Minnesota: A case study on why solar policy matters

By Mike Taylor

Editor’s Note: Mike Taylor, former director of research at the Solar Electric Power Association (SEPA), has been on sabbatical for the past year, part of which he spent researching the fast-changing solar market in Minnesota. He sees the state as providing a case study of the opportunities and challenges generated by a suite of policy measures and collaborative efforts aimed at supporting and expanding solar market growth and moving forward with energy system transformation. Mike will be returning to SEPA in a new role in 2016.

With its history of populist, progressive politics, it is probably less surprising than one might think that Minnesota has emerged as a solar market leader in the Midwest. In 2013, the state passed wide-ranging solar legislation requiring investor-owned utilities to generate 1.5 percent of their power from solar by 2020, with 10 percent of that amount to be produced from systems of 20 kilowatts (kW) or less.

Initial estimates projected that this solar energy standard alone would increase the Minnesota’s solar capacity from 13 megawatts (MW) to more than 450 MW, an exponential growth in development for a Midwest state. Other policies in the legislation were aimed at spurring the growth of distributed solar for the consumer market.

Tri-County Electric Cooperative’s Renewable Rays community solar
project in Rushford, Minnesota.

—Net Metering: The law expanded incentives for new net-metered customers and, specifically, opened the way for more commercial installations by raising the upper limit for net-metered systems from 40 kW to 1 MW.

—Community Solar: It also established a framework for new community solar programs, particularly for customers in Xcel Energy’s service territory.

—Value of Solar: The law also called for the Minnesota Department of Commerce to establish a methodology for calculating a new “value of solar” rate to be used as an alternative to net metering for compensating solar customers for excess power they produce.

Minnesota is also one of the states, along with California, Hawaii and New York, currently grappling with transformation of its energy markets through a collaborative process — here called the e21 Initiative. However, in this blog, I will focus primarily on the impacts of the 2013 solar legislation.

Different solar options, different outcomes

Prior to 2013, Minnesota consumers had only one distributed solar option — installing and owning solar panels with excess generation compensated through net metering at retail rates. The size of net-metered systems was limited to 40 kW, a capacity that provided plenty of room for homeowners, but put a notable ceiling on the commercial market.

Third-party solar leases weren’t available. One utility, the Wright-Hennepin Cooperative Electric Association, had a 40-kW community solar program.

Passed in May 2013, the impact of the new law was immediate. By the end of the year, Minnesota had close to 1,200 solar installations, totalling about 10.5 MW of net-metered solar. The majority of these systems were connected to Xcel Energy‘s distribution system. Xcel is one of the state’s primary investor-owned electric utilities.

Now, two years later, the law’s impact has been more mixed, with each of its key solar provisions taking markedly different paths.

Net Metering

In addition to the higher cap on the size of net-metered systems, the 2013 law offered new incentives for customers of investor-owned utilities, which fund the state-run program.

Managed by the state Department of Commerce, the “Made in Minnesota” (MiM) program, currently provides between 25 cents and 37 cents per kilowatt-hour (kWh) per year for 10 years for electricity produced by solar panels manufactured in-state. For example, a 3-kW system with an incentive of 27 cents/kWh would receive around $1,083 per year for ten years, depending on actual performance — more than double what a consumer would save on their electric bill each year with net metering.

Outside of the state program, Xcel also operates a less generous “overflow” incentive program for customers who don’t opt for the MiM program, while Minnesota Power also operates a supplemental rebate program that adds to what is received from MiM. Seven municipal utilities also offer solar rebates.

As a result of these changes, the net-metered solar capacity in the state grew almost 50 percent in 2014, adding about 5 MW, particularly in small commercial installations. With similar growth expected by the end of 2015, the market has doubled in just two years.

However, the market expansion is not without complications. Participants in the MiM program are chosen in a yearly lottery, with a lengthy waiting list of those not selected. In 2015, the state received 1,043 applications, with only 429 applications selected to receive the incentive.

