Navigant Research Blog

DER Solutions Emerge from Utility Rate Changes

— March 18, 2016

electric meterAs debates around solar PV net metering and other distributed energy resources (DER) compensation programs continue around the world, there is great uncertainty for many vendors. These compensation mechanisms and programs provide stability and guaranteed revenue streams that are essential for many DER business models. While the reduction or termination of net metering programs may be detrimental in the short term, these policies are likely to be replaced with rate structures that more accurately reflect the costs to serve customers in a given location at a given time. Various DER technologies can provide customers with unprecedented flexibility to respond to changing rate structures to benefit both the grid as a whole and their power bills. Leading vendors are already working to offer innovative solutions that combine multiple technologies into an optimized, flexible DER solution.  

The Hawaii Connection

The rapid growth of Hawaii’s solar PV market over the past several years has resulted in state regulators ending the utility’s net metering program in October 2015. The program was replaced with two new options that allow customers to be compensated below the retail rate for energy sent back to the grid, or keep all the energy they generate onsite and gain faster access to grid interconnection. Although this change is likely to slow solar PV installations in the near term, it opens up vast new opportunities for other DER to help customers save money while improving the efficiency of the grid. Vendors have already responded with new offerings tailored to these rate structures. Late last month, SolarCity introduced their Smart Energy Home offering, which includes solar PV, battery storage, smart electric water heaters, and a smart thermostat designed to maximize solar PV generation and self-consumption. The system automatically modifies energy usage and storage based on how much solar power is available to prevent energy from being exported to the grid in accordance with the utility’s new rate structures.

While SolarCity’s solution may be the first to offer this specific suite of technologies to customers, it is not the only company looking to capitalize on rate structure changes and consumers’ desire for control over their home energy systems. Across the Pacific Ocean, Australian telecommunications company Telstra recently announced plans to roll out a home solar plus storage solution to the millions of customers it already serves in Australia. This plan is part of a whole-home connectivity package that also includes Internet and phone. Telstra has the advantage of a large customer base and well-established customer support to help expand its offering as solar compensation programs wind down throughout the country in the coming years.

Global Trend

Utilities around the world are also getting in on the action, with companies in Vermont, Germany, Australia, and Arizona looking to offer integrated DER solutions to their customers. Perhaps the most intriguing vision for this type of offering comes from Tucson Electric Power, where CEO David Hutchens recently discussed the possibility of offering a type of “premium energy service” that may involve the utility owning and operating a whole suite of DER—including solar, storage, electric vehicle chargers, and more—based on customer needs and wants. These innovative offerings from various stakeholders in the industry are just the beginning of a post net-metering world where DER can provide increasing value to both customers and to the grid as a whole.

 

Solar Customers in Nevada Compensate for Changes in Net Metering with Storage

— February 22, 2016

clean energy backgroundThe Nevada Public Utilities Commission’s (PUC’s) recent decision to dramatically alter the net metering policy for rooftop solar customers has created an uproar and cast doubt on the state’s solar future. The fight began in December of last year when the PUC voted to not only increase the fixed charge to NV Energy customers who own rooftop solar from $12.75 per month to $38.51 per month in gradual increases over the next 4 years, but also decrease the credit solar that customers receive for the excess energy they send back to the grid from $0.091/kWh to $0.026/kWh. However, perhaps the most controversial part of the decision is its retroactive effect on nearly 18,000 existing rooftop solar customers. The new pricing took effect on January 1 of this year.

Regulators argue the new pricing scheme makes solar customers pay their fair share for use of NV Energy’s grid. But the new pricing could be a deal breaker for most solar customers. According to solar companies, the pricing changes could erase all the savings from going solar over the next couple of years. That prospect has spurred a group of solar customers to file a class action lawsuit against NV Energy, seeking payment for being misled into purchasing solar systems “that do not provide the promised rebates, discounts, and rates.”

Operations Shutting Down

Solar companies say the new pricing will effectively kill Nevada’s rooftop solar market. Several companies have already been forced to shut down operations in Nevada, including Sunrun, Vivint, and the largest solar installer in the United States, SolarCity. In fact, SolarCity has begun laying off 550 employees and closing the doors of a new training center. Due to this backlash, the PUC released a draft order saying it will reconsider “grandfathering” in existing solar customers to protect their investments, but there is no mention of reconsidering the net metering policy overall.

Despite the seemingly dismal future for rooftop solar in Nevada, existing solar customers still have options. Naturally, higher fixed charges and lower net metering tariffs can incentivize existing solar consumers to use as much of their self-generated power as possible, as opposed to selling the excess power back to the grid. This is where solar plus storage comes into play. Integrating solar panels and energy storage allows customers to generate energy during the day and store that energy to use at a time when the consumer would otherwise be paying a retail electricity rate. Products like the Tesla Powerwall can change the equation for customers, and many anticipate that these types of technologies will forever change the energy industry.

Instead of harshly fighting trends and upsetting customers, smart utilities and PUCs must find a balance and be more willing to embrace new technologies and the reality that customers now have more energy choices than before.

 

TEP’s Program a Win-Win for Solar Proponents and Utilities

— October 7, 2015

I’ve written extensively about the solar/net metering brouhaha in Arizona over the past 2 years (you can see related blogs here and here). I’ve also previously posited (here, here, and here) that electric utilities worried about solar encroaching on their core business and profitability need to embrace solar, suggesting that if you can’t beat ‘em, join ‘em.

That is exactly what one offering from Tucson Electric Power (TEP) attempts to do. Well, sort of. My analysis indicates that the deal is pretty good for all involved.

