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Essential Elements in the Value of Solar

| Written by John Farrell | No Comments | Updated on Sep 27, 2013 The content that follows was originally published on the Institute for Local Self-Reliance website at http://www.ilsr.org/essential-elements-solar/
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Comments to the Minnesota Division of Energy Resources

Re: Value of Solar Stakeholder Process

From: Institute for Local Self-Reliance

   John Farrell, Director of Democratic Energy

Date: September 20, 2013

Background

The value of solar component of the state’s new solar energy standard must be considered in the context of the state’s energy goals, expressed in two statutes:

  1. The 2007 Next Generation Energy Act’s goal of reducing greenhouse gas emissions by 80% by 2050 and that state should pursue “the development and use of renewable energy resources wherever possible.”
  2. The 2013 Energy Omnibus law, which includes “a Minnesota energy future study on how Minnesota can achieve a sustainable energy system that does not rely on the burning of fossil fuels.”

Solar energy is a valuable strategy for accomplishing both the statutory goal of significantly reducing carbon emissions and of using renewable energy to eliminate the use of fossil fuels.

The Value of Solar Calculation

The value of solar tariff statute requires the tariff methodology to “account for the value of energy and its delivery, generation capacity, transmission capacity, transmission and distribution line losses, and environmental value.”  It also allows the Department of Commerce to consider other factors, “including credit for locally manufactured or assembled energy systems, systems installed at high-value locations on the distribution grid, or other factors.”

The following comments address depth and breadth of the factors to consider.

Comments on Value of Solar Factors

Value of Energy

Solar energy offsets the need to purchase additional energy from other sources, but as solar grows (along with other renewable energy), it also reduces demand on existing fossil fuel power plants.  In particular, in Ohio[1] and in Germany,[2] this demand reduction effect has reduced wholesale power prices.  The value of reduced wholesale power prices should be include in the energy value of solar power.

Capacity Value

The Sept. 17 presentation from the Rocky Mountain Institute outlined a good framework for valuing the capacity provided by solar power, but there are three additional factors to consider:

  1. The deferred (and perhaps avoided) cost of large-scale infrastructure projects like new (particularly “baseload”) power plants and high voltage power lines.  Distributed renewable energy is growing rapidly and the approach of solar parity in many regions of the country will only accelerate the trend.  Long before their useful end of life, central-station power plants and transmission lines (with 40 or 50-year economic lives) may prove economically unviable.  The Spiritwood coal-fired generating station is a perfect example, stranded by flattened electricity demand.  The rapid change in electricity demand (or growth in distributed power generation) makes long-term utility investments in a centralized power system questionable.  It also adds to the value of solar, to defer or avoid costly stranded investments in infrastructure that will leave shareholders and ratepayers holding the bag.
  2. A locational component to the capacity value of solar.  The Long Island Power Authority adds 7¢ per kWh to its long-term contract purchase price for distributed solar projects located in the highest demand areas of its service territory.[3]  A similar locational analysis should be conducted by Minnesota utilities offering a value of solar tariff.
  3. The overlap between capacity value and energy losses.  As covered in the Sept. 17 briefing by RMI, higher load on distribution feeders leads to higher relative line losses.  The capacity value of solar (or another factor) should reflect that these line losses are relative to line load.

Value of Economic Development

A dollar spent at a locally owned retail store can circulate two to three times further in the local economy.[4]  Minnesota has no native supplies of fossil fuels for electricity generation, and much of its power generation is owned by out-of-state shareholders or private companies.

Distributed solar saves on the cost of imported fuel but also results in a multiplier of energy dollars in the state’s economy. This value should be included in the market value of solar indicate a purchase preference for energy that delivers greater economic impact to the state’s ratepayers and taxpayers.

