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Minnesota to ask: What is the value of solar power?

(Photo by Melanie Cook via Creative Commons)

(Photo by Melanie Cook via Creative Commons)

Correction appended.

Utility customers who own solar panels are doing society a favor, helping to cut carbon emissions and ease transmission line congestion, among other benefits.

Or, they’re power-grid freeloaders, lowering their own electric bills but sticking everyone else with a bigger share of costs for infrastructure they still depend on after dark.

These two competing views of solar power have led to rising tensions in recent years over policies for connecting customer-owned solar arrays to the grid.

Minnesota’s new solar law could help shed some light on that debate.

As part of a broader solar energy bill signed last month by Gov. Mark Dayton, the Gopher State will soon give utilities an alternative to paying customers the retail electricity rate for their unused solar power. Instead, utilities will be able to pay a different rate based on the “value of solar” to their system, including cost-savings to other ratepayers and broader environmental benefits.

The state’s energy office will come up with guidelines for utilities that want to calculate a value-of-solar tariff, and the utilities’ studies will need to be approved by utility regulators.

Benefits for utiliies

Solar energy supporters who lobbied for the option (including Fresh Energy, where Midwest Energy News is based) are betting that a closer look at the economics of solar will ultimately show that customer-owned arrays are undervalued by utilities. They also hope it might help defuse some of the opposition to distributed solar by allowing utilities to untangle customers’ solar generation from their monthly electricity bills.

“With the value of solar, the utility doesn’t lose any of its energy sales, and they pay precisely what that solar is worth to their system,” said John Farrell, a senior researcher with the Institute for Local Self-Reliance, which advocates for distributed generation. It’s a way to grow solar “that does not blow up the utilities’ model for doing business.”

Most customer-owned solar arrays have been installed under an arrangement known as net metering, in which utilities run customers’ electricity meters backwards to compensate them for any unused solar power they generate.

Utilities tend to dislike net metering because it lowers electricity sales. When you subtract kilowatt hours from solar customers, you’re left with less revenue to pay for “fixed costs” like power plants and transmission lines, and utilities could be forced to make up the difference by raising rates. That’s led to growing resentment and opposition against solar in some states.

In California, for example, utilities are pushing to roll back the state’s net-metering policy, which they say is shifting costs onto customers who don’t own solar arrays.

Solar advocates argue that those claims don’t take into account the value of a broad range of benefits that customer-owned solar provides, from environmental benefits to delaying the need for new power plant and transmission line upgrades. A January 2013 study by the Vote Solar Initiative concluded that solar customers in California are providing “small net benefits” to all utility customers.

Mixed results in Texas

Minnesota passed the nation’s first net-metering law in 1981. Now, it’s also the first to adopt a statewide value-of-solar policy, which has so far only been tried at the municipal utility level.

Texas-based Austin Energy introduced the first value-of-solar tariff last fall. The progressive, city-controlled utility believed it was underpaying customers for solar power and calculated the new, higher rate to more fairly compensate photovoltaic owners.

This spring, another Texas municipal utility, San Antonio’s CPS Energy, proposed its own value-of-solar tariff, but unlike Austin’s it would actually pay customers less than the retail, net-metering rate for solar power.

Minnesota’s law is the first at the state level, which is why solar advocates nationwide are watching it develop and hoping it sets a good precedent.

“The proof will obviously be in the pudding, when we see the regulatory process that develops this rate, but what we’ve seen so far, what actually made it through the legislative process is really impressive,” said Annie Lappé, solar policy director for Vote Solar, a California non-profit that advocates for solar power.

An open process

One reason Lappé is optimistic is that in Minnesota the value-of-solar rates would be set in an open, inclusive, state-facilitated process, rather than behind a utility’s closed doors. “We don’t just want a monopoly utility, whose main interest is maintaining shareholder profits, in charge of essentially setting solar policy,” Lappé said.

The first step is for the Minnesota Department of Commerce to come up with a methodology for calculating the value of solar tariff. The department has until January 31 to submit a proposal to the Minnesota Public Utilities Commission.

The formula must reflect value to the utility, its customers, and society. Specifically, that includes “the value of energy and its delivery, generation capacity, transmission capacity, transmission and distribution line losses, and environmental value.” It may also include local economic benefits, grid congestion benefits or other factors.

After the department establishes a methodology, and the state’s Public Utilities Commission has approved it, public utilities can use it to calculate the value of solar to their systems. The utilities would be required to file studies with the utilities commission, and after a public comment period the commissioners would decide whether the utility correctly applied the methodology.

“The filings that they make are going to be a great opportunity to learn more [about the economics of solar], at least I’m hopeful they will be,” Farrell said.

That’s if the public gets to see the calculations.

“Having participated in PUC proceedings before, I’m aware that a lot of times utilities basically dump a number and say, well, this is what we got and the information about how we got there is proprietary. It really does depend a lot on what kind of formulas [the state] comes up with and whether they require the utilities to disclose how they arrive at their answers.”

