by Julia Pyper
August 26, 2016

In 2014, Energy and Environmental Economics (E3) published a study on the economic impacts of net metering in Nevada and found there to be an estimated $36 million benefit to non-solar ratepayers over the lifetime of all rooftop solar systems installed between 2004 and 2016.

But in Nevada, E3’s calculus has changed. Last week, the research group published an update to its 2014 report that found that Nevada’s roughly 30,000 existing rooftop solar systems shift $36 million in costs onto non-solar customers each year. When E3 entered new inputs, the $36 million in benefits (coincidentally the same number as the annual costs) disappeared.

The findings add to a contentious debate over rooftop solar in Nevada, stemming from a new tariff that increased fixed charges, lowered the variable energy rate and reduced the credit for excess energy for both new and existing rooftop solar customers. The policy changes were approved in December 2015 and came into effect on January 1. Sunrun and SolarCity pulled out of the state shortly after and several other solar companies have had to lay off staff as the Nevada rooftop solar market has come to a standstill.

There has been strong pushback against the new rate and various attempts to undo the changes. Assemblyman Stephen Silberkraus and Senator James Settelmeyer commissioned the new E3 study to “provide a foundation as we continue the discussion of ensuring that all customers benefiting from the electric grid are paying appropriately,” the lawmakers wrote in a letter to the Public Utilities Commission of Nevada (PUCN). Regulators opened a new information docket for the report last week (16-08031).

The cost shift described in the study could undermine efforts to reinstate favored rooftop solar rates. Thomas Kimbis, interim president of the Solar Energy Industries Association (SEIA), wrote in The Huffington Post this week that the numbers in E3’s latest analysis “just don’t add up.”

“While E3’s first study was consistent with other studies in showing solar’s value to the community, the latest version insults the intelligence of Nevadan readers,” he wrote.

So what changed in E3’s analysis?

The cost breakdown

Accounting for lower costs of utility-scale solar resources was the primary reason why E3’s results were different from two years ago. In 2014, utility-scale renewable resources cost $100 per megawatt-hour. In 2016, they cost $36 per megawatt-hour. The new data decreased the “RPS value” benefit in E3’s model by 95 percent, which made self-generated electricity relatively less economic, according to the report.

Falling natural-gas prices were another factor. Lower costs decreased the value for avoided cost of energy by approximately 50 percent, further hurting the case for self-generated electricity.

“Markets change all the time, whether it’s the cost of natural gas or whether it’s the cost of solar,” said Zachary Ming, senior consultant at E3 and author of the new report. “If the results of a study are based on market data that existed at the time the study was published…and if that data changes, conclusions also need to change.”

While the study results are intended to inform net metering discussions in Nevada, the study scope went beyond NEM to account for all Nevada-specific policies that enable distributed solar, including NV Energy’s RenewableGenerations incentive. Generation from these incentivized systems can be counted toward Nevada’s renewable portfolio standard.

So for existing systems, $20 million of the $36 million per year cost shift actually represents sunk costs that have already been spent on solar incentives. The remaining roughly $15 million represents the annual cost shift attributable specifically to net metering; thus it would create a cost-shift of $15 million per year to grandfather Nevada’s existing rooftop solar customers onto the old rate structure. These results are similar to the PUCN’s own analysis that found there is a $16 million annual cost shift between solar and non-solar customers.

If Nevada’s existing 265 megawatts of rooftop solar were hypothetically to double, E3 found it would cost-shift an additional $15 million per year.

Taking the analysis further, E3 calculated that Nevada’s net-metered rooftop solar customers also lose money on the state’s distributed solar policies. According to the report, Nevada’s roughly 30,000 existing rooftop solar customers are actually paying an additional $10 million per year to have solar on their roofs.

“In other words, the cost of installing the solar system is more than what they’re getting paid in incentives and NEM bill credits,” said Ming.

The eye of the beholder

A key point is that E3's solar cost calculation factors in the availability of incentives other than NEM, like the RenewablesGeneration program. Furthermore, the inputs are very location-specific. The Nevada finding doesn’t mean that rooftop solar doesn’t benefit rooftop solar customers elsewhere, said Ming, it all depends on the rate level. In Nevada, residential rates are about 11 cents per kilowatt-hour. In California, where there are tiered rates, some customers pay up to 30 cents per kilowatt-hour. Because solar customers in California are getting bill credits up to three times larger than those on offer in Nevada, almost every rooftop system is cost-effective, Ming said.

But while solar customers in California see a net benefit, E3 recently published a separate model that estimated California’s net metering policy could cost shift $3 billion to $5 billion per year by 2025.

A cost shift in the billions may seem extreme, but Ming noted that the costs are all about preferences and perception. In Nevada, whether or not a $36 million cost shift is considered extreme is relative, he said.

“It’s about 1.2 percent of revenue requirements that means rates would increase 1.2 percent,” he said. “So if the electricity rate is 10 cents per kilowatt-hour (Nevada’s is 11.40 cents), we’re talking about an increase of about .12 cents per kilowatt-hour. So whether it’s significant or not is all in the eye of the beholder.”

The additional cost per kilowatt-hour is even lower given that much of the cost shift has already been spent through incentive payments. E3 estimates the incremental cost of grandfathering existing systems on the old NEM rates would cause a rate increase of just 0.5 percent.

Whether or not an increase is tolerable is a political question, not a research one, said Ming. In places where studies show solar is a net cost, decision-makers may well decide to pay more for the technology in the near term because it supports their community’s climate objectives or employment goals, or simply has strong consumer demand.

