Last fall, Austin Energy become the first utility in the U.S. to offer a “Value of Solar Tariff” (VOST) to its residential electricity customers.
The VOST rate is presented as an alternative to net metering, the bill credit mechanism that has driven most customer adoption ofsolarin the U.S. today. Some utilities elsewhere in the country are looking to ditch net metering and jump on the VOST bandwagon. But will that be a good tradeoff for current and future solar customers?
Let’s take a look at Austin Energy’s VOST and see how it might work in places that’s aren’t as, well, “weird.”
Here’s how the Austin VOST works: When a residential customer, let’s call her Sally, goes solar in Austin Energy’s service area, she is automatically signed up for the VOST. Sally continues to pay a monthly energy bill based on how many kilowatt-hours of electricity she and her family consume. However, now that she has a solar energy system, she is also given a credit for each and every kilowatt-hour her system generates. That credit is subtracted off Sally’s total monthly electricity bill. According to Austin Energy, the VOST rate is set up to more fairly reward solar system operators for the energy they produce. A VOST may soon be developed for commercial customers as well.
The VOST credit applied to a customer’s monthly electric bill is calculated using a value of solar algorithm originally developed by Clean Power Research in 2006. This algorithm is updated annually, and it currently accounts for the following benefits of distributed solar:
- Avoided fuel costs, which is valued at the marginal costs of the displaced energy
- Avoided capital cost of installing new power generation due to the added capacity of the solar PV system
- Avoided transmission and distribution expenses
- Line loss savings
- Fuel price hedge value
- Environmental benefits
If this list looks familiar, it essentially includes the same value elements that are examined when looking at the cost and benefit balance under net metering for residential and commercial customers.
For Austin’s VOST analysis, from 2006 through 2011, the calculated value of solar fluctuated from 10.3 cents per kWh to 16.4 cents per kWh for a fixed system. In October 2012, when the VOST was actually implemented, the value was set at 12.8 cents per kWh. We talked to some local solar advocates in Austin, and they say that they hope to add to the list of benefits, perhaps including a value for the economic development benefits of building inherently local energy infrastructure.
So how would a VOST look if implemented by a utility other than a progressive municipal-owned utility? Turns out there are a few issues unique to Austin Energy, and Austin, which make it unlikely that a VOST would look the same if it were replicated by utilities elsewhere.
Value of Energy: The largest piece of the benefits pie in Austin Energy’s VOST is the value of energy component. Austin Energy’s approach of valuing the energy supplied by a solar PV system is perhaps unique to Texas. In its algorithm, the energy value equals solar PV output plus loss savings times marginal energy cost. Marginal energy costs are based on fuel and O&M costs of the generator most likely operating on the margin (typically, a combined cycle gas turbine). The fact is, Texas is a whole different animal when it comes to pricing energy. On a transmission-constrained day on the ERCOT grid, the power can be 50 times more expensive than on an average day. Austin Energy takes account of these dramatic fluctuations in power prices, and assigns a value to solar PV known as the “PV output weighed nodal price.” In short, the Texas power market is very transparent and marginal energy costs are relatively easy to identify. Utilities outside Texas, particularly those that have traditional operations, view solar resources with a more skeptical eye and frequently don’t operate in open and transparent markets. One Southwest utility, for example, will not assign a marginal energy cost to the reductions related to solar because it commits to energy purchases one day ahead and doesn’t believe it can count on solar generation at all -- despite the fact that the sun continues to rise every morning and set every evening. Thus it assigns an average cost to any solar generation that does occur.
Environmental Benefits: Another large component (2 cents per kilowatt-hour in 2012) of the VOST is the environmental benefit category. Austin Energy assigns an environmental value based on the solar PV output times the Renewable Energy Credit price -- the incremental cost of offsetting a unit of conventional generation. While there are clear environmental benefits associated with deploying solar energy, many utilities and commissions are reluctant to provide that value to the solar system owner unless there is a measurable cost avoided by the host utility. While many acknowledge that fossil fuels have externalized costs, unless an outside agency puts a number on it and forces payment, current practice essentially assumes this value to be zero. From bitter experience, we’ve found few utilities or regulatory bodies willing to put a real value on environmental benefits.
Fuel Price Hedge Value: Austin Energy has baked in a value for the fact that solar PV generation has no fuel price uncertainty. This value is calculated by determining how much it would cost to eliminate the fuel price uncertainty associated with natural gas generation through procurement of commodity futures. There are a variety of views on methods for determining the hedge value, potentially leading to endless debate. However, the bottom line is that any risk for fuel cost fluctuations is borne by ratepayers due to certain rate mechanisms. Thus utilities have little motivation to aggressively hedge the risk of fossil fuel price uncertainty. One means of shifting the equation would be to place some of that fuel risk on the utilities. However, in the current climate, it seems unlikely to us that most utilities would similarly be willing to accept this risk or to use a legitimate hedge value. The best measure of hedge value would be comparing the actual cost of fuel over twenty to 30 years between solar (zero, of course) and natural gas. The problem is that there is no producer willing to provide a 20- to 30-year contract for natural gas because prices are too uncertain.
Owning vs. Leasing a Solar System: In Austin Energy’s service area, a solar customer cannot lease a solar energy system. The only legal option is to own the solar system outright. This goes against a huge trend we are seeing in the U.S. toward solar systems being financed through a leasing company rather than owned by the customer. In California, for example, 80 percent of new solar energy systems are leased or otherwise owned by a third party. In a utility service area where leasing is allowed, and is the preferred option for customers, a VOST becomes more complicated. The risk would then be on the financing company. How easy would it be for a solar leasing company to get low-cost capital to finance a product that has a value stream that could potentially change every year at the discretion of a utility? Not very.
City Council as the Final Decision-Maker: Finally, a factor unique to Austin is that customers and the solar industry have a decidedly different body to turn to if they want to influence the VOST. In Austin Energy’s situation, the City Council acts as the regulatory backstop to VOST decisions. A Public Utility Commission’s (PUC) main mission, at least as interpreted by many a sitting commissioner, is to keep costs low for ratepayers. City councils have much wider missions, which includes protecting the public welfare. Environmental protection and economic development are issues on which city councils take action -- a PUC, not necessarily. Thus, the chances of a city council approving a more robust VOST rate, versus the chances of a PUC doing so, are, in our opinion, much higher.
One of net metering’s strongest virtues is its simplicity. As we’ve seen here, valuing the many attributes of on-site generation is a complex endeavor. While the VOST as devised by the good folks at Clean Power Research provides a solid basis for valuing solar energy, our experience in advocating for similar programs has shown that it will be very difficult to replicate. In California, for example, we’ve tried in multiple regulatory proceedings to set a fair value for distributed solar generation, and were, frankly, less than successful. The latest effort came out at -- wait for it -- about 3.5 cents per kilowatt-hour..
We love the idea -- if it can be done effectively, and that’s the rub.
Our suggestion? As a practical matter, we suggest that VOSTs initially be introduced as an option, not a replacement for NEM. Retain NEM for on-site generation, and develop a VOST as a voluntary alternative option for customers. This is exactly what our friends up in Minnesota are attempting this legislative session. See how it works before ditching the thing that does. Unless you are dealing with a solar champion like Austin Energy, the one-to-one retail net-metering credit keeps the conversation simple and fair for consumers, and limits the opportunities for shenanigans to undervalue distributed solar.
Annie Lappé leads state campaigns throughout the West and Midwest for Vote Solar, a nonprofit grassroots organization working to bring solar energy into the mainstream across the U.S. Annie holds environmental policy degrees from Oxford University and UC Santa Cruz and lives in Boulder, CO.