Utilities, by and large, are not fond of customer self-generation of any kind, be it combined heat and power (CHP), rooftop solar PV panels or even efficient appliances. What they like are devices that guzzle juice out of the network and make the electric meter spin fast. That’s why wide adoption of central air conditioning, despite exerting extreme stress on the distribution network and creating sharp spikes in peak demand during hot summer days, was welcomed as a big boon across the industry.
More kWhrs consumed, the bigger the bills, more revenues, expanded opportunities to invest in upgrading the network, more assets in the rate base and more profits. Those were the good old days.
In recent years, the rapid proliferation of rooftop PVs in certain jurisdictions has caused the meter to spin backwards, at least during the sunny periods when panels typically generate more than consumers need at the premises – with the excess feeding into the distribution network. It does not take rocket science to see why, all else being equal, a typical utility would not favor having more of its customers become self- sufficient, at least part of the time.
Utilities’ dislike of self- generation is aggravated by the fact that their traditional revenue mechanism was tied mostly or exclusively to volumetric sales as measured by the spinning disk on the meter – now replaced with advanced smart meters that no longer have spinning disks.
To those who say this is too much ado about nothing, Energex, a distribution company serving Brisbane’s metropolitan and surrounding areas in sunny Queensland, Australia offers some sobering statistics that might keep more utility CEOs awake at night elsewhere contemplating what may be coming their way sooner, or later. Energex’s latest statistics, covering the period to August 2015, shows what distributed solar generation can do:
- Energex’s customers have collectively installed over 1 GW of solar PV capacity on their roofs – that is the equivalent capacity of a large nuclear power plant;
- At last count, nearly 300,000 PV systems have been installed growing at 3,000 per month with the average system having 3.5 kW of capacity;
- The penetration rate, around 2.8 out of every 10 detached homes, is among the highest in Australia, perhaps globally;
- The combined installed solar on the network now accounts for around 13% of all Energex residential consumption and growing;
- Typical prosumer – that is a consumer that is a net producer at least part of the time – now produces half their consumption; and
- The average feed-in tariff paid per day to a customer with solar PV is $1.46. The numbers are sobering indeed.
- Australia, of course, may be an extreme case because,
- It is blessed with extremely high levels of solar insolation most of the year;
- Has a high percentage of residential consumers living in detached homes with big roofs; and
- Fairly high retail tariffs – which make self-generation commercially advantageous.
In Australia, as well as the US and many other parts of the world the debate is now focused on how to deal with the rapid growth of distributed self-generation, its impact on utility revenues, on the distribution network and – most controversial – the equity issues arising from the fact that under existing tariffs, solar customers end up getting subsidized by non-solar ones, or that is the claim most often heard from incumbent utilities and some consumer advocates.
A recent study by Grattan Institute covered in August 2015 issue of this newsletter, for example, concluded that Australia’s solar feed-in-tariffs (FiTs) – now mostly phased out – have been a costly policy mistake not to be repeated. This claim was immediately refuted by a number of experts and academics who pointed out that the Grattan study failed to include all the benefits of the solar investments made by individual households and relied on questionable accounting and discounting methods.
Another recent report by Frontier Group that examined the cost/benefits of solar PVs in the context of net energy metering (NEM) laws in the US concluded that on average, customer-owned solar PVs are a net gain, i.e., the owners of grid-connected solar arrays offered net benefits to the electric network when reduced environmental compliance costs, reduced capital investments, and avoided energy costs are included in the analysis.
As illustrated on graph on page 19, the Environment America Research and Policy Center, which looked at 11 previous studies of net metering’s effects on both the grid and on society as a whole, found that in every case, the value of solar exceeded the prevailing retail tariff.
Collectively the studies suggest that the median value of solar power, roughly 17 cents/kWh exceeded the average US retail electricity rate of about 12 cents/kWh. Taken at face value, this means that not only has solar net metering not been harmful to non-solar customers, but that utilities have, on average, actually been underpaying for the generated solar electricity.
Referring to the survey, Karl Rábago, Executive Director of the Pace Energy and Climate Center, who has developed a methodology for valuing the costs and benefits of distributed solar reported in the Sept 2015 issue of this newsletter, said,
The solar studies reviewed in this reportconfirm that huge amounts of solar have already been developed without paying the full value that solar brings. Not only does that mean that solar customers have likely
been subsidizing non-solar customers and the utility, but that over the long term, continued development of solar promises downward pressure on electric rates for all.
Different studies relying on different methodologies and using different assumptions lead to vastly different results, hence the claim that solar PVs are a big policy mistake – as in the case of Grattan Institute – or a under-appreciated investment, as reported by Frontier Group.
With a few exceptions, such as in Australia, the solar PV panic, however, may be over-rated. According to the Solar Energy Industries Association (SEIA), the average residential solar energy system in the US feeds between 20-40% of its output to the grid, and much of this serves nearby customers’ electric loads – with offsetting costs such as avoided fuel costs.
