy, advocates will have to play defense or offense, but always be in the room.
A Right to Self-Generation?
Not in his reading of the law, suggested Karl. He believes that utility tariff law and PURPA provide a broader right, however, that customers should only have to pay for what they use. In that vein, he finds the notion of charging higher fixed fees on customers “silly.”
“There is nothing in Econ 101 that says that the way you collect your revenues has to be parallel to the way you incur your costs.”
Just because utilities find that more of their costs are “fixed” (poles, wires, transformers), instead of variable energy delivery, doesn’t mean that they have mimic that in their billing. He offers the anecdote of a coffee shop, which has high fixed costs but that charges its customers for what they use (the coffee they buy) and no more.
Utilities: Focused on the Small, Insignificant Things
Karl concludes his analysis of the utility attacks on distributed solar and other distributed generation with an anecdote from a utility board room. Looking for a scapegoat in an increasingly challenging market, utilities realize they have little control over the major factors: natural gas prices, energy efficiency, the weather, the economy.
“I have a sense that well-meaning people…are reaching out for the small, insignificant things because they can control them rather than facing a fundamental reality of the utility business that the largest, most capital-intensive business on the face of the earth is driven almost entirely by exogenous factors, commodity prices and the general state of the economy.”
The fight against value of solar or net metering is a fight against a changing business model, says Rabago, and change always comes hard.
Can We Get Along?
Karl notes that whether everyone loves value of solar policy, the notion of proper valuation for solar energy is supported widely. Cost-benefit studies of net metering for solar have had enormous support from advocates. Even The Alliance for Solar Choice, notable for its opposition to value of solar, has filed a brief in favor of proper solar valuation in a North Carolina regulatory proceeding.
Benefits to Value of Solar
While no policy is perfect, Karl sees several benefits to using value of solar policy.
- It eliminates the argument about “cross subsidies” between solar producers an non-solar customers.
- Customer gets full compensation for their energy production
- Customer doesn’t have perverse incentives around energy efficiency, because reducing energy use (even for a solar owner) always means reducing their energy purchases.
For more information on the value of solar, see ILSR’s recent report Minnesota’s Value of Solar, ourextensive coverage of the policy adoption in Minnesota, and our commentaries on the subject.
This is the 22nd edition of Local Energy Rules, an ILSR podcast with Senior Researcher John Farrell that shares powerful stories of successful local renewable energy and exposes the policy and practical barriers to its expansion. Other than his immediate family, the audience is primarily researchers, grassroots organizers, and grasstops policy wonks who want vivid examples of how local renewable energy can power local economies. It is published twice monthly, on 1st and 3rd Thursday. Click to subscribe to the podcast: iTunes or RSS/XML
Thanks to ILSR intern Jake Rounds for his audio editing of this podcast.
Photo credit: Flickr user SuperFantastic
Disclaimer: Any opinions expressed on this site by persons not affiliated with PV Solar Report reflect the judgment of the author and not necessarily that of PV Solar Report.