INTRODUCTION
The California Public Utility Commission (CPUC) is voting on a decision about changing the way that distributed (“rooftop”) solar power is billed and credited. Distributed solar power includes energy produced in the proximity of the end user, including residential solar as well as small scale community solar projects where a group gets together and shares a community owned array. This contrasts with centralized generation where solar electricity is produced by a large plant, transmitted over long distances and then distributed to consumers through a power distribution network (grid). The proposed new rates are referred to as NEM 3.0 (Net Energy Metering) to replace current NEM 1.0 and NEM 2.0.
BACKGROUND
NEM 1.0 and NEM 2.0 provide a means for a user (solar producer) to send unused power back to the grid to be credited for use at a future time. There are slight differences between NEM 1.0 and NEM 2.0 in how the “extra” energy is evaluated, but the general idea is that excess power used at one time can be “used” anytime during the future year. The basic idea is to use the grid as a kind of long term “battery”. This approach provides a way to size a system in such a way as to provide a credit for excess power produced in the summer months when solar is plentiful, and use the resulting credit it to offset the use (and cost) in the winter months when solar is scarce. At the end of the year there is a “true up” where the user either pays for any power that they used in excess of what they made, or get paid a small amount for excess power that they didn’t use (usually in the form of a credit). In addition, there is a small (around $10/month) bill for “non-power” mandated subsidies for other things including energy efficiency programs, public purpose programs, the Wildfire Fund, and Nuclear Decommissioning and grid service costs.
Residential electric bills are divided into three major categories that cover the (1) cost of energy, (2) cost of transmission and distribution, and the (3) mandated non-power costs. These are all combined into a rate that is then billed in a single “cost per-kWHr” rate. Thus if a solar user is “net zero”, they have no energy use and therefore do not pay for the energy or distribution infrastructure costs – except for a small flat rate as previously noted. That means that they not only don’t pay for the power they use (which seems correct since they didn’t use any), but they also don’t pay for the costs associated with installing and maintaining the grid or providing the other services that are necessary to make the system function. Depending upon the value of their excess power production, they might be getting something for nothing, meaning those that do not have solar are paying more than they would otherwise pay if nobody had solar.
Based upon this consideration, the PUC determined that the NEM 2.0 billing practices are “unfair” for those that are not solar users and that something needs to be done to “solve” this terrible “problem” by finding a way to charge solar users more for the use of the grid.
PUC ANALYSIS
The PUC commissioned their energy consultants E3 (Energy and Environmental Economics), Verdant Associates and Itron, Inc to perform Lookback Studies and Avoided Cost Calculations in an effort to determine the cost/benefits associated with the presence of distributed solar power on the grid. These consultants were asked to determine whether or not solar was a cost benefit or deficit based upon six studies: (1) A lookback study evaluating historical cost/benefits; (2) Avoided Cost Calculations to determine the value of added solar resulting from avoiding grid costs; (3) Participant Cost Test (PCT); (4) Program Administrator Test (PAC); (5) Total Resource Cost (TRC); and (6) Rate Payer Impact Measure (RIM). In addition, the PUC was charged with performing a seventh test, the Societal Cost Test (SCT) but did not do so because of a lack of interest, and therefore a lack of funding. Each of the measures for the PCT, PAC, TRC and RIM resulted in a value on a scale centered on zero impact, with relative positive or negative values. The tests estimated whether solar had a negative or a positive impact on the costs of each of the areas of concern. While the name of the Avoided Cost Analysis sounds like it is all encompassing, it actually provided a narrow view into the total avoided costs. It was specifically described in the report as being incomplete and unsuitable for rate structuring purposes – however, it was the MAIN calculation used in the decisions concerning changes to the rate structure.
The exclusion of Societal Cost Test (SCT) is perhaps the most egregious failure of the PUC Commission’s evaluation because that is the place where costs beyond the narrow costs of providing power would have been addressed. Costs such as the loss (or preservation) of open land, environmental/ecosystem impacts, leakage of methane, reduction in the risk of global warming, and many other “extra” costs would have been identified. However, the PUC ruled that not only were they not funding those studies, but they believe these “other” costs are insignificant and needn’t be included in the modeling.
The PUC then formed a group of several interested parties charged with the task of developing independent proposals based upon the results these studies to help identify a solution that would achieve mandated energy goals while maintaining a “fair” billing structure for all parties. Proposals for Net Energy Metering Tariff Changes were submitted by CALSSA (California Low-Income Coalition); CCSA (Coalition for California Utility Employees); Californians for Renewable Energy; CESA (California Energy Storage Association); CalWEA (California Wind Energy Association); Clean Coalition; Foundation Windpower; GRID Alternatives with Vote Solar and Sierra Club; Ivy Energy Multifamily VNEM; Joint Utilities; NRDC (National Resources Defense Council); PCF; Public Advocates Office; Sierra Club; SBUA (Small Business Utility Advocates); SEIA/Vote (Vote Solar with the Solar Enginery Industry Association) ; and TURN (The Utility Reform Network).
