Discussion - Distributed Energy

DISCUSSION: Value of Solar Tariff, Adaptable for Other Markets?

Net metering undoubtedly benefits consumers, but it is a crude fashion of valuing rooftop solar and does not take into consideration, nor pay for, many of the benefits provided by the grid.

Austin Energy (AE) launched its Value of Solar Tariff (VOST) in the fall of 2012. AE’s VOST calculates its electricity tariff for solar rooftop homeowners based on a formula derived by AE.  AE’s VOST formula weights a variety of criteria, which take into consideration the benefits, and costs, of rooftop solar penetration to the grid and electricity customers on the whole.

source: cleantechnica

In some instances, rooftop solar owners are receiving more than the retail rate provided by net metering, which signifies that rooftop solar provides more value to the grid than utilities had previously realized.

AE’s VOST scheme addresses some complaints from utilities, but is the framework transferable? Minnesota is set to release its own version of a Value of Solar Tariff by the end of the year. (According to the not-yet-finalized Minnesota VOST utilities can choose to either use the net metering prices, or those derived by the State’s VOST calculation.)

DISCUSSION: Is the VOST framework the regulatory structure for Utilities 2.0? And, will Minnesotan utilities embrace rooftop solar’s value and pay more than what is dictated by net metering rules already in  place ? 

10 replies »

  1. Hi Brandon, interesting topic! I had a look at Austin Energy’s “Resource, Generation, and Climate Protection Plan to 2020”. Especially the chapter “Additional Objectives and Initiatives” caught my attention. It seems there that they are incorporating a substantial focus on building frameworks, setting rates for benchmarking, as well as creating communication channels to receive feedback and engage communities. Hence,I think it is to soon to be conclusive as to whether it will be the appropriate regulatory structure. It seems to be a substantial step forward in defining the solution space for the integration of distributed energy in our energy system

  2. Perhaps I should rephrase the question: is the Value of Solar Tariff framework the right approach, (i.e. valuing and incorporating the benefits and costs rooftop solar brings to the grid) and enough to satisfy Utilities and Regulators when incorporating rooftop solar into the grid? The premise of the framework is that it is a derived calculation addressing the concerns of utilities while also considering benefits for customers, not crude assumption of value (net metering). The tariff, surely, regardless of where it is, can be modified and adapted as realities change. The question queries if this is the beginning, not the end.

    • Yes, I believe that it may be a nice way to rephrase it. Solar Tariff’s framework is a much more “dynamic” way of measuring. What other alternative approaches are currently being discussed. Speaking about sun, lovely sunny day today in New York.

  3. I agree with the idea behind VOST since net metering is not a very precise method for determining what costs and benefits residential solar PV provides to the system. My only concern however is that this allows for a price that could potentially be more volatile since it is set year to year. For example, from 2006 to 2011 Austin’s value of solar (calculated retroactively by Austin Energy) fluctuated between 10.3 and 16.4 cents per kWh. That being said, I think that it is a step in the right direction to use more rigorous methods in calculating the value of solar and a definite improvement upon net metering.

  4. Leah,

    Keen observation. I presume that annual price volatility is preferable to daily price fluctuations. But, i agree: changing prices year-to-year has a direct effect on the ability of a third-party owner (SolarCity, Sunrun, etc.), who has a significant amount of solar resources, to sign PPAs, negotiate long-term agreements, and secure financing based on predicted cash flows.

  5. Wile the approach is intriguing and (apparently) compelling from an analytical standpoint, the cost metrics used are subject to all sorts of variation and manipulation. For anyone who has tackled cost accounting, to assign costs for a multi-billion $$$ revenue utility down to the kWhr (and deferred investments?) is a noble but ultimately highly subjective exercise.
    Wouldn’t it be easier and equally “fair” to structure residential rates to a time of day basis? Certainly the political problems to do this are huge, but the market would then function more effectively. What is the difference between someone installing a solar system or installing a higher-SEER A/C system? Or for that matter, shutting off their A/C (or electric water heater) in the daytime? Should the homeowner with the A/C system be singled-out and penalized for reducing their peak demand?
    It is interesting that residential solar has barely penetrated our generation mix, yet the utilities regard it as an existential threat. The real threat they are facing of course is disintermediation. You will soon see PUC’s siding with utilities against distributed generation, because their existence will also be threatened if the day ever comes that utilities are so small they don’t need regulators.
    The big elephant in the room w/r/t electricity generation has always been capital. For this reason the transition to distributed generation is not going to happen quickly, nor is it even going to happen to the 100% level across communities.