Once regulators approve a utility’s proposed value-of-solar rate, customers who install solar arrays, unlike with net metering, would continue being charged for all of the electricity they use — their meter wouldn’t run backward on sunny days. Instead, a second meter would be installed on their solar system and the utility would purchase all of that electricity at the value-of-solar rate, which would be locked in for 20 years.

Utilities would recalculate the value-of-solar tariff every year, and the rate could not be lower than the regular retail rate for the first three years after the program starts. After that, solar will have to prove its value in order to receive a premium.

Lappé and Farrell are confident, based on recent studies, that if the process goes as intended it will prove that solar customers aren’t freeloaders but actually making undervalued contributions to the electricity system.

“If you get the methodology done well, we’re not too concerned about the value of solar falling below retail rates,” Lappé said.

That isn’t the same as a subsidy. Customers who own solar arrays would merely be paid for the value they generate for the utility, ratepayers and society. Should utilities opt to try value of solar, Farrell hopes it will bring that value to light.

“[The desire was] to make it much easier for people to go solar, and to create a market and a financing mechanism,” Farrell said, “and the other part was to bring a lot more transparency to the value of solar and distributed power to the grid system.”

The ILSR is a member of RE-AMP, which also publishes Midwest Energy News.

Editor’s note: Minnesota’s first net-metering law was passed in 1981, not 1983, as stated in an earlier version of this story.

Comments (7)

There is a role for solar. But in Germany, the poster country for solar, $10 billion/year is collected from low and middle income rate payers and tax payers to fund the wealthy who can afford to decorate their roofs with panels.

By Rolf Westgard on Jun 11, 2013

We’ve heard for years that the “grid” is out dated and that power companies are working on a new “smart” grid, what this means is that the wires, the transformers, the switches and fuses, the capacitors are too small and need to be up graded. Most power companies see their peak usage from business and industry during the day, typically 9 am -3 pm. This article does not speak to the power companies plan to install “smart” meters, which in reality are “time of day meters”.
With the installation of the smart meter the customer will pay several different rates depending on the time of day they use the electricity, cheapest at night , highest during the day. Customers will either alter their usage or pay the higher rate. Guess what, 9-3 is when solar does its thing.
Having a few solar generators in neighborhoods will be a big help to the power companies as they may not have to replace any of the too small, outdated, grid parts, saving the power companies and shareholders lot of money.

By Jim Harvey on Jun 11, 2013

If the goals are to reduce GHGs, relieve the grid, and create jobs, the societal benefits of working with low-income households to improve energy efficiency, reduce taxpayer assistance, and keep money in the piggy banks of those who need it most far outweigh the Value of Solar.

Please explain how solar energy leapfrogged to the front of the energy line this legislative session.

By Fritz Ebinger on Jun 11, 2013

Fritz – the key thing that’s changed is that the prices for solar panels have plummeted in recent years, so earlier conventional wisdom no longer applies.

Also, it’s not being pursued at the expense of efficiency, but in addition to those efforts. Efficiency alone cannot reduce GHG levels to where they need to be.

By Ken Paulman on Jun 11, 2013

I think you could make the argument that subsidies for solar are a form of Pigouvian tax, making electricity more expensive. This paper from MIT, “Is There an Energy Efficiency Gap?” makes the case that subsidizing efficiency isn’t necessary a better idea than taxing pollution. http://web.mit.edu/ceepr/www/publications/reprints/Reprint_239_WC.pdf
In the long run, we need to transition our energy supply to renewable resources. Getting a head start on that process might be a good plan.

By Fred Horch on Jun 11, 2013

If the assertion is that Germany’s solar push has harmed low and middle income rate payers, let’s look at some high-level data.

From http://www.eia.gov/electricity/data/browser/ and from http://epp.eurostat.ec.europa.eu/ we can get residential electricity prices for MN and Germany; the latter goes back to 2001 so let’s use that as a baseline.

Germany went from 0.1220 in 2001 to 0.1441 in 2012 per kWh; an 18% increase.

Minnesota went from 0.0761 in 2001 to 0.1137 in 2012 per kWh; a 49% increase.

The “low and middle income rate payers” in Germany seem to be faring a bit better than those in Minnesota, solar growth notwithstanding…

By Eric on Jun 11, 2013

“When you subtract kilowatt hours from solar customers, you’re left with less revenue to pay for “fixed costs” like power plants and transmission lines, and utilities could be forced to make up the difference by raising rates.”

I’m wondering, is there similar resentment against people who implement efficiency & conservation? Even without solar, we use half the state residential average. Are we half-freeloaders, then?

I’ve never understood why “fixed costs” aren’t accounted for as fixed line-items on the bill, and let customers pay for energy on top of that. If fixed costs are part of a per-kWh rate, that just seems broken to me.

By Eric on Jun 11, 2013