Moreover, solar PVs and other forms of self-generation such as CHP are not for everyone. For many networks and for years to come, the great majority of customers would remain dependent on the local utility and the distribution network for the bulk of their needs. For millions of consumers living in densely packed high rises in major cities, solar PVs are not much of an option regardless of tariffs or NEM laws – there aren’t enough roof space per capita.
In case of the solar customers, their dependence on the grid will in fact increase since they will need the network to act as a gigantic battery to balance their self- generation and load while enjoying the grid’s reliability. Batteries and storage devices will help, but they are not for everyone either.
As Severin Borenstein, a Professor at Haas Business School at Univ. of California at Berkeley wrote in a recent blog titled the decline of sloppy electricity rate making on 24 August 2015, the critical issue facing the industry and its beleaguered regulators may be how best to manage ―the so-called inefficient bypass, which is described as a situation when a customer would find an alternative supplier (or self-generation) that wasn’t actually lower cost than the utility, but offered a lower price.
Inefficient bypass, always a problem when utility tariffs were not properly set and/or cost-reflective, is becoming more pronounced in places were tariffs are high and tiered, as in California (graph on page 20), pushing hordes of customers to self-generate even though they may be better off to buy from the network. As Borenstein notes in his recent Blog, historically,
Avoiding inefficient bypass meant the utility tried to keep customers for which it was the lowest-cost supplier by setting price close to that cost.
Luckily for utilities — and for the stress level of regulators — few customers had real bypass opportunities in those days, certainly not residential or small commercial customers. But that luck has run out; technology is now making every customer a potential bypasser.
Borenstein adds (emphasis added),
Except for some very particular narrow applications, none of these technologies lowers total grid costs by as much as it lowers customer bills, which means bypass leaves the utility with a revenue shortfall.
Borenstein appears undaunted by the threat of much dreaded utility death spiral. He says,
Something is dying alright, just not the utility. It’s the ability of regulators, utilities, and interest groups to push around revenue collection among customers without the customers pushing back.
Which explains the title of the blog, the demise of sloppy rate making. The pressure, he maintains, is on the regulators to prevent consumers to become prosumers when there are no net societal gains. Borenstein offers a number of examples of how sloppy rate making has come to haunt both the utilities and the regulators.
- Try to punish high-consuming households by raising their price many times above cost – as has been done in California for the last 15 years – and they will now install solar to reduce their grid purchases, undermining revenue collection.
- Try to use ―demand charges‖ that are based on a customer’s peak usage — regardless of whether its peak coincides with system peak — and soon they will be installing batteries to smooth their peak, but in many cases without helping to lower grid costs.
- Try to raise retail rates for most customers in order to offer discount electricity to low-income households and the high-price customers will turn to all forms of distributed generation instead of subsidizing the poor.
- Try to stick commercial and industrial customers with more of the utility costs and they will invest in CHP and other onsite technologies.
- Try to encourage demand shifting to off peak with exaggerated peak-period prices during all summer weekdays and the customer will use batteries to shift not just on the hottest high- demand days, but also on days when there is no benefit to society, though still an arbitrage play for the customer.‖
These examples lead to two important observations by Borenstein,
- First, ―… technology is making it ever easier for customers to respond to prices, and to arbitrage between price differences.
- Second, ―… the flexibility regulators have had in (the past in) designing retail rates to pursue other goals – whether helping the poor, subsidizing grid-scale renewables, paying for energy efficiency programs, or just keeping rate design ―simple – is going to come under increasing pressure … .
That, in other words, will lead to the end of sloppy rate making. Politically-motivated cross subsidies among and across customer classes, tariffs designed to promote socially desirable outcomes, etc. – long tolerated due to the inability of consumers to bypass them – will become increasingly untenable. On this, Borenstein writes,
Economists have for years argued that utility rate design should follow cost causation principles, because departures from cost will lead to inefficient customer response. Regulators have often paid little heed largely because the inefficiency was small when customer ability to respond was limited. That left regulators a free hand to harness rates for pursuit of other policy agendas.
The increased pressure on regulators to prevent inefficient bypass by moving towards cost-reflective tariffs has a silver lining, as Borenstein notes,
- Accurate cost-based pricing can not only lower costs, but can also use customer-side participation to gain the flexibility that will be required to integrate more wind and solar power.
- Distributed generation, storage, electric vehicle charging, and smart customer-side usage technologies (think controllable communicating thermostats) mean that the inefficiencies from sloppy rate design – prices that depart substantially from cost – will be magnified.
The debate on net energy metering, solar feed-in-tariffs, and the relative gains and pains of moving towards a smarter, more decentralized electricity delivery network which also happens to be more efficient, more renewable and ultimately sustainable boils down to having efficient and smart price signals – not just for consumers and prosumers but also for everyone upstream of the meter, all the way to the generators, wholesale markets and the grid operator.
The misunderstood and under-appreciated regulators are likely to be in the limelight.
This article was originally published by EEnergy Informer. Reproduced here with permission