by Planning Engineer

There is a lot of public debate around the rates utilities charge solar customers, but very little of it shows an awareness of the embedded technical and philosophical issues.

This posting will seek to provide a general context to help sort out issues in that ongoing debate. It will focus on transmission for simplicity’s sake, but the concepts can be extended to generation as well.

Part of the problem is that people associate rates with costs. Rates are crude ways to collect costs that work out on average. Early innovators can often take advantage of rate structures to get more than they pay for. But as usage patterns change and as more consumers “game” the system – rates need to be refined and adjusted. For example, for many years many systems did well charging residential customers just a flat energy rate. Based on the average use of their customers over the year they were able to collect their fixed cost and variable costs. However, for example, some areas saw increasing numbers of summer cottages that used only limited amounts of energy. Charging for their limited usage did not accrue enough to cover the fixed cost for providing the meter, the line and their usage. Some utilities corrected by adding a fixed monthly charge. People get irate when they have to pay something they did not before. They rarely realize that perhaps before they were getting below cost service and that as rate structures are exploited they need to change.

Traditionally the costs of transmission service were collected from consumers through their electric energy usage charges. For homes with behind the meter solar the price of the transmission cost can’t effectively be distributed for them across regular usage hours. While transmission costs are driven by peak demand periods, it would be extremely cumbersome and costly to individually monitor and bill residences for their contribution to transmission costs. Rate methods are devised to get approximate appropriate charges from individual customers, but these rate methods need to keep up with changes in how customers use (and “game”) the system.

Customers with their own generation are receiving a different service from the utility than traditional customers and traditional cost structures will not work for them. They are benefiting from back up service that will not be paid for by their use under existing rates in most cases. Extra costs are incurred to provide backup service to residential solar customers from the grid. Utilities can’t collect transmission expenses from them that are spread out across hourly energy costs. To recoup the costs associated with backup, utilities either can have a general charge for backup, charge backup customers’ extremely high costs when it is needed or subsidize them by charging rates designed for higher usage customers. The subsidized approach was acceptable when roof top solar made up a small portion of the customer base. The inequity could be ignored because supporting fledgling renewables did not cost other customers much and was seen as desirable or not worth the trouble to fix. This approach will cause problems with higher penetrations of intermittent renewables.

A digression

To get away from the emotion generated by consideration of renewables here is a short discussion of potential philosophies around cost sharing.

Imagine you are having a contractor do some work in your backyard for a cost of $8,000. You learn that your neighbor is planning a similar smaller project that will cost him $4,000. You talk to your contractor and he can combine both jobs and do it for $10,000. There are multiple ways that the $2,000 savings could be apportioned.

Business Model: You go to your neighbor with an offer that competes with his. Perhaps because you are overseeing all the work, he would prefer to have you do it for $4,000 or perhaps you have to lower the price some to be competitive. But basically you seek to use your capabilities to meet your neighbor’s need and offer him some small benefit, so you can maximally offset your costs.

Subsidy Model: Perhaps you decide to treat your neighbor. If you decide to pay more than $8,000 for the combined project you are subsidizing your neighbor. He could see anywhere from a $2,000 to $4,000 benefit from the combined project from this approach. There likely needs to be some other motivating factor to make you accept this arrangement.

Incremental Cost Model: You pay the $8,000 for your share and charge the neighbor the $2,000 increment. The neighbor gets his project at half of what his cost would be otherwise, as the entire $2,000 saving goes to benefit him. You’ve done your neighbor a favor, but received no benefit.

Shared Savings Model: You and your neighbor each reduce your cost by $1,000 or perhaps you each reduce your cost by 20%. This provides benefits to both parties and encourages cooperation from both sides.

None of the above models are generically right or wrong, but may be more or less applicable in various situations.

Hypothetical renewable example

Imagine a system with a level of solar roof penetration such that the transmission system would cost $10 billion for combined service to traditional and solar rooftop customers. If the system only served traditional customers it would cost $8 billion. A system to serve just the solar rooftop customers would cost $4 billion. Let’s look at the models introduced above in the context of this example.

Business Model: the utility would seek to get as close as possible to $4 billion from the solar customers to provide benefits to their traditional customers. I don’t believe anything approximating such an arrangement has or would occur in the electric utility industry. Such a model would cripple the potential for most self-generating customers who require grid back up as they do not have other feasible alternatives.

Subsidy Model: The traditional full service customers could be responsible for most of the costs. This is the model which dominates the utility industry today. At small penetration levels the costs are not large for the traditional customers, but as costs increase they can get very burdensome increasing the risk of a death spiral. A death spiral would occur if rising costs to traditional customers cause defections to solar customers and the reduced customer base has to continue subsidizing the growing base of solar customers.

Incremental Cost Model: Here the traditional customers are held neutral and the solar customer reaps all the benefits of the combined system. This is a controversial model today because it makes it very difficult to justify solar programs in many areas.

Shared Savings Model: For those familiar with cost accounting, charging renewable customers their fully allocated costs would be one way of doing this. I don’t know anywhere that this approach is currently being seriously and successfully advocated in cost of service studies for renewables, though it is generally common for other classes of service. (I welcome reader input and enlightenment here.) It would greatly reduce the risk of a death spiral but it would also greatly delay the implementation of renewable resources until such time as they were more cost competitive.

Discussion

History, inertia and the desire to support renewables have resulted in significant support for the idea that traditional customers should subsidize renewable customers. Perhaps this is coupled with the idea that traditional customers should be punished while renewable customers should be rewarded. Many of the battles around charges to solar customers are just over what the appropriate degree of the subsidy should be. Moving away from the subsidy model engenders great conflict. I have not read all the details, but I believe the Salt River Project’s controversial pricing plan is just trying to recoup the incremental costs of serving rooftop solar. (Perhaps they are asking for some help with shared/common costs. Any help readers?) In the press Salt River Project has been accused of “penalizing” solar customers, being anti-competitive, sabotaging their customer’s right to choose and far worse.

We need to move the public debate so that it is not just about the level of subsidy utilities should provide to solar. The subsidy model nearly guarantees that if the system transitions to high levels of local renewables there will be a major death spiral collapse as the traditional customer base erodes and the subsidized population increases. While some envision utilities as highly profitable entities with deep pockets that can well afford massive subsidies, in fact, the subsidies come from the ratepayers. Whether utilities pay for their system through money collected from their traditional customers or backup customers, their profits are in the hands of their public service commissions. Unlike the utilities, which will make money if they work with their regulators, ratepayers will be materially impacted by the cost sharing model selected. Indirect taxes placed upon electric utility ratepayers are terribly regressive and in the area of rooftop solar they result in significant wealth transfers from the less affluent to the more affluent.

Renewable subsidies disproportionately impact the poor, impacting their quality of life. To avoid these effects traditional customers should pay no more than incremental costs. If as a society we want to offer subsidies to rooftop solar we should consider funding it through a less regressive and punishing approach. That source will likely be less convenient to target but far more appropriate.

Aside from the appeals to fairness for ratepayers, the other models have further benefits. They send appropriate price signals to encourage more rational choices. They could help provide better flexibility for a transition to a renewable future that avoids price collapses and is open and potentially better able to serve newer and better “clean” energy alternatives.

JC note: As with all guest posts, please keep your comments relevant and civil.