In addition, MiM incentive levels vary between the state’s four solar manufacturers, which has raised questions about efficacy, and all but 21 of the MiM participants in 2015 were in Xcel Energy’s territory.

Community Solar

The new initiative to expand community solar, known as “solar gardens” in Minnesota, has been the main accelerator for potential solar change in the state, as well as the most complicated and drawn out of the state’s solar initiatives. The initiative was specifically targeted at Xcel’s service territory, and after opening the program, the utility received an initial flood of about 1,200 project proposals, totalling more than 1,150 MW.

Unfortunately, the process was complicated by issues surrounding the details of new program designs and the sheer magnitude of the potential growth. Under the legislation, Xcel has to purchase the energy from the solar gardens at a “value of solar” rate — which has been set above retail rates, as will be discussed in the next section. Developers responded by locating multiple 1-MW projects — the upper limit for individual solar gardens — next to each other, resulting in de facto projects up to 20 MW in size.

The large number of applications also presented Xcel with a considerable interconnection queue.

Read SEPA’s new report on Community Solar Program Design Models here

As of its most recent monthly report, filed with the Minnesota Public Utilities Commission last month, Xcel reported it currently has 615 applications in the interconnection queue and 925 applications being reviewed for completeness. How many of these applications are “placeholders” — applications that will not be actively pursued by developers — remains an open question. About 24 projects are moving into the initial stages of construction, Xcel reported.

On the other side of the coin, project developers having been soliciting subscribers to fill all those megawatts. Everyone from homeowners, renters, nonprofits, large corporations, and small and large cities with dozens of buildings are participating. No one subscriber can use more than 40 percent of any 1 MW project.

Educating the public on community solar — and the contract terms, conditions and pricing that different developers are offering — has also been a challenge. Clean Energy Resource Teams, a public-private effort, has become a de facto clearinghouse providing basic information for consumers and communities.

Voluntary — that is, not required by legislation — utility-led community solar programs have also been launched outside Xcel’s service territory. Ten electric cooperatives are running voluntary community solar programs, with another five or six being planned by a variety of utility types.

Value of Solar

Minnesota’s efforts to develop a value of solar rate — the first state in the country to do so — was major news when first announced in 2013, but the results have been anticlimactic.

Value of solar (VOS) was intended to be an alternative to net metering, allowing utilities to purchase solar output directly from consumers at a rate that takes into account all the benefits and costs of solar for consumers and the utility.

By separating solar from consumption, VOS attempts to disentangle the thorny, cost-shifting issues of net metering, a solution which, in theory, would be appealing to utilities. Austin Energy in Texas has been the only utility to implement a value of solar program.

In Minnesota, the state Public Utilities Commission approved a VOS calculation based on solar costs and benefits to utilities, their ratepayers and society in April 2014. But, uncomfortable with some of the calculations (notably for environmental costs), and uninspired by the resulting VOS rate, which was higher than retail rates, no utility has chosen to replace net metering with value of solar.

Getting ready for a performance-based future

At this point, Minnesota’s solar market can be divided into two parts – Xcel Energy and everyone else. Xcel customers now have a vibrant solar market, with generous incentives for installing rooftop panels and community solar programs available for their homes or businesses.

At the utility-level, Xcel also has large solar installations being built, and a recent integrated resource plan shows utility-scale solar as economic in 10-15 years. In October Xcel also announced plans to cut carbon emissions in Minnesota by 60 percent by 2030.

For the rest of the state, the rate of solar development is slower, steady and local. Customers of investor-owned utilities and some municipal utilities have access to solar incentives, and community solar programs, mostly hosted by electric cooperatives, are in the works. Innovations will be driven by voluntary initiatives by particular utilities. They will happen, but not uniformly.

Another factor is the e21 Initiative, which is aimed at shifting Minnesota’s energy sector toward a performance-based system in which utilities are rewarded for providing a range of outcomes — energy efficiency and cleaner power, along with reliability and affordability.

Certainly, the state’s growing solar market will be a part of this bigger picture.