In August 2014, TEP proposed a rooftop rental arrangement for customers in its territory whereby TEP would rent its customers rooftops and install solar panels for its own generation needs. In exchange, the utility fixes customers’ monthly bills at their current level for the next 25 years, which TEP considers to be the life of the panels. According to the company website, TEP intends to accept 500 participants in 2015 and was still accepting applicants through September. The plan has been viewed with caution—but not outright hostility—by solar advocates because TEP is subcontracting out the panel installation business rather than creating its own internal, division.

Long-Term Benefits for All

TEP’s proposal could have a substantial positive financial value to customers in its territory. Here’s why: If you run a discounted cash flow analysis, using an 8% cost of capital assumption and a 25-year time horizon, the present value of the savings that TEP customers might enjoy is substantial—assuming that electric prices in Arizona continue to rise at historic rates.

In running my calculations, I assumed a customer would start the program at the beginning of 2015 and that the current $0.12/kW cost rises 3.4% annually through 2040 (this is the average annual increase between 2003 and 2013 in Arizona).

A current $100/month TEP customer is using 852 kWh per month; a $240/month customer is using 2,044 kWh. Keep that usage fixed for 25 years, and the net present value to these customers of the fixed rate versus projected actual monthly bills ranges from more than $6,000 to more than $14,000. The nominal (undiscounted) value of the savings amount to more than $20,000 for the $100/month customer and an eye-popping sum of more than $50,000 for the $240/month customer.

Tucson Electric Power Solar Rooftop Proposal: Potential Net Benefits to Consumers

Richelle Table(Source: Navigant Research)

Even if the rise in electric rates were to fall to half of its historic rate in Arizona (1.7% rather than 3.4%), the savings to TEP rooftop renters would be $2,600 and $6,200 respectively on a present value basis, and the nominal benefits accrue to $9,000 and $21,000 for $100/month and $240/month customers. Considering the heat in Arizona, I’d be willing to bet there are quite a few $300+/month customers for whom this is an even more attractive proposal.

It Takes a Village

Solar installers in Tucson do not view TEP as a competitor because they continue to get the business. Customers do not have to worry about credit scores or qualifying for financing. TEP expands its solar generation capabilities. The deal truly appears to be a win-win-win. In fact, the financial benefits to TEP are probably the lowest on management’s totem pole. The program helps the utility meet renewables requirements and keeps customers happy—and that is worth quite a lot.

 

Net Metering Fight Comes to New Mexico

— January 8, 2015

The fight over solar interconnection and net metering – a topic I’ve covered previously in several blogs (here, here, and here) – has come to my home state.  In a rate case filed in December, Public Service of New Mexico (PNM) asked that customers with their own solar generation capacity solar customers be charged $6 per kilowatt (kW) of capacity, per month, beginning in 2016.  It also proposed that “banking” of excess power sold back to the utility be discontinued; this means that rather than selling back excess kilowatt-hours (kWh) generated in March for top dollar in July, solar customers will receive the net value of the energy in the same month that it’s generated.

Girding for a Fight

Solar industry advocates suggest that the plan will severely dampen demand.  New Mexico has abundant sunshine, but a relatively poor economic base, and solar adoption in the Land of Enchantment has been lower than one might expect.  According to IREC, New Mexico ranked 9th nationwide in total PV installations, with 257 megawatts (MW), at the end of 2013.  With accelerating economic recovery and the expiration of federal tax credits just 2 years away, New Mexico is poised for strong growth in 2015-16.

And that’s why PNM is making this move now.  Its argument that non-solar customers are increasingly subsidizing solar customers has merit, and growth in installations is only going to cost PNM more as it not only loses revenue from solar customers, but also must invest in its grid to support increased two-way electricity flow and changing load profiles.

Hitting Home

I’ve studied the proposal with more than just professional interest.  I recently got a quote for a solar array on my own home, in southern New Mexico, and while PNM isn’t my utility, El Paso Electric, my local provider, will surely be watching the proceedings closely.  Here’s my take on the situation, both as an analyst and as a potential solar customer.

First, $6/kW is fairly substantial, from a solar customer’s point of view.  PNM says that the average New Mexico system in its territory is 3-5 kW, but solar installers suggest that recent installations average 6 or 7 kW.  In order to serve my 2,800 square foot home, a 10 kW system was proposed.

So while PNM says its fee would average $18-$30/month, my own system would cost $60/month under the PNM proposal.  That would extend the payback period for my system from 8 years to 11 years.  But, unless I sell my house in the next 10 years, it’s still a good investment.

The solar industry, however, doesn’t agree.  A recent article in the Albuquerque Journal offered detailed numbers to illustrate how PNM’s fees will change the solar equation to the point where consumers are better off sticking with the utility.

Payback Period

There are some flaws with this analysis, however.  First, solar panel prices have been falling dramatically, and should continue to do so for many more years.  So the math outlined in the Journal, based on current prices, will likely become moot in another year or two.  Second, the article fails to ascribe value to the fact that once the system is paid for, the homeowner pays only the connection fee to the utility.

In my case, the average monthly bill would fall from $223 (today) to $60.  Call it a $200 per month saving to account for rate increases.  Even with PNM’s proposed connection fee, the system will easily last long enough to support the investment.

New Mexico’s installed base of solar systems is likely to double or triple over the next decade.  It’s not reasonable to expect utilities to interconnect these customers for free, pay them peak prices for non-peak production, and spread those and other costs over the shrinking base of ratepayers.  But I do think it’s reasonable to question the $6/kW figure and ask PNM to justify it—especially since Arizona’s compromise plan last year came in at a far lower level.

 

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