01

Introduction

Rate Options for Sustainable Distributed Energy Resource Growth:

What is the value of solar and what rate options can facilitate rooftop solar growth and utility cost recovery?

Colorado Springs Utilities is a municipal property, which means that they are a non-profit. They are concerned that there may be cost-shifting1 between solar and non-solar customers within the same rate class. Their goal is to find solutions that ensure fair and equitable rates that are non-discriminatory, align with customers’ cost of service and do not discourage solar development as long as rates are fair and equitable.

THE SCENARIO:

As we know, the sun only shines during the day. Naturally, we can only generate electricity from solar panels when the sun is shining. The inherent challenge here is the amount of electricity used by a home with solar panels on it varies by the time of day, and often doesn't match-up with when the sun is shining. Click through the scenarios below to see how this can impact the flow of electricity to and from an electric utility company.

EXPLORE THE SOLAR CYCLE:
6:00 AM
12:00 PM
6:00 PM
POWER GRID USAGE
SOLAR POWER CREATION

AT 6AM:

In the morning, rooftop solar panels are producing relatively little power, as the sun is still rising.

Zoom Out  

AT 6AM:

However, most homes are using a significant amount of electricity as people start their day: hot water heaters for showers, hair dryers, lights, amongst many other appliances. All of this electricity has to come from the grid.

POWER GRID USAGE
SOLAR POWER CREATION

THE SCENARIO:

As we know, the sun only shines during the day. Naturally, we can only generate electricity from solar panels with the sun is shining. The inherent challenge here is the amount of electricity used by a home with solar panels on it varies by the time of day, and often doesn't match-up with when the sun is shining. Click through the scenarios below to see how this can impact the flow of electricity to and from an electric utility company.

EXPLORE THE SOLAR CYCLE:
6:00 AM
12:00 PM
6:00 PM
POWER GRID USAGE
SOLAR POWER CREATION

AT NOON:

In the middle of the day, rooftop solar panels are producing the most amount of electricity... but no one is home to use it.

Zoom Out  

AT NOON:

This means that the electric utility must buy it back from the homeowner, at the same price the homeowner pays the utility for the morning electricity, in most cases.

POWER GRID USAGE
SOLAR POWER CREATION

THE SCENARIO:

As we know, the sun only shines during the day. Naturally, we can only generate electricity from solar panels with the sun is shining. The inherent challenge here is the amount of electricity used by a home with solar panels on it varies by the time of day, and often doesn't match-up with when the sun is shining. Click through the scenarios below to see how this can impact the flow of electricity to and from an electric utility company.

EXPLORE THE SOLAR CYCLE:
6:00 AM
12:00 PM
6:00 PM
POWER GRID USAGE
SOLAR POWER CREATION

AT 6PM:

The sun is setting just as people are returning home to turn on all of their electricity consuming devices.

Zoom Out  

AT 6PM:

They are drawing most of their electricity from the grid.

POWER GRID USAGE
SOLAR POWER CREATION

02

Challenges

Going Above & Beyond with Renewable Energy

Colorado statute requires that six percent of Springs Utilities retail electricity sales for the years 2015-2019 and 10 percent for the year 2020 and beyond are generated by renewable energy resources.12

However, Springs Utilities currently generates approximately nine percent of its electric portfolio through renewable energy resources, which satisfies the statutory targets through 2019. In 2010, Springs Utilities adopted and implemented its own “Energy Vision” plan to provide 20 percent of its generation through renewable sources. Therefore, while Springs Utilities has already exceeded the statutory renewable energy targets, it continues to seek an increase to the amount of renewable generation in its electric portfolio.

CHALLENGE #1

Utilities often recover more of their costs through variable rather than fixed rates, even though their fixed costs may be much higher than their variable costs.

CHALLENGE #2

Net metering essentially requires utilities to purchase electricity from customers at this variable rate even if it is higher than the value that the solar brings.

Striking The Right Balance

Often utilities are required to purchase this generation whether it is needed or not, which can make it challenging to balance supply and demand.

03

Objectives

What’s the impact of retaining net metering versus other options for solar customers?

Springs Utilities retained the Team to undertake this Study. The goal of this Study is to compare the impact of retaining net energy metering (NEM) versus other options for solar customers2. These other options include:

Value of solar tariff (VOST)

WHAT'S THIS?
A Value of Solar (VOS) tariff compensates a solar customer either for total DPV production or for excess DPV production. The VOS rate represents the aggregate value stream of benefits that DPV brings to the grid.

