Tuesday, February 09, 2016

Solar Wars Redux

The tide is shifting… again.  California and Nevada have been the battleground for the two most recent and longest running skirmishes.  But they have not been the only battle fronts.  Think back just a few years when it appeared that solar – and distributed generation or rooftop solar in particular – had the upper hand.  Then came the January 2013 Edison Electric Institute report Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business.  And, although pundits on both sides declared this report to be exposing an “existential threat” to utilities, that precise term is nowhere to be found in the report. Rather, the EEI report did speak to DG solar as representing a disruptive threat – one of the few times that the term disruptive innovation has been correctly used in the literature.  The utility response to the EEI report was immediate – first in Arizona and then elsewhere.

At the heart of the dispute is how to value the benefits and costs of distributed generation, especially distributed solar, to the grid.  On one side, utilities argued that there was a cost shift as nonparticipants would be required to assume more of the fixed costs of maintaining the grid and on the other solar proponents cited reduced transmission costs and other benefits.  Both are correct, but they are largely irrelevant.

Net metering was justified by the public policy argument that it was needed to incentivize what was then a nascent technology trying to establish itself in the marketplace.  Self-generators, it was argued, should be compensated at the full retail rate for electricity delivered back to the grid. As a public policy argument to help a nascent technology gain a foothold in the marketplace, this made sense.  As an economic argument for sustaining what has now become a mature technology, it makes little.

Utilities in state after state responded to the EEI report by filing applications to reduce net metering compensation and/or implement new fixed charges for self-generators.  Unfortunately, at utility commissions where such applications were filed the dispute became more of a political referendum than an economic one.  Some utility commissions, such as Nevada and Arizona, agreed.  Colorado, for its part, studied net metering for months and then simply kicked the can down the road, maintaining the status quo. Sadly, this has been more of a religious war than a technological and economic one and the Colorado docket in particular was marked by dueling advocacy rather than objective analysis. But the decision must not be based on theology. 

Here are a few general principles that an unbiased observer should find unassailable:

First, why should any business – including utilities – be compensated to make up for consumers using less of their product?  Too big to fail? Were buggy whip makers compensated for the transition to automobiles?  How about ice delivery companies whose business model was disrupted by the advent of refrigeration in the early 1900s?   Innovate or die.

Utilities are the only industry I know of that seem to have the investment/return relationship backwards.  Here in Colorado the major utility, Xcel Energy, recently announced its Our Energy Future plan for Colorado which kicks off not with new services but with a rate case that includes a new monthly grid fee for solar customers. This comes after the Colorado PUC rejected the utility’s efforts to reduce net metering compensation.  Apparently, investor owned utilities are the one business entity for whom No never means No.  Utilities, here’s the way it works. First, you invest. Then, when that investment yields a product or service that is accepted by the marketplace, you realize the rewards…. Finance 101.

Now, for the other side.  Self generators, you are a customer, not a supplier, unless of course your business partner – in this case a utility – wants you to be.  You have no unalienable right to access the grid, unless you pay for it.  Nor do you have a right to sell electricity to your neighbors using that grid, unless you pay for it.  The typical utility customer receiving power pays for that access as do wholesale suppliers.  If you are using that grid to both send and receive power, you should pay for it.

Now let’s talk about that full-retail-rate net metering compensation.  First most every business purchases at wholesale and sells at retail.  Why should electricity be different?  It is often argued that the value of solar energy supplied in the afternoon is far higher than electricity delivered at other times.  True enough.  It then follows that the simple – if not incredibly obvious – answer is to put self-generators on bidirectional time of use (TOU) rates.  If you supply power to the grid, you are paid a wholesale rate based on the rate that the utility pays for power at that time.  Similarly, you pay for power drawn from the grid at a retail rate in effect at that time.  Given the differences in peak vs. off-peak pricing, I expect you may come out ahead. 

With that said, this does not imply that all customers need to be put on TOU rates.  TOU rates, and even tiered rates of various types, have been the bane of typical utility customers who simply want to turn on the lights when needed and not have a side job of managing their electricity consumption every fifteen minutes.

Last, with respect to the dueling advocacy we see in these proceedings, it would be great if commissions would keep two points in mind. First, argument is not evidence. Second, advocacy and conviction, no matter how well intentioned, does not rise to the level of objective analysis in the public interest.

Note: a shorter version of this blog has picked up by Solar Industry Magazine and is available here.