By EDF Blogs
By: Kristina Mohlin, Visiting Economist; Beia Spiller, Economist; and James Fine, Senior Economist
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Source: Duncan Rawlinson
At EDF, our eyes are fixed firmly on improving local air quality and reducing global warming caused by fossil-fuel based electricity. We have high hopes for the role that clean, renewable, and distributed energy solutions like rooftop solar can play in “decarbonizing” our energy system. To get there, the price must be right for residential solar to flourish. With recent price drops (e.g., the cost of solar panels has declined by around 75 percent since 2008) and innovative new financing tools, residential solar is booming. However, this exacerbates the need to find a balance between rewards for investors (a.k.a. home and building owners) and service cost recovery for electric utilities.
California and other states are considering substantial changes to how distributed energy resources are compensated, revisiting both the underlying tariff structures along with how PV customers are paid for generation. Thus, it is both timely and crucial to analyze how these impending changes may affect investment in solar photovoltaic (PV) energy and its long-term viability.
EDF’s new SolaROI study explores how Pacific Gas & Electric’s (PG&E) proposal for new electricity rates impacts the residential customer’s return on investment (ROI) from installing rooftop solar.
Challenges and opportunities for net metering
Net energy metering (net metering) is a policy that reimburses solar customers for the energy they generate by allowing the household utility meter to run backwards when the solar system is generating more energy than the home is using. Though net metering is the focal point of the debate on how to compensate rooftop solar, the key value driver is the underlying electricity rate design structures. Why? Because running the meter backwards essentially pays the solar panel owner retail rates for their PV generated solar power.
Electricity rate structures can encourage or discourage energy use and affect behavior, such as when individuals decide to turn on non-essential appliances. These structures can also influence who – solar or non-solar owners – pays for other power grid-related costs. Currently, most Californians pay inclining block rates (IBR), whereby each increasing tranche, or tier, of electricity use is billed at a higher rate. Since prices increase steeply the more you consume, this creates an incentive for customers with high electricity usage to conserve in order to avoid higher-priced electricity.
Net metering allows high-usage customers to avoid higher-priced tiers. However, there are several challenges with net metering. First, if a customer nets to zero annual payments, the electric utility cannot be confident it will recover the costs required to serve that customer (i.e., transmission lines, energy load management, etc.). Second, solar power isn’t priced at true market value for the variety of services it provides to the grid. Because of this, some utilities are moving towards implementing a Value of Solar (VOS) tariff that essentially pays PV owners for the benefits their solar power provides to the system at large.
The net metering-IBR combination presents a strong incentive for large electricity customers to invest in solar panels, but it does not create an incentive for them to shift their energy use to times of day when the demand for energy is lower and less costly. Alternatively, more refined tariff structures (such as time-of-use (TOU) electricity rates) have the ability to send price signals that can alter the time of electricity use in a way that provides benefits both to customers and the power grid.
SolaROI study
In our new study, EDF developed a model to calculate the ROI of residential solar under differing rate structures. Specifically, we compare ROI under California’s current four-tiered inclining block rates to the following rates:
(1) PG&E’s proposed new two-tiered inclining block rate; and
(2) two voluntary TOU rates: PG&E’s proposed TOU rates with a mid-day peak and another hypothetical rate with an evening peak.
Furthermore, we estimated how large a VOS tariff would have to be for the PV owner to receive a positive ROI. Essentially, this demonstrates the minimum payment required to maintain investment in residential solar if a VOS tariff were to replace net metering as the compensation tool.
SolaROI findings
We examined solar PV systems that would cover all of the household’s yearly electricity use. Here are our findings:
- For high-energy using customers (i.e., those with monthly energy use levels 50%-100% above average), returns with the new two-tiered tariff structure were lower than those with the current four-tiered tariff structure – due to the fact that they are no longer avoiding very high retail rates by generating their own power.
- For all customers, returns for PG&E’s proposed TOU rates were higher than those under the proposed two-tiered tariff structure.
- High-energy using customers initially on the two-tiered tariff structure can enjoy additional savings from switching to TOU rates, making the total savings from both the rate change and solar PV investment larger.
- TOU rates with an evening peak window provide a positive ROI under a conservative set of assumptions.
- A VOS tariff would have to be 22 cents – much larger than the 11 cents currently offered by Austin Energy – to yield a positive ROI.
One final note worth mentioning: This analysis did not attempt to model the technologies and practices that could be deployed to fundamentally change the ROI associated with residential solar. For example, co-locating energy storage capabilities with solar PV could enhance returns dramatically. Similarly, we did not model a truly dynamic electricity rate structure that could provide significant value to the electricity system while also reducing harmful pollution.