“I think the argument [that distributed solar costs more, but is still worth it] is a much more nuanced and accurate [argument] in favor of keeping net metering, as opposed to stating outright that today net metering provides a net benefit,” Ming said.

Monetized and societal benefits

Rooftop solar advocates have long been lobbying for state regulators to consider benefits as well costs when evaluating policies that affect the economics of solar. This is particularly relevant to debates on net energy metering, where the credit has a tangible cost, but that cost ignores all of the benefits rooftop gives back to the electrical grid and society at large.

The National Association of Regulatory Utility Commissioners (NARUC) recently came out with a draft manual on how to compensate distributed energy resources, including rooftop solar, that identified cost-benefit studies as the most neutral way to regulate. Getting regulators to consider benefits in addition to costs is a victory for distributed energy advocates, but there’s a lot more that goes into figuring out what distributed solar is worth. And the process can have a profound effect on the results.

E3’s two Nevada reports demonstrate just how significantly changing a couple of inputs can affect the outcome of cost-benefit report.

Interestingly, given the outcome, E3 used a more generous set of distributed solar benefits in the 2016 study than in the 2014 case. This time, E3 included distribution benefits for solar in the calculations, and still arrived at the $36 million cost shift. Without those benefits, the cost shift rises to $43 million. This analysis doesn’t include any benefits that cannot be monetized, however.

“The cost shift looks at what other ratepayers are paying for the solar versus what they’re getting,” said Ming. “It just looks at things that impact utility rates. That means it’s only looking at monetized benefits.”

Societal benefits don’t impact utility rates; therefore, it doesn’t make sense to include them in a cost-shift study, Ming said. Furthermore, the societal benefits are very dispersed. Nevada’s rooftop solar sector is contributing to reduced emissions, but since emissions are global, very little direct benefit accrues to the people of Nevada.

For comparison, E3 did run a scenario that looks at externalities and non-monetized health and environmental benefits and found that net costs to the state of Nevada are even higher than the cost shift. In this scenario, leaving existing solar on Nevada’s previous solar rate would cost $55 million per year. This is primarily because distributed solar counts toward Nevada’s RPS, so the more distributed solar there is, the less utility-scale generation there is, which is the cheaper form of clean energy. Meanwhile, E3 states there is no substantial difference in the societal benefits each solar resource offers.

“If you’re looking at how can we get the electricity system to be as green as possible, as fast as possible, and as cheap as possible, rooftop will always be at a structural disadvantage to large-scale renewable energy. Because when you install these systems on a rooftop, they’re installed in small quantities so you don’t have economies of scale for installation. They’re often at suboptimal angles, shaded by trees or buildings and often not in sunniest areas like a desert,” said Ming. “All of that adds up to situation where even if costs go down, it will go down for both rooftop and utility-scale, and rooftop will always be more expensive.”

Of course, rooftop solar proponents would challenge that conclusion, pointing to the huge swaths of land and transmission lines needed to support large-scale solar projects. Solar advocates are also challenging E3’s latest conclusions and the process through which it was introduced.

Rigorous, fair and transparent

According to Jon Wellinghoff, chief policy officer for SolarCity, the E3 study was conducted "behind closed-doors" and presented without peer review, which runs counter to Nevada's typical legislative vetting process.

"We don't know who decided the inputs," he said. "It was done in a big black box, and here they are touting a [cost-shift] number.”

Two Nevada legislators originally requested the E3 follow-up study, but the study didn't make it onto the agenda for the interim energy committee's final hearing last week. In an "unprecedented move," according to Wellinghoff, the study was published in a stand-alone informational docket that does not allow for stakeholder input.

For solar advocates, the biggest flaw with the new E3 study is that it does not address all 11 of the cost and benefit categories that Nevada regulators said should be used to “determine the possible value/detriment of NEM” (p. 151). In their net-metering ruling, regulators only accounted for two rooftop solar benefits -- avoided energy and energy losses -- citing “insufficient time or data in this proceeding to assign a value to the other nine variables.”

In May, SolarCity and the Natural Resources Defense Council (NRDC) released a peer-reviewed report that looked at the full suite of costs and benefits and found that Nevada’s existing rooftop solar customers provide net benefits to all Nevadans ranging from 1.6 cents to 3.4 cents per kilowatt-hour of solar production, which translates to $7 million to $14 million per year. A version of the report tailored to Northern Nevada will be submitted to Sierra Pacific Power’s upcoming rate case and Integrated Resource Plan. E3’s study may also be considered.

Both reports are also likely to be evaluated by Nevada's New Energy Industry Task Force, which is preparing recommendations for Governor Brian Sandoval to include in proposed legislation for 2017.

But rather than simply write dueling reports, what stakeholders really need is a full, fair and transparent accounting of the costs and benefits of solar, said Chandler Sherman, deputy campaign manager for the Bring Back Solar Alliance, a rooftop solar advocacy coalition backed by SolarCity.

"We look forward to working with other stakeholders to review this draft study, and provide input on the data and analysis through a transparent peer-review process,” Sherman said of the E3 report. “The public deserves a rigorous and fair accounting of the costs and benefits of solar, and we will work with the PUC and other leadership to ensure the updated study, like the initial study, meets the high standards the public expects.”

This story has been updated to include comments from Jon Wellinghoff, chief policy officer for SolarCity.