PUC DECISION
The PUC held extensive hearings on the topic of the “fairness” of the current rate structure, with almost exclusive emphasis on how much of the Transmission/Distribution costs were being shifted from distributed solar users to those who do not use solar. There were no considerations that perhaps private citizens building their own power plants might decrease the need for such purchased by the utilities or any other system level benefits that might be provided by distributed power. Their findings are that the solar users are not paying “their fair share” and therefore the rates need to be changed to balance the costs. While this is perhaps a reasonable conclusion, their approach selecting a solution was arbitrary and capricious in that it was in reaction to a claim of “unfair” but had little, or no, basis in facts or the data. They heard all of the proposals, turning them down as being unconvincing. There final decision was actually pretty simple. They decided that distributed solar was receiving too much incentive and therefore should pay higher rates for the use of the grid. Their statement of the problem is that distributed solar users make too much on their investment. In order to decrease their return on investment, they decided to design a rate schedule that will limit the simple payback time for a solar installation to 14 years without batteries, and 10 years with them (as an incentive to install batteries).
Therefore the rate schedule that they developed by the PUC was designed to limit the value of the investment on solar rather than cover the costs of maintaining the grid. A 14 year payback period is equivalent to about 7% return on investment. While this is a “reasonable” return, it is less than can be expected from many other types of long term investments, such as investments in stocks or bonds. This is significantly less than the historical 10% return on stocks and is hardly an “incentive” rate, especially since it requires tying up a large amount of cash for many years, limited flexibility – and includes significant uncertainty associated with future prices of energy and future PUC rate setting actions. Not only is there significant uncertainty of the future price of energy, but distributed solar arrays typically have warranties of around 10 years for inverters and 25 years for solar arrays, with no warranty on the other parts of the system and the warranties are for parts only, they do not cover labor costs beyond ten years. There is the potential for a large future cost to repair/replace failed components.
By way of comparison, large solar installations receive various types of government incentives and subsidies designed to provide the owners with a minimum rate of return of over 15% (usually over 20% after tax incentives are included). A 15% ROI translates into 6.7 year simple payback time. The reason that large solar installations are subsidized by that amount is that there is a strong desire to switch to non-polluting energy sources for “social” reasons such as avoiding a catastrophic collapse of the worlds environment due to greenhouse gas emissions, and because it takes this much (or more) to make taking rather risky investments such as solar economically worthwhile – whether for a business or an individual.
CONCLUSIONS
The PUC NEM 3.0 proposal does not result in a “fair” rate schedule, nor does it achieve the important goals of achieving carbon reduction goals while protecting the rest of the environment. To fund electricity infrastructure by attaching the cost to energy costs is outdated, and unworkable, in precisely the same way that attaching road taxes to gasoline has become as more and more cars are becoming electric. In the case of automobiles, paying for the transportation infrastructure costs through gas tax means that those that use gasoline pay all of the costs, and those that use electric cars pay none. The infrastructure costs should be attached to the use of the infrastructure, in this case to mileage and vehicle weight. Perhaps there should be no gas tax, but there certainly should be a mileage tax.
In the case of electricity, the infrastructure costs should be attached to the use of the infrastructure – in this case the amount of power available (demand service size). The maximum delivered demand load drives the size of all of the infrastructure components, and hence the cost of providing the infrastructure supporting each service. There should be “hook up” charges based on the size of the service plus some non-demand related fixed costs such as the “non-energy” mandated charges. The energy charges should be based upon the amount of energy used, or purchased since solar allows the service to act at a power source to the grid.
Burying one type of expense in a different type of service/product results in “unfair” practices, and makes it much more difficult to understand and therefore provide appropriate incentives and subsidies where desired for socially desirable reasons.
The move to a new NEM 3.0 should be postponed until such time as the rest of the costs are included in the cost modeling, and until a decision about how to better separate energy costs from grid infrastructure costs are determined. Making such important decisions based upon a casual opinion that a 14 years payback should be sufficient for homeowners is bad policy and is inexcusable in this case. A logical extension of the PUC proposal is to limit, or charge the customer, for improved efficiency measures since that means they will use less power and therefore pay less for the use of the grid than others who don’t invest in efficiency measures. The goal is to reduce the need for power, reduce the use of non-renewable energy, and minimize the greenhouse impacts on the environment. Focusing on keeping prices high, and providing dis-incentives for efficiency improvements (including self-generated solar) are counterproductive.