Fixed (or standby) charge

WHAT'S THIS?
Utilities that have large fixed costs but who recover revenues primarily through variable charges may consider increasing fixed charges (and decreasing variable charges) to ensure recovery of fixed costs.

Demand charge

WHAT'S THIS?
A monthly charge for peak demand, especially during system peak periods, may help to recover costs due to resource adequacy and to incentivize customers to reduce peak demand. Such a charge may help to address stresses on the system due to air-conditioning and other high power uses.

Time-of-use (TOU) rate
 

WHAT'S THIS?
Different variable charges for peak and off-peak periods reflect the different costs incurred by the utility in providing services during peak and off-peak. This can incentivize customers to reduce peak demand and/or shift to offpeak periods.

Utility-owned solar rooftop program

WHAT'S THIS?
A utility-owned solar (UOS) program can provide another option for customers to install solar by making financing or leasing options available, which could widen the potential solar customer base.

Combined volumetric TOU rate and demand charge

WHAT'S THIS?
A combined volumetric TOU rate and a demand charge was evaluated. This demand charge had an inclining block structure so that the customer was only charged if they exceeded a peak demand threshold.

For each of these options as appropriate, the Team:

1

Calculated the rate to recover cost of service (in the case of the VOST, simply calculate the VOST).

2

Discussed technical, legal, and regulatory considerations.

3

Examined cost-shifting by calculating the variance between the net cost (cost of service minus the VOS) and the revenue received, for different solar scenarios.

4

Estimated the installed solar photo voltaic system cost that would allow the customer to break-even.

04

Value of Solar

Distributed solar can bring a broad stream of net benefits to the grid

For example, solar production can offset other generation and the fuel and operations & maintenance associated with that generation. Unlike centralized power plants, distributed solar generates at the point of usage, which means it avoided losses that are usually incurred in the transmission and distribution of power. Some jurisdictions use VOS to compensate for distributed solar production.

  • Energy: Distributed solar displaces energy production from other sources which may avoid the cost of fuel, operations and maintenance and start-up.
  • Capacity: Distributed solar may avoid the need for new capacity to meet system peak.
  • T&D Upgrades: Distributed solar may avoid or defer the need for transmission and distribution upgrades or infrastructure.
  • Distribution losses: By generating at the point of use, distributed solar avoids distribution system losses.
  • Transmission losses: By generating at the point of use, distributed solar may avoid transmission losses.
  • RECs: Distributed solar helps the utility to meet its renewable energy targets and may avoid the need to build new renewable energy capacity.
  • Reserves: Distributed solar may increase the need for operating reserves to help balance solar variability.
  • Emissions: By avoiding fuel use, distributed solar may avoid the associated CO2, SOx, and NOx emissions.
  • Fuel Price Risk: Distributed solar may reduce the utility’s overall exposure to fuel price risk.

05

Key Insights

Time Of Use (TOU) incentivizes customer behavior which can reduce overall costs

Utilities can decrease the challenge of cost recovery when there are large amounts of distributed solar on their systems by exploring different rate structures. While they could eliminate the challenge by simply using a fixed charge, this would ultimately drive away, and towards other, less expensive options. TOU rate structures enable utilities to collect a little more from solar customers while also reducing the overall costs of running the grid.

VOS for the year 2018
(Chart shows information in Kilowatt hours)

2017 DPV

LOW »

MEDIUM »

HIGH »

Energy
$0.03574/kWh
Capacity
$0.03773/kWh
T&D Upgrades
0
Distribution Losses
$0.00214/kWh
Transmission Losses
$0.00095/kWh
RECs
$0.00484/kWh
Reserves
-$0.0013/kWh
Total Value of Solar
$0.081/kWh

2017 DPV »

LOW

MEDIUM »

HIGH »

Energy
$0.03442/kWh
Capacity
$0.03048/kWh
T&D Upgrades
0
Distribution Losses
$0.00211/kWh
Transmission Losses
$0.00092/kWh
RECs
$0.00484/kWh
Reserves
-$0.0013/kWh
Total Value of Solar
$0.07147/kWh

2017 DPV »

LOW »

MEDIUM

HIGH »

