TODAY’S STUDY: MAINE PROPOSES A WAY TO GET OFF THE NET METERING MERRY-GO-ROUND
A Ratepayer Focused Strategy for Distributed Solar in Maine
May 23, 2015 (Maine Office of the Public Advocate/Strategen Consulting Group)
This white paper offers a framework for sustainable growth in Maine’s distributed solar energy sector that maximizes and fairly allocates benefits for all ratepayers. This approach builds on the Public Utilities Commission’s recent “value of solar” study as well as lessons learned from other states. The policy proposed is specifically tailored to the state of Maine and offers innovative program design features intended to capitalize on the latest technological advances in the solar industry. The goals guiding this policy are the following:
• Maximization of ratepayer benefits: Establish competitive market structures that take advantage of advances in technology and declining costs to the benefit of all ratepayers.
• Transparent allocation of costs and benefits: Clearly link actual system benefits to transparent compensation mechanisms.
• Opportunity for participation across all solar market segments: Allow every market segment the opportunity to participate in the program on fair terms, from retail customer-paired residential solar, commercial and industrial resources, to standalone distribution-connected wholesale resources.
• Market-based encouragement of technological innovation: Allow data-based value adders to encourage technologies, combinations of technologies, and resource dispatch behaviors that are beneficial to the grid.
• A fair balancing of stakeholder interests: Each key stakeholder group receives equal consideration with a focus on win-win approaches (e.g. no one group left as a clear loser or winner).
While designed to present a coherent and holistic policy framework for state-wide adoption, this whitepaper is also intended to solicit stakeholder feedback.
1.1 High-level Policy Overview
This framework uses market forces to maximize value to all ratepayers, while fairly compensating solar adopters. The core attributes of the policy are as follows:
1. A cost-conscious and fair alternative to the current net metering based system.
2. Long-term compensation structures with a levelized cost of energy cap set initially at a level based on a value of solar analysis and above the current level of compensation offered by net metering.
3. Competitive bidding and capacity based step downs to drive actual program costs well below this initial level.
4. The potential (if the market can reach aggressive pricing targets) for 300 MWs of total new solar capacity by 2025, divided between three market segments – wholesale (150 MW), residential/commercial (100 MW), and industrial/community (50 MW).
5. Aggregation and procurement of solar resources to capture and monetize the value of solar generation in the relevant markets.
This whitepaper is divided into four sections, including this introduction (Section1). Section 2 provides an overview of Maine’s existing net metering policy, its advantages and its shortcomings. Section 3 describes the results of the Maine Public Utilities Commission’s value of solar study. Section 4 describes an alternative solar policy, rooted in the Commission’s value of solar analysis and the goals described above. The Appendix include lessons learned in three states, California, Arizona, and Minnesota that informed the policy approach set forth here.
2. Overview of Net Energy Policy in Maine
Net metering, or net energy billing (NEB), is a billing mechanism that allows customers to receive credit for energy produced on-site that is sent back to the grid at the variable retail electricity rate. In Maine, this is currently the primary incentive available for distributed solar generation. Maine’s two investorowned utilities (IOUs) must offer net energy billing to their customers.
Net metering is popular with both customers and the solar industry. The primary benefit of net metering is its simplicity: to rate payers, developers, investors, and regulators.
However, the falling costs of solar, paired with rising retail electricity costs have driven increased adoption that has revealed fundamental issues with the net metering platform. While it is not an issue yet in Maine, the scalability of NEM is under review in a number of states. At high penetrations of solar, the retail rates underpinning NEM do not send timely or appropriate price signals to solar adopters—in short, these customers are compensated at rates that do not reflect the value of the resource or the continuing decline in the installed cost of solar. While this may result in higher levels of solar installation, at increased penetration rates these issues may undermine the consensus supporting the continuation of the policy.
Other issues inherent in the net metering incentive structure include:
• There is no certainty for net metering customers, whose rates may change in response to variations in wholesale prices and rate design. This lack of certainty can raise consumer protection concerns and also impacts the costs of financing.
• The economics of the underlying rate design do not make sense for larger commercial and industrial customers because their costs are largely recovered through demand charges.
• High rates of rapid adoption can lead to significant cost shifts to non-net metered customers. In other words, as net metered customers invest in self generation and reduce their electricity bills, non-net metered customers must pick up a greater share of the overall costs to deliver energy.
• There is little transparency regarding the relative costs/benefits and cost shifts.
• Discussion of rate design changes affecting all customers may be disproportionately impacted by a small, vocal subset of solar customers and supporters.
For many of the reasons stated above, states across the country are revisiting traditional net metering or, at least, the underlying rate designs upon which it rests. Still, absent a viable policy alternative, the popularity and simplicity of net metering make it unlikely that Maine’s existing net metering policy will be changed, until Maine experiences higher levels of solar penetration.
3. The Maine Distributed Solar Valuation Study
Pursuant to the “Act to Support Solar Energy Development in Maine” (P.L Chapter 562; codified at 35-A M.R.S. §§ 3471-3473) (“Act”), the Maine Public Utilities Commission (“Commission”) was required to develop a methodology for determining the value of distributed solar energy generation in the State. In March of 2015, after robust stakeholder input on all aspects of the methodology, the Commission published the “Maine Distributed Solar Valuation Study.” The Study contained three major findings: (1) a methodology for estimating the cost and benefits of solar, (2) values for each cost and benefit (expressed as dollars per kilowatt hour) for the three utility territories, and (3) implementation options for encouraging solar adoption within the State’s existing utility framework.
