In Focus 2013: Undervaluing net-metered generation
With distributed solar generation (DSG) growing at a record pace, states nationwide are undertaking comprehensive studies to assess the benefits and costs of this dynamic resource. The origins of these studies are diverse, either undertaken at the behest of regulators, commissioned by advocates in the solar industry, or put forward by utilities. The implications of these studies are critical as they are being conducted in a growing number of states, often with the explicit intent of altering the very structure of net metering programs or practices.
The importance of a transparent and informed DSG study methodology cannot be overstated. A flawed analysis that exaggerates general ratepayer costs associated with net-metered customers and understates the benefits provided by DSG systems can provide an inaccurate and inadequate basis to establish or change public policy. Recently, several utilities have put forward methodologies that significantly undervalue or ignore the long-term grid benefits and capacity value of net-metered systems. Most studies also tend to exclude the quantifiable societal benefits of net metering, including job creation, environmental benefits and health benefits from reduced pollution. It is logical to consider these benefits in valuation studies, or at a minimum considered as qualitative factors, as these public benefits are often the foundation for legislative support for net metering programs in the first place.
The foundation for best practices in the valuation of solar should involve the formulation of defensible and reasonable assumptions about the true spectrum of value that DSG brings to the table. There is a growing body of literature devoted to this subject, and IREC’s recent publication, A REGULATOR’S GUIDEBOOK: Calculating the Benefits and Costs of Distributed Solar Generation, provides comprehensive guidance on how to develop a robust framework for developing a valuation methodology for DSG. Regulators should be involved in determining the reasonableness of assumptions at the outset, and should not be relegated to the clerical role of merely checking the math of studies put forward by parties. There is a fair amount of recent regulatory activity on this issue, but there has not been much definitive treatment by state authorities of the proper method of calculating the benefits of DSG or in determining the cost-effectiveness of policies like net metering.
Unfortunately, 2013 brought a number of utility-sponsored studies that severely undervalued customer-sited DSG because they significantly departed from best practices on the topic. In this sense, these studies are an emerging worst practice in today’s regulatory landscape. While state regulators have not yet accepted these methodologies, we consider significant deviations from the type of comprehensive analysis necessary to accurately value the benefits and costs of DSG to be a worst practice as it not only causes significant friction between all stakeholders, but also deviates from long-standing practice in regulatory decisionmaking. Ongoing proceedings in the following states provide salient examples of how not to undertake such a review and these proceedings highlight the importance of regulators establishing a standard methodology at the onset to fairly evaluate questions of cost-shift and equity among ratepayers.
With over 250 megawatts producing enough power for about 31,000 homes, Arizona has installed more rooftop solar than almost any other state, behind only California and New Jersey. However, in July, Arizona’s largest utility APS filed a proposal at the Arizona Corporation Commission (ACC) to assess substantial new charges on customers who go solar – a move that would stymie the current pace of solar adoption. APS put forward a cost-benefit analysis in support of its proposal that many stakeholders believe overlooks the significant capacity value of solar and makes other assumptions that represent a worst practice in valuing DSG.
The APS analysis found that the bottom line value of the expected DSG installed on homes and businesses would be 8.2¢ per kilowatt-hour in 2025. Discounted to today, that alleged value to the utility is only 3.5¢. This amount is far less than the findings of similar studies performed outside of Arizona, which ranged from 12.8¢ (Austin Energy, Texas) to 19.3¢ (California) and higher to 25-32¢ (New Jersey and Pennsylvania). This amount is even less than APS’s own 2009 APS analysis of the benefits of distributed energy, which found that DSG value to range fro 7.91¢ to 14.11¢ per kWh, well within range of the retail rates at which these customers are being credited. These divergent results are due to many factors, including differences in the scope of the analysis (i.e., the time span over which benefits are evaluated) and the varying assumptions about the value of solar capacity that already exists and provides current benefit. These differences underscore the importance of developing fair and transparently developed assumptions to measure the value of DSG. Against this backdrop, the ACC staff issued a recommendation to the Commission in October 2013 to reject the utility’s proposals, counseling that any changes to this foundational policy should be addressed in future rate cases. Considering the importance of net metering to Arizona’s growing rooftop solar market, such careful consideration is warranted. The proposals now go to the commissioners to make a final decision about the future of net metering in Arizona.
In a similar proceeding in Colorado, Xcel Energy requested that the Colorado Public Utilities Commission (CPUC) treat net metering as a subsidy based on its analysis that those customers are imposing more costs than benefits on the system and on non-participating customers. Similar to APS, Xcel’s analysis includes a number of assumptions that stakeholders claim will either significantly discount or overlook many of the cost savings that distributed renewables deliver to the utility system, including such benefits as avoided generation capacity costs, avoided ancillary costs, and avoided line losses. An alternate analysis—that accounts for these benefits—paints a much different picture, indicating that existing DSG currently in the Xcel service area delivers as much as $11 million in annual net positive benefits to Xcel’s ratepayers. While this proceeding is pending, as of publication, and the CPUC has not yet sanctioned or endorsed Xcel’s particular methodology, the critique here is that Xcel did not fully account for the benefits of net metered systems.
In early 2013, Idaho Power Company proposed weakening the utility’s net metering program and otherwise penalizing DSG customers through its rate case proceeding. The utility argued that non-participants must assume all the costs that net metering customers are avoiding by investing in solar and other renewable resources, but the utility did not support its claim with any analysis to substantiate those allegations. Fortunately in this case, the Idaho verdict came – appropriately the day before Independence Day – with the Idaho Commission standing strong for net metering and rejecting the utility’s proposals to dismantle net metering.
Need for standardization:
While values associated with net metering do indeed differ from one utility to the next, the approach used to calculate that value should be uniform. Any conversation about changes to net metering must begin with a fair, quantitative assessment of the value that DSG provides to the utility and to other ratepayers. The examples cited indicate how much methodological assumptions impact the end results. As this question arises in more jurisdictions, it is important for regulators, non-utility stakeholders and utilities to be working from the same playbook. Regulators, utilities and other stakeholders should adopt a standardized set of ‘best practice’ methodologies to help ensure accountability and verifiability of benefit and cost estimates. For more information about the issue and proposed standardized approaches, read IREC’s A REGULATOR’S GUIDEBOOK: Calculating the Benefits and Costs of Distributed Solar Generation.
 Larry Sherwood, U.S. Solar Market Trends 2012 (IREC), available at www.irecusa.org/wp-content/uploads/IREC-Trends-Report-2012_091312.pdf.
 DSIRE website, Austin Energy-Value of Solar Residential Rate web page, available at http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=TX139F.
 Beach, Thomas and McGuirre, Patric, Re-evaluating the Cost-Effectiveness of Net Energy Metering in California (2012), available at http://votesolar.org/wp-content/uploads/2012/01/Re-evaluating-the-Cost-effectiveness-of-Net-Energy-Metering-in-California-1-9-2012.pdf; Perez, R. et al., The Value of Distributed Solar Electric Generation to New Jersey and Pennsylvania (2012), available at http://communitypowernetwork.com/sites/default/files/MSEIA-Final-Benefits-of-Solar-Report-2012-11-01.pdf.
 R.W. Beck, Inc., Distributed renewable energy operating impacts and valuation study (2009), available at www.aps.com/_files/solarRenewable/DistRenEnOpImpactsStudy.pdf.
 Crossborder Energy. “Net Benefits of Solar Distributed Generation for the Public Service Company of Colorado.” (Sept 2013) Available at: http://protectnetmetering.org/files/2813/8003/9574/Critique_of_Xcel_Study_of_the_Benefits_of_Distributed_Solar_Generation.pdf