In television’s longest running game show, contestants are challenged to guess the prices of a wide variety of consumer goods. The contestant who comes closest to the actual price, without going over, is the winner.
I found myself thinking about The Price Is Right at a recent workshop in Denver, hosted by the Community Solar Value Project—one of 14 innovative Solar Market Pathways projects funded by the U.S. Department of Energy. Community solar “prices” were one of the hot topics at that workshop. (For simplicity, we’ll refer to “prices” regardless of whether participating customers pay a fixed price per kilowatt-hour for their share of the output of the community solar installation, or receive bill credit for each kilowatt-hour.)
“A fortune in fabulous prizes may go to these people today if they know when The Price Is Right!” – Johnny Olson
Utilities from all around the country are wrestling with the challenge of getting solar prices right, and like those game show contestants, they don’t want to guess too high. Most of the national debate thus far has focused on credits for behind-the-meter, rooftop solar generation, but pricing for community solar projects is nearly as challenging and may require different solutions.
When the hosts of the Denver meeting asked me to talk about pricing at their workshop, I made it clear that I wouldn’t be able to tell the attendees what the right price is, because that price will vary from one utility to the next. But I and my colleagues at RAP have given a lot of thought to rate design principles that can lead utilities to the answers that are right for their unique circumstances. We’ve concluded that the classic references on electric utility rate design, written in the 1960s and 1970s, provide a solid foundation on which to build a more modern, updated framework. The “classics” that we most frequently reference are:
- Bonbright’s Principles of Public Utility Rates (1961);
- Garfield & Lovejoy’s Public Utility Economics (1964); and
- Kahn’s The Economics of Regulation (1970).
Each of these classics identifies a set of fundamental principles that can guide utilities and utility regulators through the treacherous waters of rate design. Examples of guiding principles taken from Bonbright’s work include:
- Tariffs should keep the utility viable;
- Tariffs should fairly apportion the utility’s cost of service among consumers;
- Tariffs should promote economic efficiency in the use of energy as well as competing products and services; and
- Tariffs should be simple, understandable, acceptable to the public, feasible to apply, and free from controversy as to their interpretation.
All the rate design “classics” were written in a time when monopoly electric utilities satisfied all the generation, transmission, and distribution needs of their customers. But in the decades since, we’ve seen the emergence of independent power producers, competitive wholesale electricity markets, retail energy supply competition (in some states), programmatic energy efficiency, and behind-the-meter generation. Considering these significant changes, RAP has produced or contributed to several publications in recent years that strive to update the fundamental principles of rate design and apply them to the challenge of distributed generation. In Smart Rate Design for a Smart Future, we distill our thoughts into three simple, core principles:
- A customer should be allowed to connect to the grid for no more than the cost of connecting to the grid;
- Customers should pay for the grid and power supply in proportion to how much they use, and when they use it; and
- Customers delivering services to the grid should receive full and fair value—no more and no less.
I’m confident that utilities can apply RAP’s simple rate design principles, combined with elements of the “classics,” to the special case of community solar program offerings and get the price right for their locale. What might that entail? As far as principle 1 goes, it simply means that utilities shouldn’t be using non-bypassable monthly customer charges to recover transmission and distribution costs, except for the costs of the customer-specific facilities (final service line and meter) connected to the customer’s premises. This is true for community solar participants and non-participants alike. So now let’s focus on how principles 2 and 3.
The current national debate over distributed generation tariffs centers on two related facts. First, customers with behind-the-meter solar are still connected to the grid, and use the grid at virtually every moment to either import or export electricity. Utilities appropriately recover a large portion of the costs of the grid through volumetric ($/kWh) charges, but net-metered customers purchase fewer kWh and thus contribute less revenue toward the maintenance of the grid. Second, most net metering tariffs award participating customers full retail rate credit for any energy not consumed on site, whereas utilities normally purchase or avoid energy at a much lower wholesale rate. The grid costs do not change much in the short run as sales go up or down.
In the case of community solar projects, all the generated energy must be delivered over the utility’s wires to customers (assuming the project is not located on participating customers’ premises, as might be the case for a multi-family housing project). This simplifies our application of rate design principle 2: if the community solar project is connected to the transmission system or to a different distribution system than the one serving the participant, that customer should pay the same grid/delivery costs that non-participating customers pay. If the project is connected to the distribution system that serves the participant, that customer should pay the same distribution system costs as other customers, but less (or possibly nothing at all) for transmission system costs for the power received from the community solar project.
The trickiest part comes with principle 3. Under a strict interpretation of that principle, community solar program participants should receive a bill credit for each generated kWh that reflects the full value of that kWh at the time and location where it is generated. That full value should certainly reflect the utility’s avoided costs for energy, capacity, and ancillary services, but it should also reflect other values such as avoided environmental and health impacts, avoided fuel cost and fuel supply risk, and market price effects. Proper accounting for these benefits of renewable energy production can add 2 to 5 cents per kWh to the undifferentiated value of energy. Some analysts also argue for the inclusion of macroeconomic effects, such as lower energy bill leakage from the community.
However, this is where the “art” of rate design comes in. As we’ve noted, one of the still-applicable principles of classic rate design is that tariffs should be simple and understandable. Inevitably, tradeoffs must be made that balance the principle of keeping tariffs simple with the principle of getting the prices right.
One possible way to balance these principles is to model the expected total value of the community solar project’s output over a typical year, using time-varying values for all the categories of value described here, but then normalize that annual total into a single value per expected kWh and apply a simple, fixed credit to the participating customer’s bill for each kWh generated. This is appropriate in part because the hours when the solar project will produce are reasonably well-known in advance.
The devil, of course, is in the details. And nobody is saying this will be easy. But the good news is that difficult rate design decisions can be guided by combining time-tested and widely-accepted principles that have served us well for decades with a short list of new principles suitable to today’s changing grid.