  6. All,

    TJC, i agree: realtime pricing would be ideal and lead to a fair valuation of the electricity provided by rooftop solar owners. The unfortunate reality is those types of meters are not currently being used/deployed alongside private or third-party solar installations. Smart meters with realtime capabilities will undoubtedly send the appropriate signals to utilities and customers to adjust their respective behaviors. It’s plainly evident that our grid needs an upgrade. But, with utility profits falling, and rooftop solar deployment companies’ margins relatively thin, upon whom does that burden fall?

    Additionally, here’s some fuel for the fire.




  7. Hello Brandon,

    I am not sure why you conclude that “…with utility profits falling, and rooftop solar deployment companies’ margins relatively thin…”
    Utility profits are simply a function of their PUC political overseers. If some utilities profits are falling (I was not aware of that as a trend) it is likely because they don’t have big upcoming CAPEX programs, the utiliy has stubbed their toe operationally somewhere, or their PUC is cutting rates Not happening)!
    The notion that rooftop solar deployment companies margins are thin is also suspect. Solar City just announced today that they raised another $250 million in capital, and have now raised $4 billion to finance leased-installations. The financiers (which includes Solar City) are making (or expect to make) margins of 8% to 15% after tax on these loans. Solar City’s market cap is $6 billion, and they are a quite immature company.
    Solar City’s (and others) lease financing innovation has driven a great deal of industry growth. The leasing companies receive a 35% MACR’s depreciation benefit which is in addition to the margins available on the solar system….and the MACR’s benefit is not available to ordinary homeowners.
    The issues that the residential rooftop solar insdustry has with respect to growth are not currently margin-related.


  8. TJC,

    Reports from our European friends and domestic utilities all show that revenues are down, for varying reasons, one of which is rooftop solar penetration and self generation. This is exceptionally true in regulated markets. (Granted you do not find much solar penetration in these markets.) Furthermore, utilities make their margins on the difference between what they pay for electricity (regardless of if they generate it) and for what they sell it, with ancillary services making up more and more of their revenues as of late. Therefore, when they are paying retail rates to customers for the electricity they produce and then charging them the same rate, that’s net zero for the amount customers are producing. (In some cases, as shown above, more than the retail rate.) Thus eroding the profits structure and business model associated with some utilities and markets. Coupled with state energy efficiency programs, utilities are seeing declining profits. Are they in a death spiral? Not yet. Could they be if they don’t adapt? Potentially.



    SolarCity is one firm that is changing the way solar deployment companies raise capital, obviously. But, prior to their latest security offering and capital campaign, they seemingly had made the lion’s share of their profits from tax incentives and attractive policy environments.


    There are numerous other third-party rooftop solar deployment companies who do not have the requisite assets to raise the amount of capital SolarCity does. We should avoid cherry picking top candidates to define a market. (On a personal note, I think SolarCity is a smart company playing the “all of the above” strategy in financing and hope they succeed.)

    This all speaks to your question of who should bear the costs of smart meters? Should they be bundled with solar installations? Should utilities provide them? Should consumers foot the bill? Or, does the answer lie somewhere between all the players involved?


  9. I really like the idea behind AE’s VOST and I consider it to be a pricing approach that bears the potential to treat all stakeholders in a fair way. However, regulators have to make sure that all VOST parameters are defined, and regularly adjusted, in a neutral way. Potential areas of conflict could rise from very subjective questions, such as: how can we define the premium price paid for the “value of “renewable-ness” of PV”? (http://mn.gov/commerce/energy/images/VOS_Overview_KRR_130107.pdf)

    It would be also interesting to see regulators being involved in AE’s VOST fine-tuning in order to incentivize the transition towards carbon neutral electricity generation, instead of being a bystander of this neutral pricing approach. For example, regulators could balance the equilibrium of benefits towards distributed generators forcing utilities to increase their generation efficiency and decrease their transmission losses. By doing this, utilities would have to react until reestablishing the equilibrium between the cost of centralized generation and distributed generation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s