Rethinking Standby and Fixed Cost Charges: Regulatory and Rate Design Pathways to Deeper Solar Cost Reductions
By Jim Kennerly, N.C. Clean Energy Technology Center and Kathryn Wright, Meister Consultants Group
The U.S. solar market has experienced rapid growth in recent years, and is expected to expand by 25% in 2014. However, as the rooftop solar PV market has expanded, adoption of these distributed energy technologies has begun to challenge the traditional revenue and business models of utilities. This has led many utilities to apply standby and fixed cost charges specific to solar PV for customers choosing to go solar through a billing practice called net energy metering (NEM) in an attempt to recover their costs.
While solar PV’s impact on utilities has been a hot topic for the past year, little attention has been paid to the potentially damaging risks posed by these solar PV-specific rate designs (often informally referred to as solar “fees” or “taxes”) upon the Department of Energy’s SunShot Initiative’s efforts to reduce the non-hardware “soft” costs of going solar. In fact, applying these rate designs to solar PV customers could actually lead to an unfortunate situation – one in which standby and fixed cost charges make it more difficult for solar PV to reach the point at which it would need no incentives to provide value to customers.
In our report, Rethinking Standby and Fixed Cost Charges: Regulatory and Rate Design Pathways to Deeper Solar Cost Reductions, we outline a series of approaches that utilities and their regulators can adopt that provide a “softer path” to rate design that does not delay solar grid parity. Currently, discussions around net-metering centered around the value of solar concept, while ignoring the contributions of other factors, such as declining energy usage across most utilities’ customer base, on utility fixed-cost recovery and financial stability.
Our report discusses and recommends an integrated approach, which several forward-thinking utilities and regulators are beginning to adopt to combat this systemic problem without imposing disproportionate burdens on solar DG, and SunShot Initiative soft costs reduction efforts. This integrated approach includes:
- Revenue decoupling, which allows utilities to ensure recovery of their costs, meet investors’ expectations, and encourage customers to save energy;
- A “minimum monthly contribution”, which allows utility to recover a critical degree of revenue from customers who are zero net energy users (often referred to as “prosumers”); and
- Mandatory time-differentiated (also known as time-of-use) pricing, which provides both solar and non-solar customers with transparent utility cost information (and minimizes a significant cost shift benefitting non-solar customers);
Our report also recommends other emerging “win-win” approaches for utilities and solar PV, including value of solar tariffs (VOSTs), identifying and encouraging siting of solar PV in areas that maximize cost savings for utilities and other customers, community shared solar and virtual net metering, and developing utility shareholder incentives for deploying solar PV.
It appears that solar PV markets now have sufficient momentum to render the question of “will solar become commonplace?” less relevant than the question of how quickly it will happen, and what impact will higher installations rates have on utilities and their business models. Overall, we believe the balanced approach we recommend will protect utilities and their customers and allow critical solar PV soft cost reductions enabled by the SunShot Initiative to continue unabated.
Click here to access the Executive Summary
Click here to access the entire report