TODAY’S STUDY: SOLAR PV CUTS CONSUMERS’ ELECTRICITY BILLS

Electricity Bill Savings from Residential Photovoltaic Systems: Sensitivities to Changes in Future Electricity Market

Naïm Darghouth, Galen Barbose, Ryan Wiser, January 2013 (Lawrence Berkeley National Laboratory)

Executive Summary

Overview

Customer-sited photovoltaic (PV) systems in the United States are often compensated at the customer’s underlying retail electricity rate through net metering. Calculations of the customer economics of PV, meanwhile, often assume that retail rate structures and PV compensation mechanisms will not change and that retail electricity prices will increase (or remain constant) over time, thereby also increasing (or keeping constant) the value of bill savings from PV. Given the multitude of potential changes to retail rates and PV compensation mechanisms in the future, however, understanding how such changes might impact the value of bill savings from PV is critical for policymakers, regulators, utilities, the solar industry, and potential PV owners, i.e., any stakeholder interested in understanding uncertainties in and potential changes to the long-term customer economics of PV.

This scoping study investigates the impact of, and interactions among, three key sources of uncertainty in the future value of bill savings from customer-sited PV, focusing in particular on residential customers. These three sources of uncertainty are: changes to electricity market conditions that would affect retail electricity prices, changes to the types of retail rate structures available to residential customers with PV, and shifts away from standard net-metering toward other compensation mechanisms for residential PV.

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• Electricity Market Scenarios: We investigate the impact of a range of electricity market scenarios on retail electricity prices and rate structures, and the resulting effects on the value of bill savings from PV. The scenarios include various levels of renewable and solar energy deployment, high and low natural gas prices, the possible introduction of carbon pricing, and greater or lesser reliance on utility-scale storage and demand response.

• Retail Rate Structures: We examine the bill savings from PV with time-invariant, flat residential retail rates, as well as with time-varying retail rates, including time-of-use (TOU) rates and realtime pricing (RTP). In addition, we explore a flat rate with increasing-block pricing (IBP).1

• Net Metering and PV Compensation: We evaluate the bill savings from PV with net metering, as currently allowed in many states, as well as scenarios with hourly netting, a partial form of net metering.

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The report seeks to explore the interactions between these three types of potential future changes. For example, higher penetrations of renewable energy could have a significant impact on the hourly profile of wholesale electricity prices. These changes could, in turn, impact retail electricity rates and the bill savings from residential PV, particularly if full net metering were no longer available or if residential retail rate structures were to shift towards marginal cost pricing with higher temporal resolution (i.e., prices that change with period of the day or hour) through TOU rates or RTP.

This scoping study is the first known effort to evaluate these types of interactions in a reasonably comprehensive fashion, though by no means have we considered every possible change to electricity market conditions, retail rate structures, or PV compensation mechanisms. It focuses solely on the private value of bill savings for residential PV and does not seek to quantify the broader social or economic cost or value of solar electricity. Our analysis applies assumptions based loosely on California’s electricity market in a future year (2030); however, it is neither intended to forecast California’s future market, nor are our conclusions intended to have implications specific only to the California market. That said, some of the findings are unique to our underlying assumptions, as described further within the main body of the report, along with other key limitations (see, in particular, Section 1.3 and Chapter 4).

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Approach

To explore key uncertainties in the future value of bill savings for residential PV, we take the following approach:

1) We model the impacts of various electricity market scenarios on hourly wholesale market prices, using a simplified production-cost and capacity-expansion model. Using the California electricity market in 2030 as a loose case study, we model a reference scenario (which roughly assumes current levels of renewable generation); five Isolation scenarios that consider a single change to the reference scenario (15% PV penetration, 15% wind, $50/t carbon price, Table 1 and high and low natural gas price scenarios); a 33% renewable energy mix scenario; and three 33% renewable energy mix scenarios that include, respectively, a higher penetration of grid-level storage, demand response, and concentrating solar power (CSP) with storage. (in Section 2.1) summarizes the assumptions for each of the scenarios.

2) Based on the hourly wholesale market prices calculated in the first step, and other assumptions specified in the report, we create three potential future retail rates for each electricity market scenario: flat, TOU, and RTP. The rate levels and structures are created using standard rate design principles and assuming full cost recovery of variable and fixed costs. The fixed costs are recovered through a volumetric adder, rather than with a fixed customer charge, but we recommend further research to analyze the impacts of the latter rate design option.

