By Jim Kennerly
PV Solar Report Guest Contributor
Are utility business models facing long-term disruptive change? In recent years, declining solar costs have made this a question of when, not if. Thus, utilities in leading solar PV markets are attempting to buy enough time to retool their strategies.
Part of the way utilities have tried to do this is by claiming that net metering causes “cost shifts” that raise prices for non-solar customers, and attempting to pay solar customers less than the retail rate. In response, solar advocates have, without significant exception, argued that solar provides more benefit than costs, and thus solar owners should be paid more than the retail rate for their energy.
The negative and polarizing tone of the state-by-state struggle over net metering leaves little room for an honest evaluation of the problem, or the development of a simple, yet comprehensive long-term solution. For example, the solar industry frequently glosses over the fact that net metering can, at times, result in cost shifts. In addition, utility consternation over the “cost shift” of net metering is clearly selective in nature – nearly all utilities offer large discounts to industrial or low-income customers, or allow customers to avoid paying for the true cost of electricity supply on peak. All of these cost shifts are effectively financed by other ratepayers, and are much larger than the “subsidy” for net metering.
However, it is possible for utilities and the solar industry to come together to support common-sense, workable proposals. In our recent report Rethinking Standby and Fixed Cost Charges, my colleagues and I at the NC Clean Energy Technology Center have developed an approach that we believe will allow utilities to profitably preserve net metering at the retail rate and allow solar PV costs to continue their downward trend.
The cornerstone of this approach is a “minimum bill” to cover the most basic costs of serving each customer that has only episodic need for the utility’s grid.
Why a minimum bill?
Recently, Massachusetts attempted to remove the net metering cap, in exchange for a minimum bill. Somewhat surprisingly, the minimum bill approach was jointly and equally supported by the aggressively pro-solar The Alliance for Solar Choice (TASC) and Massachusetts’ investor-owned utilities. This unlikely pairing shows that minimum bills in particular are a workable approach for both utilities and solar in leading solar PV markets, and fertile area for long-term compromise. However, there has been a great deal of confusion in the industry surrounding minimum bills and higher fixed monthly charges, which led (partially) to the demise of the compromise in Massachusetts. I would like to do my best to explain why we believe minimum bills are a far superior approach to fixed charges, and are in no way the same thing.
While conventional wisdom suggests utilities are “guaranteed” profits, this is not actually the case – they are only guaranteed the right to charge rates that would, assuming sufficient sales, provide them with a pre-set profit. The utility must earn the rest by selling electricity (or, in some cases, energy-efficient “negawatts”).
In an age in which more customers supply themselves with energy, however, it is necessary for a utility’s financial survival to recover the most basic fixed costs of serving customers that supply the large majority of their own energy. These costs include those of billing, metering, customer care, and part of the distribution system. These costs, in general, are no more than $15-$20/month.
The chief advantage of the minimum bill: very limited solar customer rate impact
Here’s how a minimum bill works: If a utility’s minimum bill is $15 and a solar customer uses no grid power in one month, a customer would still receive all bill credits they might have earned by generating solar energy, but would have to pay $15. In the (far more likely) case that they use some grid power, they’re just paying the $15 they’d pay anyway. However, when utilities impose higher fixed charges on their customers, it is true that the average “energy” rate that customers can avoid by investing in solar will not increase as quickly, or may go down. This discourages energy conservation, one of the key goals of utility ratemaking.
The table and graph compares a “minimum bill” of $15 to other ways that utilities have tried to collect the same $15 in “bare minimum” costs. For example, if a utility levies that amount as a fixed charge, it would cause all solar and non-solar customer bills to increase. Applying $15/month fixed charge would result in a minimum $7/month rate increase for solar and non-solar customers, while a $15/month charge just for solar customers would of course result in an increase of that much each month. On the other hand, with a minimum bill, no one, not even non-solar customers, would see their rates go up, except for the customers that offset 95% of their energy in any given month with solar.
Thus, viewed through the lens of earning the “bare minimum” cost to serve solar customers and maintain reliable infrastructure, higher fixed charges — which do not account for how much grid electricity solar customers actually use — are, in essence, an effort by utilities to recapture revenue they have not earned.
Is a minimum bill enough to fix residential rates?
Not hardly. The minimum bill is even more effective when two other factors are present as well – utility revenue decoupling and time-of-use pricing.
At present, utility rates are designed for an electricity system built by central planning and control, and utility profits are driven by increasing sales. However, as the developments in New York and elsewhere have shown, many regulators no longer believe it is prudent for the utilities they regulate to design their business around such a centrally controlled system. Thus, when customers begin to supply more of their own energy, utilities lose money, and the wide variety of distortions built into rates are exposed. Utilities can minimize these disruptions by taking two steps.
First, they can decouple their revenues from their sales, which accounts for the fact that all customers (not just solar customers) are using less over time. When they put decoupling in place, the utility is able to secure enough revenue to pay for their most critical distribution infrastructure, encourage efficiency, and plan for a future where distributed energy is the rule, rather than the exception.
Second, they can institute default time-of-use pricing. This is important for a distributed energy age, because most customers pay rates that represent the average, rather than the actual cost of energy at any given time. Thus, many utilities are carefully considering time-of-use prices as the default rate plan for most customers. The special advantage of this approach for solar customers is that it would compensate them for the true value of the energy they sell back to the grid, and require them to pay for its true cost.
The dominant narrative has shifted toward a negative, polarizing conversation focused too narrowly on solar’s value. In contrast, we believe that this approach has great merit as a way for all parties to be comfortable with lifting net metering caps, and can thus promote a workable future energy market for both utilities and solar PV.
Jim Kennerly is a senior policy analyst at the NC Clean Energy Technology Center at NC State University, where he works on the Department of Energy’s SunShot Solar Outreach Partnership (SolarOPs) and the Database of State Incentives for Renewables and Efficiency (DSIRE). He will present at Solar Power International 2014 on how minimum bills, time of use pricing and decoupling can allow states to raise net metering caps.
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