TODAY’S STUDY: THIS COULD BE THE REAL VALUE OF SOLAR

Minnesota’s Value of Solar; Can a Northern State’s New Solar Policy Defuse Distributed Generation Battles?

John Farrell, April 9, 2014 (Institute for Local Self Reliance)

Executive Summary

In March 2014, Minnesota became the first state to adopt a “value of solar” policy. It may fundamentally change the financial relationship between electric utilities and their energy- producing customers. It may also serve as a precedent for setting a transparent, market- based price on solar energy. This report explains the origins of value of solar, the compromises made to get the policy adopted in Minnesota, and the potential impact on utilities and solar energy producers.

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The Value Of Solar Concept

The basic concept behind value of solar is that utilities should pay a transparent and market-based price for solar energy. The market value of solar energy is based on:

•Avoiding the purchase of energy from other, polluting sources

•Avoiding the need to build additional power plant capacity to meet peak energy needs

•Providing energy for decades at a fixed price

•Reducing wear and tear on the electric grid, including power lines, substations, and power plants

Value of solar is not like net metering, where producing energy reduces your electricity bill just like turning off a light. Figure A illustrates the difference between net metering and value of solar in Minnesota. It also highlights a few key features of the adopted value of solar policy, including the 25-year contract, and the use of bill credits rather than a separate cash payment.

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Minnesota’s Value of Solar

As adopted, Minnesota’s value of solar formula includes all of the basic components of the theoretical policy. The following chart shows the relative value of the various components, and the total value, based on early estimates filed during the proceedings at the state’s Public Utilities Commission.

A Caution

Although Minnesota’s value of solar policy is a precedent, the adopted policy had some good elements that were lost in the legislative process, elements that other states may want to revive…

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The Impact on Utilities and Customers

Value of solar offers something for everyone. For utility customers, a 25-year contract at a fixed price makes solar financing much easier, and as the cost of solar continues to fall, quite lucrative.

For utilities, the transparency of the market price means no concerns about cross-subsidies between solar customers and non-solar customers. It means a payment for solar energy uncoupled from the retail electricity price. It may also mean a potential for cost recovery on payments made to solar producers, something not allowed with net metering. In Minnesota’s case, it also means free access to solar renewable energy credits, at a substantial savings compared to credit prices in states with competitive credit markets, i.e. New Jersey, Pennsylvania, etc.

Will Value of Solar End Battles Over Distributed Generation?

If Minnesota utilities report favorably on the value of solar, it may change the debate on other state battlegrounds over distributed generation (Figure D).

The value of solar delivers a transparent, market-based price for solar. It solves problems for utilities and for utility customers around compensation for distributed renewable energy generation. But its ultimate success lies in whether electric utilities can be convinced that accommodation of customer-owned power generation is in their best interest, or whether any concession of their market share is a deadly threat to their economic livelihood.


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Introduction

On March 12, 2014, Minnesota became the first state to give utilities and distributed solar power producers a new way to negotiate power supply contracts, a method called the “value of solar.” If adopted by utilities, it will fundamentally change the relationship between solar- producing customers and their electric utility.

Until now, producing on-site energy from a solar panel has been treated much like any other activity reducing electricity use. Energy produced from solar is subtracted from the amount of energy used each month, and the customer pays for the net amount of energy consumed. This “net metering” policy has guided the growth of distributed solar power in the United States to an astonishing 13 gigawatts (GW) by the end of 2013.

But net metering has now become the focal point for the utility war on the democratization of the electric grid and the expansion of distributed solar. The numerous attacks by utilities around the country are a phenomenon made possible by enormous reductions in the cost of on-site power generation from solar. The following map illustrates the many states where utilities have sought to undermine policies and/or incentives supporting distributed renewable energy generation.

The potential transformation of the grid and the improving economics of self generation have utilities crying foul (or fowl) because as more and more customers use net metering, it reduces electricity sales. Combined with increasing energy efficiency and an economic downturn, this has utilities feeling that their business model is evaporating.

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Increasing evidence suggests that the overall economic benefits to the utility’s electric grid may outweigh the loss of revenue, but this benefit is not transparent because on-site power generators are paid based on the cost of using electricity, not the value of their energy production.

The new value of solar policy creates a market price for distributed solar energy in an effort to answer utility concerns, but also to reinforce the notion that on-site power generation benefits the customer, her neighbors, and the electric grid. Interestingly, Minnesota’s rigorous formula suggests that in crying “foul,” utilities may have been crying “wolf.” That’s because the initial estimates of the market value of solar peg it at more than the retail electricity price. In other words, Minnesota utilities have been getting a sweet deal on solar power, reaping its benefits for their ratepayers and shareholders.

Does that mean that the value of solar will be better than net metering for solar producers? For utilities? For ratepayers? Perhaps.

This brief will explain the current standard for distributed solar – net metering – the value of solar option, the recent development and approval of the policy in Minnesota, and the implications for the continued expansion of distributed renewable energy.

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The Old Standard: Net Metering…The New Option: Value of Solar…The Principle…Minnesota’s Value of Solar Law…Will it Work for Solar Producers?...Will it Work for Utilities?...Who Wins?...

What’s Next?

The hope is that value of solar can help defuse many of the state policy battles in progress over distributed generation. As shown in Figure 1 (page 2) from the introduction, local power generation policy is under attack by utilities in many states.

If Minnesota utilities adopt the approved value of solar methodology and see it as a success, then it may encourage utilities in other states to support the option. Similarly, if solar and distributed generation advocates in other states see value of solar as a successful tool for growing on-site power generation, they’ll be willing to come to terms with utilities.

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The key to success is not just the policy, however, but the process of adoption and implementation. Minnesota’s value of solar wasn’t without significant controversy, and key provisions in the original law (e.g. customer choice) were lost before the process of setting the methodology. Even some of the enacted options (e.g. local economic development benefit) were left out of the approved methodology. Other states may find that these components are essential to getting all parties to approve of the value of solar.

Additionally, Minnesota had a very robust stakeholder process that was led by a very competent government agency and guided by two superb teams of experts from Clean Power Research and Rocky Mountain Institute. Without a similar process and expertise in another state, the process may not result in a similar level of buy-in. (Indeed, at this report’s publication date, no utility had filed for value of solar in Minnesota yet).

Ultimately, value of solar is a promising policy opportunity, a way to address concerns of utilities and distributed renewable energy advocates with a transparent and robust market price. We’ll see if it lives up to the promise.

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