How Do Different Utilities Determine the Value of Solar?

Several utilities have implemented, proposed, or are researching the use of value of solar (VOS) tariffs as a means to institute financially sustainable transactions with distributed generation customers.

Under a VOS tariff arrangement, which might replace or serve as an alternative to net metering, the utility purchases all of the solar electricity directly at a defined rate in cents per kilowatt-hour, while the customer continues to pay for energy consumed under the applicable retail rate. Some have described the VOS tariff as a value-based feed-in-tariff, while others have described the VOS as a technology and location-specific qualifying facility¹ (QF) rate.

CPS Energy, a municipal utility in San Antonio, recently proposed and withdrew (after receiving strong reaction to) a VOS rate of 5.6 cents/kWh, while Austin Energy, another Texas municipal utility, successfully implemented a VOS tariff of 12.8 cents/kWh. The natural tendency is to compare the two rates and ask how they could be so different.

A VOS tariff is calculated by summing up the values of all the benefits and costs that distributed solar provides the utility. A common list of value criteria is included in Table 1.

Table 1: Value of Solar Benefit Criteria

As the discussions about VOS purchasing frameworks continue, it’s important for utilities and stakeholders to ensure that they are comparing “apples-to-apples” for VOS values between utilities. The calculated amounts may differ, sometimes significantly, and it’s important to understand what drives the differences, i.e. why is utility X’s rate 6 cents/kWh and utility Y’s 13 cents/kWh?

This discussion addresses two of the potential underlying differences in this kind of comparison.  It is not a direct case analysis of CPS and Austin, but a high-level introduction to some of nuances of VOS design and calculation.

Each utility may use different criteria and will have different inputs for the same criteria.

The kind and number of criteria that utilities include in the value calculations may differ as utilities evaluate the certainty, available data, calculation methodologies, operating history, and accounting methods of each criterion.

Additionally, no two utility systems are identical and their inputs will similarly vary. Utilities have varying cost structures and may even use different calculation methods. For instance, every utility has different power plant debt, energy contracts, fuel contracts, distribution system characteristics, etc. that, in turn, translate into different inputs into a VOS calculation.

There are also several capacity calculation methods, which can either be applied at the generation level for resource adequacy purposes or at the distribution level for operations and maintenance deferral possibilities.

Additionally, the solar resource variation can translate into different benefits – in the southwest solar aligns with summer system peak much more reliably than in the northwest, which is winter peaking.

These differences in costs, inputs, and assumptions across criteria will then translate into different dollar amounts attributed for a given value.

What time frame does the VOS reflect?

Irrespective of the specific VOS inputs, most will agree that the resulting VOS will change over time as additional utility capacity needs are anticipated, inflation impacts items such as fuel costs, and potentially environmental regulations take effect.  In parallel, PV panel performance will decline slightly over time – a 0.5% annual degradation rate translates into about a 9% annual performance reduction by year 20. Ultimately a utility may reflect these changes in the VOS rate in two ways:

1. Annualized as a present year cost, a prediction of each year’s costs over the life of the solar installation; or
2. Levelized cost of those annual values.

The figure below graphically represents a hypothetical annualized versus levelized VOS rate, both representing exactly the same data and assumptions.

Beyond the depiction of the VOS amount, the utility and its regulators (if applicable) must also determine how those rates are translated into programs and tariffs.

The utilities could annually recalculate the rates, effectively utilizing 1-year contracts. For example, Utility X might offer a Year 1 value of 7 cents/kWh and recalculate the annualized number in Year 2. The forecast of the annualized rate will rise to 18 cents/kWh in Year 20, but it may not, depending on actual results. Utility Y could offer an annually recalculated 20-year levelized rate that starts at 10.5 cents/kWh in Year 1 and is similarly adjusted each year going forward.

The tariff could alternatively be deployed as a long-term guaranteed contract, for say 20 years, that fixes the payment schedule at either the annualized schedule (starting at 7 cents/kWh in Year 1 and rising to 18 cents/kWh in Year 20) or the levelized rate of 10.5 cents/kWh fixed over time. The longer the contract term, the more the utility takes on the forecast risk, both upside and downside.

It is important to remember that unlike traditional long-term wholesale PPAs, which typically purchase energy and sometimes capacity as delivered, VOS tariffs are incorporating a more holistic blend of value streams, many of which have greater risks and unknowns associated with their calculation and realization.

Further, the utility and its regulators (if applicable) must also assess the need and form of additional payments, if necessary, to successfully drive installations of distributed solar generation in those cases where the VOS alone is not sufficient to accomplish deployment objectives.

It is important to remember that the VOS concept is a new solar approach for transacting on distributed solar and an attempt to appropriately capture the values those resources provide to both the customer and the utility system.

Naturally, in the short-term, there will be debate on the appropriate assumptions, inputs, and calculation methods; however, SEPA is confident that with the cooperative engagement of utilities and the solar industry, and with further, unbiased research into how best to value distributed solar, a common framework can be established that will bring consistency to this process. When this is achieved, the solar industry, solar customers and utilities will come out stronger in the long-term.

¹ Qualifying facilities are small power producers designated under FERC as part of the 1978 Public Utility Regulatory Policies Act, which encouraged onsite renewable or efficient generating technologies.

² These criteria can be directly valued and captured by the utility. Other societal benefits, such as economic development (job creation, tax revenue, etc) and other indirect environmental benefits are often cited in discourse but are outside the utility benefit calculations. SEPA has a forthcoming summer report (A Primer for Solar Net Energy Metering Policy Review) that discusses the primary VOS criteria in more detail.