California’s long-awaited proceeding on distributed solar compensation may offer important answers to new questions about the costs of renewables that will come with the Biden energy transition.
Net energy metering (NEM) compensates distributed solar owners for generation exported to the power system at the retail electricity rate. At low solar penetrations, that may not impose significant costs to other customers. But utilities and solar advocates differ on the cost-benefit balance at the higher penetrations now forecast by the U.S. Energy Information Administration, the Solar Energy Industries Association (SEIA), and others. To get past the controversy, stakeholders across the U.S. are working toward a successor to NEM.
"At the heart of any good successor tariff is the recognition that retail rate NEM overpays customer generators," Edison Electric Institute (EEI) Executive Director for Regulatory Affairs Adam Benshoff said. Because it is passed to other customers, it is "an unfair and unnecessary subsidy" and the best way to support distributed solar’s growth is "a properly designed NEM rate that doesn’t overcompensate."
But imposing a successor tariff is premature in most states now because research shows "solar’s benefits to the grid exceed its costs when penetration is low," SEIA Vice President of State Affairs Sean Gallagher said. Research also shows that "at penetrations of 5% to 10%, the cost-benefit curve starts to flatten and a new policy that aligns customer behavior with grid needs can benefit both."
For regulators, utilities and solar advocates who would design a new tariff to support solar growth, the challenge is to protect non-solar owning customers by balancing any increase in system fixed costs with the value of the system benefits from increased solar.
A successor tariff that imposes more costs than benefits is unsustainable and distributed solar’s future is in a successor tariff that benefits all stakeholders, solar advocates and utilities agree. That is why attention is turning to California where the world’s fifth largest economy, with a 22.3% solar penetration, just opened a new proceeding to reconsider NEM.
Across the country
Because NEM begins to impact non-solar owning customers when penetrations reach 5% or more of peak demand, concerns about distributed solar’s costs and benefits begin with its forecasted growth. And distributed solar's growth was forecast to be "10% to 15% between 2023 to 2025" without extension of the federal tax credit, according to 2020 Q4 SEIA-Wood Mackenzie U.S. Solar Market Insight Report, released Dec. 15.
The latest COVID-19 relief bill’s functional extension of the tax credit through 2025 and anticipated further support for clean energy from the incoming Biden administration seem likely to accelerate that growth and increase the federal and state actions around the country to reconsider NEM.
Federal regulators’ July 2020 decision that NEM is not under their jurisdiction assured that solar policy designs will continue to suit individual state markets. During Q3 2020, 17 states were working on successor tariffs to alter NEM compensation, the North Carolina Clean Energy Technology Center (NCCETC) Q3 U.S. solar policy update reported.
Many proposals are based on the avoided wholesale cost of electricity to the utility.
Utah regulators are now deciding between Rocky Mountain Power’s $0.0156/kWh estimate of that cost and Vote Solar’s $0.222/kWh estimate to replace the current $0.092/kWh NEM compensation. Both included avoided fuel and transmission and distribution line loss costs, but distributed solar’s "health and climate benefits are notably absent from Rocky Mountain Power’s study," Utah Clean Energy reported.
"The solar industry, utilities and regulators have realized that linking compensation and the value of DER to the system can address cost shift concerns."
Autumn Proudlove
Senior Policy Program Director, North Carolina Clean Energy Technology Center
Rocky Mountain Power can obtain similar benefits at a lower cost from utility-scale solar, its September 15 filing in the proceeding responded.
Using an avoided cost framework, Arizona’s 2017 Resource Comparison Proxy provides a "pathway" away from the cost shift "by focusing on the actual cost of energy," EEI’s Benshoff asserted.
That compensation rate is also based on what utilities pay for utility-scale solar, Arizona Residential Utility Consumer Office (RUCO) Director Jorge Fuentes said. Reductions from the retail rate can only be 10% per year in Arizona, but it will eventually fall to the avoided cost, and policymakers are looking at other approaches to supporting distributed solar's growth, Fuentes said.