Furthermore, investments in solar energy deliver more marginal jobs per megawatt of capacity than investments in other (particularly fossil fuel) energy sources.[5]

Environmental Value

Electric utilities enjoy an enormous cross-subsidy from non-customers and customers alike: the health and economic costs of greenhouse gas emissions, criteria pollutants, and water consumption from fossil fuel extraction, delivery, and combustion.  The value of solar should include and quantify all of these avoided costs, including but not limited to:

  • The cost of compliance (as measured by expected ratepayer impact) with existing and anticipated environmental regulations.  At a minimum, including EPA’s Cross-State Air Pollution Rule (CSAPR) and Carbon Pollution Standards for the Power Sector (due in 2015).
  • The health and economic costs of pollution currently (and anticipated to be) regulated by federal and state government, with expected ratepayer impact if costs were internalized.
  • A robust sensitivity analysis of these costs (i.e. including but not limited to the Obama administration’s social cost of carbon dioxide, ranging from $12 to $129 per metric ton).[6]

Reliability and Resilience

Electric system reliability is a core function of an electric utility, and maintaining or increasing reliability provides significant benefits to ratepayers. The value of solar should include the broadest possible valuation of its contribution to reliability including:

  • Economic losses to customers, which are substantial and avoidable.[7] A reasonable methodology would be similar to that used in the National Research Council study in 2010 (as shown in the RMI presentation on Sept. 17).
  • Utility internal costs to deal with system outages, including the capacity value of human and physical resources.  For example, increased reliability and resilience from smart grid investments saved the Chattanooga, TN, utility over $1.4 million in a single storm.[8]

Calculation Timeframe and Discount Rate

Utility planning for infrastructure is done on a 40 to 50-year timeframe, and the value of solar should be similarly long-term.  Values associated with solar energy should be amortized over a commonly accepted timeframe for estimating solar module output (30 years at a minimum, given 25-year system warranties).

A reasonable, long-term timeframe for the value of solar is crucial to accurately reflect its ability to defer infrastructure improvements that could otherwise be stranded by increasing distributed solar capacity.

Discount Rate

For elements of the value of solar that are part of the utility balance sheet (grid services, financial, and security from the Sept. 17 RMI presentation), the utility’s weighted average cost of capital is a well-recognized and appropriate discount rate.

For environmental and social values of solar, a more appropriate discount rate would reflect tradeoffs for players other than the utility.  As such, the U.S. Treasury bond rate for comparable term (e.g. 30 years) would be an appropriate proxy.

Hedging Value

The hedge value of solar against electricity fuel costs is more important for ratepayers than for utilities, since the utility commission typically allows fuel costs to be passed through – as is – to ratepayers.  Neither EIA forecasts nor NYMEX futures contracts come close to the price reliability of solar energy, especially beyond 10 years (since there are no options for gas contracts beyond 10 years).

The hedge value of solar energy should include a robust uncertainty component with a broad sensitivity analysis that accounts for the remarkable variation in fuel costs for fossil fuel power plants.  The graphic below was taken from RMI’s Sept. 17 presentation.

Screen Shot 2013-09-27 at 12.05.34 PM

Transparency

Utilities have long complained of “cost-shifting” in net metering policies. On the other hand, independent studies have calculated many quantifiable benefits that are poorly represented on utility balance sheets.

The value of solar tariff represents an opportunity to bring transparency to pricing and purchase of solar energy, but only if utility calculations (using the Department’s methodology and formulas) are transparent, too. It is essential that the utility data use to calculate the value of solar tariff be public information, allowing all stakeholders to verify the calculation.  Without full transparency, it will undermine the entire notion of a stakeholder-vetted value of solar tariff formula.

Photo credit: CERTs


[1] Midwest Energy News, 9/5/13. http://tinyurl.com/nwqob8s

[2] CleanTechnica, 9/3/13. http://tinyurl.com/kysooe9

[3] Long Island Power Authority, 7/12/13. http://tinyurl.com/lrr46ap

[4] Civic Economics, 2003 and 2013.

[5] Wei, Max, Shana Patadia, and Daniel M. Kammen. “Putting renewables and energy efficiency to work: How many jobs can the clean energy industry generate in the US?” Energy Policy 38.2 (2010): 919-931. Available at http://tinyurl.com/18r

[6] Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis – Under Executive Order 12866, May 2013. http://tinyurl.com/k5k3kyr

[7] Perez, Richard, et al. Solar Power Generation in the US: Too expensive, or a bargain? (2011), 4.  http://tinyurl.com/kyqo7y9

[8] GreenTechMedia, 9/4/13. http://tinyurl.com/k29scrm

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About John Farrell

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. More

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