Energy
$0.02557/kWh
Capacity
$0.02519/kWh
T&D Upgrades
0
Distribution Losses
$0.00210/kWh
Transmission Losses
$0.00068/kWh
RECs
$0.00484/kWh
Reserves
-$0.0013/kWh
Total Value of Solar
$0.05709/kWh

2017 DPV »

LOW »

MEDIUM »

HIGH

Energy
$0.02542/kWh
Capacity
$0.02125/kWh
T&D Upgrades
0
Distribution Losses
$0.00207/kWh
Transmission Losses
$0.00068/kWh
RECs
$0.00484/kWh
Reserves
-$0.0013/kWh
Total Value of Solar
$0.05296/kWh

Avoided energy and capacity are the most significant components of the VOS, and as expected, they decline with increasing penetration of solar. Some components (emissions, fuel price risk) are zero because Springs Utilities does not place a monetary value on them. Others (Transmission & Distribution upgrades, ramping reserves) are zero because they are not needed or not avoided by distributed solar.

In comparison, the 2017 variable charge for most residential and small commercial customers is $.0763/kWH, with an Electric Cost Adjustment (ECA) of $.0273/kWH and Electric Capacity Charge (ECC) of $.0014/kWH for a total variable charge of $.105/kWH.

There are several reasons that the VOS is significantly lower than the current variable charge.

  • Springs Utilities has excess capacity. This means that distributed solar installed in 2018 does not avoid capacity (or bring the associated value) until a decade after it is installed.

  • Gas prices are currently low and anticipated to continue to be relatively low. This means that avoided energy, of which fuel costs are the main contributor, has a relatively low value.

  • Finally, the fact that emissions are not valued and that the Transmission & Distribution system is already robust, lead to a zero value for some of the smaller VOS components.

06

Recommendations

What can utilities like Springs Utilities do to address cost-shifting as distributed solar levels increase?

Springs Utilities does not fully recover costs from NEM  solar customers today, resulting in a greater cost burden on non-solar customers. Alternative rate designs could more adequately recover the costs of serving solar customers, enabling Springs Utilities to more sustainably scale distributed solar and other DERs. Time-varying rates in particular could help to recover costs by lowering cost of service and recovering more of the costs of service.

NOW

  • For the residential and small commercial classes, one option is to increase fixed charges (and simultaneously decrease variable changes to keep revenues fixed). However, increased fixed charges don’t provide useful price incentives to customers.

  • Compensating distributed solar at the VOS rate calculated above would eliminate cost-shifting but would significantly increase bills for solar customers. NEM is required by Colorado statute, but Springs Utilities could offer a VOS option. This is not likely to be attractive for residential and small commercial customers but it could be attractive for industrial customers.

  • A better option may be time-varying rates, such as time-of-use (TOU) rates. The TOU rate options analyzed here would increase bills modestly for solar customers and have slight impacts on non-solar customers. More importantly, TOU rates would incentivize consumers to shift load from peak to off-peak hours, which would reduce the cost of serving those consumers and overall utility costs. Together, the modest bill increase for solar customers and reduced cost of service would help the utility better recover its costs.

  • Moving to TOU rates would require time to educate customers and provide tools for customers to manage their energy use.

NEAR-TERM

  • A combination of a demand charge with a TOU rate may provide the most robust option in terms of the right price signals and fair compensation in anticipation of growing DERs

07

Share & Download

Share this story with your network, and help them understand the value of solar.

The use of solar is growing across North America and many other parts of the world. Share with friends and colleagues so they can understand the real “value of solar” to power systems.

1 The Team recognizes that the term “cost-shifting” is a complex subject in the industry-wide NEM discussion. For the purposes of this Study, the Team defined “cost-shifting” as the shortfall in the revenue collected from NEM customers in meeting their cost of service revenue requirement. In practice, NEM customers may not have the same dollar revenue requirement (i.e., cost of service) as non-solar customers but a detailed analysis along these lines was outside the scope of this Study.
2 In practice not all NEM customers are solar customers and not all solar customers participate in NEM. However, for the purposes of this report, we use the terms “NEM customer” and “solar customer” interchangeably throughout this Report
12 Colo. Rev. Stat. § 40-2-124 (2016). Colorado’s Renewable Energy Standard (RES”), originally enacted in 2004, applies to investor-owned utilities and certain cooperatives and municipal utilities, referred to as “qualifying retail and wholesale utilities.” The RES contains specific requirements for municipal utilities serving more than 40,000 customers, which includes CSU.