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3) Finally, we calculate the value of bill savings from PV for a sample of residential customers by calculating their annual bill with and without PV generation, for each retail rate type and for each electricity market scenario. We calculate bills with PV using two compensation mechanisms: (a) net metering, in which the customer receives full compensation at the prevailing retail rate for all PV-generated electricity; and (b) hourly netting, in which the customer’s PV electricity generation during each hour displaces electricity consumed during that hour at prevailing retail rates, but PV generation that exceeds customer consumption during any hour is compensated at wholesale electricity market prices. Hourly netting arguably represents a practical lower bound for how utilities might compensate excess PV generation.

The last step described above is conducted for 226 California residential customers for whom data on hourly metered load are available. Simulated PV generation profiles for each customer are used to calculate bills with PV. The PV systems are sized to meet 75% of annual customer load in the default case, which is slightly higher than the current average for California customers; some results for 25% and 50% PV-to-load ratios are also presented. The value of bill savings from residential PV is calculated as the difference in the annual bill with and without PV divided by the total annual kilowatt-hours generated by the PV system. Expressing the value of bill savings in terms of $/kWh allows for a direct comparison of electricity bills between residential customers with different loads and between alternate PV-to-load ratios.

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Results and Conclusions

For our sample of 226 residential customers, we calculate each customer’s value of bill savings from PV for each electricity market scenario, rate option, and PV compensation mechanism. The median value of bill savings across all customers for each of these permutations is summarized in Figure ES-1. In order to focus on the sensitivity of bill savings to each source of uncertainty, the bill savings in each case is expressed on a relative basis, as a percentage change from the bill savings with the flat rate and net metering under the reference scenario. The reference scenario assumes 0.3% of electricity from PV, 4.0% from wind, no CSP, and 7.4% from other renewables including geothermal, small hydro, and biogas, as well as no carbon price, no demand response, and a natural gas price based on the U.S. Energy Information Administration reference projection for 2030. This comparative baseline case is loosely modeled after residential rate structures common in the United States today (though it does not contain usage-based IBP that is currently the norm in California).

In general, the results show that future electricity market scenarios, retail rate structures, and the availability of net metering interact to place substantial uncertainty on the future value of bill savings from residential PV. As such, simple assumptions that project a flat or increasing value of bill savings over time (in real terms) may not be accurate.

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Specific key findings from the analysis are as follows:

• Under electricity market scenarios with increased utility costs, the value of bill savings is higher than under the reference scenario when PV is compensated via a flat rate with net metering. A number of the scenarios entail higher electricity costs than in the reference case, due to either the purchase costs of higher levels of renewable energy or increased costs for fossil generation in scenarios featuring a carbon price or higher natural gas prices. These conditions increase the retail rates needed to recover utility costs and thus also increase the value of bill savings for PV customers that can take advantage of flat rates with net metering. Under the particular scenarios considered, the bill savings from PV with a flat rate and net metering are 1% to 13% higher than under the reference case. The only exception is the isolation scenario with a low natural gas price, which yields lower electricity purchase costs for utilities and a 4% lower value of bill savings than under the reference case, for PV compensated via a flat retail rate and net metering.

• Hourly netting significantly erodes bill savings, relative to net metering. Under hourly netting, PV customers receive the retail rate for PV generation that displaces hourly load but the hourly wholesale price for any electricity generated beyond their electricity consumption within each hour. Over most hours in which hourly excess PV is exported to the grid, wholesale prices are lower than retail rates (whether flat, TOU, or real time pricing), yielding a sizable decrease in the value of bill savings, particularly when hourly exports are a sizeable portion of total PV generation. As a result, the bill savings from PV are 23% to 47% lower with hourly netting than with full net metering, depending on the electricity market scenario and rate option, at a 75% PV-to-load ratio. If the compensation rate for net excess generation exceeded the hourly wholesale electricity price, e.g., if compensation was provided for other benefits provided by PV, such as avoided transmission and distribution costs and losses, then this reduction in value would be lower.