Indiana, Michigan and Iowa are also moving to an avoided cost framework, Environmental Law and Policy Center (ELPC) Staff Attorney Nikhil Vijaykar said. "But the utilities in those states have solar penetrations below 2%, and often below 1%, and there is more benefit to their customers than costs, because cost shifts are not significant at those penetrations."
A 2016 Illinois law required Illinois regulators to study compensation structures when distributed solar penetration reached 3% of peak demand and to design an upfront rebate to replace NEM at a 5% penetration. In April, Ameren Illinois surprised stakeholders and regulators by announcing it had reached 3%, and would reach 5% in October.
Solar advocates said Ameren's penetration is only 1.4%, Vijaykar said. In the debate, Ameren proposed interim compensation based on avoided cost. It is on hold, pending a Jan. 21, 2021, commission hearing.
The lesson here for other states is that a successor tariff policy should allow "enough time for regulators, utilities, advocates and industry stakeholders to specify details," Vijaykar said. "I wish I could point to a good model of that work being done, but I can’t."
South Carolina may be that model, according to solar and utility representatives who proposed a new type of successor tariff for the state.
"The solar industry, utilities and regulators have realized that linking compensation and the value of DER to the system can address cost shift concerns," NCCETC Senior Policy Program Director Autumn Proudlove said. "That is why granular details like when and where the benefits of DER are delivered are becoming policymakers’ focus."
South Carolina’s Act 62, enacted in 2019, was not a sustainable approach to its growing DER penetration, utilities, solar advocates, and policymakers saw when controversy over compensation was renewed after its cap on NEM was reached.
A solution proposed by Duke Energy and solar advocates that would end the cost shift debate is now before South Carolina regulators. It links a time-of-use (TOU) rate and a more dynamic time-varying rate that addresses critical peaks with an upfront rebate for participation in Duke's demand response and energy efficiency programs.
If approved, it would be an advanced rate design that grows DER, reduces utility peak demand challenges, and supports policy goals without imposing costs on other customers, NCCETC's Proudlove said.
"States need to get ahead of the solar penetration with forward-looking rate designs."
Lon Huber
Vice President for Rate Design and Strategic Solutions, Duke Energy
The high-level Act 62 objectives required eliminating the cost shift, ensuring the solar market remain uninterrupted and offered the option of time-varying rates and other strategies, Duke Energy Vice President for Rate Design and Strategic Solutions Lon Huber said. The policy elements address those objectives with "best practices from other states in a scalable long-term framework."
Other states have made more progress on a successor tariff.
Hawaii was the first state with distributed solar penetrations high enough to threaten system stability and struggled for years to design a successor tariff. It took rulings by Hawaii regulators in October 2015 and November 2017 to produce the TOU rate design that is now shifting Hawaii’s solar installations to solar plus battery systems.
Hawaii’s TOU rates worked but regulators "waited too long," Duke’s Huber said. "States need to get ahead of the solar penetration with forward-looking rate designs."
California’s utilities and solar advocates agree a forward-looking successor tariff must use the state’s nation-leading rooftop solar penetration to address its increasingly dynamic system needs with storage. But the state's utilities insist addressing the cost shift must come first.
California’s conflicts
California set NEM compensation at the retail electricity rate in 1996. In 2015, the Assembly Bill 327-required NEM 2.0 proceeding mandated TOU rates for all new solar customers and required a successor tariff from the next NEM reconsideration.
When the California Public Utilities Commission (CPUC) NEM 3.0 proceeding (R2008020) opened earlier this year, California had approximately 9,356 MW of net-metered solar. An August 2020 draft evaluation of NEM concluded there is still a cost shift that allows residential customers, the vast bulk of net-metered solar owners, to pay less than the cost to serve them.
The state’s three dominant IOUs, Pacific Gas and Electric, San Diego Gas and Electric, and Southern California Edison (SCE) want no delay in addressing the cost shift, their initial Joint Utilities filing said.
NEM compensation is a "subsidy" by non-solar-owning customers to solar owners, they wrote. For distributed solar to "grow sustainably," as ordered by AB 327, the NEM program "cannot deplete or permanently damage" the non-solar owning customers who "fund it."