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• For electricity market scenarios without an increase in solar penetration beyond the reference case level, TOU rates provide the greatest bill savings value among the three rate options considered, followed by RTP. In these low-solar-penetration scenarios, TOU and RTP yield a higher value of bill savings than the flat rate (by 8-13% and 1%-7%, respectively), because wholesale electricity prices are generally higher than average during times that PV generates electricity (i.e., PV output is positively correlated to summer peak load), and PV generation therefore benefits from time-differentiated compensation. The modeled TOU rate, calculated using a clustering algorithm to identify TOU periods, results in higher bill savings than the RTP rate because PV customers benefit from the averaging of hourly wholesale electricity prices over the peak TOU period, thereby increasing the average effective compensation rate of PV generation compared with RTP (see the full report for details on this non-intuitive finding). Electricity systems with winter-evening peaks, where PV output does not correlate well with peak wholesale electricity prices, would likely experience very different results than those presented here owing to our California-based assumptions.

• In stark contrast, for all scenarios with high solar penetration, the flat rate provides the greatest bill savings, followed by the TOU rate, followed by RTP. In these higher-solar-penetration scenarios (with greater than 10% of total electricity generation from PV), hourly wholesale electricity prices are generally lower than average when PV generates electricity because significant solar generation during the afternoon shifts the time of peak “net” load (system load minus PV generation) into the evening hours, also shifting the temporal profile of hourly wholesale electricity prices to be negatively correlated with PV output. As a result, the TOU and RTP rates, which are time varying and directly related to wholesale prices, provide a 1%-16% and 1%-27% lower value of bill savings from PV than does the flat rate, respectively. Given this and the previous finding, whether flat, TOU, or RTP rates provide the most benefit to residential PV customers depends critically on the level of solar generation within the regional electricity grid.

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• High PV penetration levels reduce the value of bill savings under most combinations of rate options and compensation mechanisms evaluated in this report other than the flat rate with net metering. Under the 15% PV penetration case, for example, the value of bill savings is 8% higher than in the reference case if PV is compensated under a flat rate with net metering (due to the higher costs associated with utility-scale PV generation) but is 8%-51% lower than in the reference case for the other five permutations of rate option and compensation mechanism (all of which have a time-varying component related to wholesale prices, which are lower than the reference scenario at times when PV generates). Sizable declines in bill savings can occur even at relatively low PV penetration levels, although the degree of decline depends on the retail rate structure and compensation mechanism. Specifically, in this scoping analysis, for TOU rates, the value of bill savings declines particularly steeply at PV penetrations of just 2.5%-7.5% (and then declines more slowly at higher PV penetration levels), whereas for RTP and for flat rates with hourly netting, the value of bill savings declines more linearly with grid PV penetration levels.

• At high renewables penetration, the bill savings from PV increase with greater deployment of grid storage, demand response, or CSP with storage. Other analyses have highlighted the potential value of storage and demand response as a way to integrate large amounts of renewables into the grid, and our results show that storage and demand response also enhance the bill savings from behind-the-meter PV. Specifically, compared to the standard 33% renewable energy mix scenario, the value of bill savings from PV increases by up to 12%, 10%, and 8% with increased grid-level storage, demand response, or CSP with storage, respectively. These strategies shift prices such that they are higher during times when PV is generating, compared to the price profile in the core 33% renewable energy mix scenario, leading to increased average compensation rates for behind-the-meter PV. The value of bill savings is also higher due to increased retail rates resulting from the additional utility costs of CSP and storage.

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• IBP can lead to variations in the value of bill savings from PV that are even more significant than the variations associated with other rate options, compensation mechanisms, and electricity market scenarios. IBP is a rate structure with usage tiers and increasing volumetric charges for consumption within each successive tier. Depending on the steepness of the usage-based price tiers, IBP can lead to a high value of bill savings from PV, especially for households with significant electricity consumption. The variation in value of bill savings across customers is directly related to the range between the lowest- and highest-priced tier and hence dependent on rate design parameters. Using the rate design parameters specified in this report for a flat rate with IBP (which are based on the residential IBP rates currently employed in California), customers in the lowest consumption tiers receive a value of bill savings from PV that is up to 33% lower than for customers on the non-tiered flat rate with net metering, whereas customers in the highest tier receive a value of bill savings that is up to 102% higher than for customers on the non-tiered flat rate.

While these findings may be somewhat unique to the assumptions and setting used in the present research, they nonetheless demonstrate that future electricity market scenarios, retail rate structures, and the availability of net metering can interact to greatly impact the future value of bill savings from residential PV. As policymakers, regulators, utilities, the solar industry, and potential PV owners consider the future economic attractiveness of residential PV—as well as appropriate rate design and PV compensation mechanisms—the interactions described in this report require further consideration and more detailed and location-specific analysis.

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