"Solar challenges utilities’ outdated business model by allowing customers to generate their own local clean energy and buy less energy from the utility."
Susannah Churchill
Senior Regional Director for the West, Vote Solar
Compensation should be "decoupled from the retail rate," SCE Managing Director, State Regulatory Operations Gary Stern said. Ideally, compensation would be at or near the avoided cost of procuring energy from wholesale markets. But it should provide incentives for benefits "to the grid and other customers."
The existing retail rate NEM is, however, not an incentive that will grow the solar-plus-storage systems that could be used by IOUs to enhance reliability and protect against blackouts, Stern added.
Solar advocates also support a successor tariff, but do not want existing compensation ended until its implementation is entirely ready, a filing from the California Solar & Storage Association (CalSSA) and a joint filing from Vote Solar and SEIA agreed.
"That allows for planning a transition to the new compensation," SEIA’s Gallagher said.
A successor tariff can satisfy the AB 327-prescribed sustainable solar growth and protection of non-solar owners with incentives for storage, the Vote Solar-SEIA filing agreed with the IOUs.
But "sustainable growth" must also mean protecting existing solar customers and the solar business, Vote Solar Senior Regional Director for the West Susannah Churchill added. "Solar challenges utilities’ outdated business model by allowing customers to generate their own local clean energy and buy less energy from the utility," she said. That may not make for an "easy consensus."
The TOU rate imposed on solar customers by NEM 2.0 could be the best type of incentive to grow storage, CalSSA’s filing said. But a low off-peak price and high peak price that would drive storage adoption is "just the opposite" of the high midday compensation that would most benefit present solar owners, CalSSA Regulatory Affairs Senior Advisor Scott Murtishaw said.
Energy storage provides "tremendous benefits" to the power system and customers, but is "complicating" for development of a successor tariff to eliminate the cost shift, EEI’s Benshoff said.
Storage will "absolutely" be central in California’s 3.0 discussion, SEIA’s Gallagher added. "Solar companies want to sell packaged solar and storage systems, utilities want it to help manage load, and regulators have seen the resilience and reliability it adds to the power system."
AB 327’s focus on protecting all customers could make input by independent ratepayer advocacy group The Utility Reform Network (TURN) significant in the debate.
"Immediate decisive action" is needed because retail rate NEM "is driving electrical rates up at an unsustainable rate," TURN’s initial filing said, echoing the IOUs' position. But TURN agreed with solar advocates that the right successor tariff will allow solar to be a cost-effective and equitable part of achieving the state’s building decarbonization, transportation electrification and climate goals.
There are many controversial details that need to be resolved in the proceeding, including the size and type of eligible resources, the "grandfathering" of existing solar customers, and specifics of the tariff's calculation, TURN added. Regulators must also address technical limits on charging and discharging storage that will figure into that benefit-cost calculation.
In addition to the cost shift and these other controversial details, another area of conflict is in assuring that the new tariff allows low and moderate income customers access to solar. But utilities want this "economic justice" issue set aside until the cost shift is resolved. Equity will come from addressing the shift of costs imposed by "affluent owners" on "customers who cannot afford, do not have access to, or do not want private solar," EEI’s Benshoff agreed.
The commission must "prioritize equity as a key factor in a successor tariff because it will increase solar access and solar savings for low income families," Vote Solar’s Churchill said.
"There are financing strategies that can make equity work," SEIA’s Gallagher added. Mechanisms identified as effective at driving equity in a recent DOE study, like no-upfront-charge leasing and on-bill financing, may be introduced in the proceeding, he said.
The basic challenge of the successor tariff design is "balance," TURN Staff Attorney Matt Freedman said. It must balance a lower compensation to solar and a higher installed cost for adding storage by deriving more value in the form of higher compensation for stored solar exported when it meets system needs.
The CPUC, Joint Utilities and TURN filings called for a successor tariff by the end of 2021. But the commission "must take the time and expend the resources" to build a "robust record" on which to determine a successor tariff, the Vote Solar-SEIA filing said.
A CPUC ruling on the scope of NEM 3.0 is expected soon.