2.2 Methodology for Quantifying Costs and Benefits of Solar PV…2.3 Avoided Market Costs and Societal Costs…Avoided Market Costs…Societal Costs…Relevant and Direct Values to Ratepayers…
4. A New Program Design
The policy presented here is based on the premise that there are now better ways than net metering to encourage solar adoption that send the right signals to developers and consumers, drive technological innovation, and allow utilities to more easily manage the increase in intermittent generation. This paper presents policy concepts for two important distributed solar market segments in Maine:
• Customer-sited (systems installed for residential and small commercial/industrial customers)
• Wholesale (systems installed on the utility side of the meter within the distribution system)
An aggregation entity, or “Solar Standard Buyer” (SSB) would interface with the customer sited market segment. Under the existing net metering construct, this role is currently assumed by the Standard Offer Provider or a customer’s competitive electricity provider. Centralizing procurement with the SSB would allow for a more efficient aggregation and sale of the different attributes solar energy can provide. The SSB would aggregate the energy, RECs, capacity value, and ancillary services potential and monetize these in the applicable markets. As stated previously, the underlying goal of the policy structure is to allow Maine ratepayers to capture the benefits of distributed solar energy while minimizing the costs and inequities experienced in other states.
For the wholesale market, the Commission would solicit competitive bids with the ultimate purchaser for these contracts being the Standard Solar Buyer. The amounts purchased would “prime the pump” for the Standard Solar Buyer’s solar portfolio to ensure that the portfolio is of sufficient scale to efficiently monetize the benefits described above.
These policies combine the values of distributed solar calculated in the Commission’s Study with the lessons and experience from other states. The idea is to set Maine on a course that allows the distributed solar market to grow and thrive and for incentives to align with market maturity. If successful, this policy could provide a platform for future innovation and development for all types distributed resources. Below is a more detailed discussion of each program and market specifics.
4.1 Customer-sited Solar Contract
For the customer-sited market segment, the compensation structure must be straight forward for the customer and subject to reasonable financing. 2 The core of the policy is the Customer-sited Solar Contract (“CSC”), a fixed-price, 20-year contract between the customer and the solar aggregator. Twenty years is a common term for solar equipment financing and well within adopter payback. The compensation rate for all market segments would be capped initially at the sum of the direct market derived values found in the Distributed Solar Valuation Study (see below). While societal values will not be compensated directly (for reasons stated above), if the solar industry thrives below the value cap then all Maine residents reap the financial and environmental benefits of solar. The following is the value stack associated with a 20-year levelized assessment:
Under the CSC, a solar aggregator would enter in a long-term, fixed contract with residential and small business customers that choose to host solar energy. The “payment” would be based on a per kWh rate that would appear as a monthly bill credit on the customer’s bill (similar to Maine’s existing NEM structure). The level of compensation would be capped at $0.20/kWh.
As stated above, centralizing procurement with the Solar Standard Buyer would allow for a more efficient aggregation and selling of the different attributes solar energy can provide. The role of the solar aggregator is also central to this policy framework. The solar aggregator, which could be a distribution utility or a Commission-designated third party, will be the counterparty for each CSC, and will be responsible for aggregating and monetizing the value of the different attributes Maine’s solar generation fleet provides.
Both the payments to customers under a CSC and the revenues received through this aggregation and sale would be credited to all customers through T&D utilities’ existing stranded cost mechanisms. The near-term premium, the difference between the amount recovered by the solar aggregator and the amount paid under a CSC, would be covered in the stranded cost adjustor on each customer’s bill. Likewise, this would be the same account that would be credited when wholesale prices increase above the solar contract.
While the near-term compensation level for a CSC is higher than current retail and wholesale rates, nonparticipating customers will be better off than under net metering, because they will capture, monetize and retain substantially more of the benefits associated with distributed solar generation. Nonparticipating customers may even realize benefits over time if the revenue received from monetizing the benefits described above overtakes the fixed price of the solar contract. Because the first year level of compensation is capped based on the avoided market costs calculated in the Commission’s value of solar, customers will not pay more than the best available estimate of the likely benefits to them, even if all of these benefits are not directly monetized by the Solar Buyer…
This whitepaper proposes an alternative to the existing net-metering program that supports the installation of additional solar while prioritizing ratepayer benefits and encouraging fairness, transparency, and market principles. Moreover, it proposes the opening of a new market segment, wholesale DG, which can deliver nearly the same benefits of rooftop solar but a significant discount in cost. The policy vision presented here strikes a balance between stakeholder interests with a unique focus on producing benefits for all of Maine’s ratepayers. With the correct structure in place, economic development benefits follow, large political fights can be diffused, customer options multiply, and innovation occurs.
While many details would need to be defined, it is our hope that all parties can agree on the general goal of maximizing benefits while mitigating costs, and that this common guiding principle can foster further dialogue on strategic and sustainable solar deployment in Maine. Rather than simply adopt the policy conventions of other states, Maine can establish a policy tailored to its specific needs, goals, and market structure. Maine can build on the innovative, collaborative work in its Value of Solar Study to be the first restructured market to adopt a value of solar based compensation structure. It can also be one of the first states to aggregate DG resources to the benefit of all ratepayers. Maine can anticipate and avoid the conflict seen in other states that have built solar incentive on net metering, by developing an alternative approach that builds a sustainable solar industry while benefiting all ratepayers. Finally, Maine can both recognize the value and benefits that distributed solar provides, while not necessarily paying for each and every value. Instead, ratepayers can and should obtain these values at the lowest price possible, while still maintaining resource diversity and customer sited options. For this concept specifically, Maine can show a path forward that balances the cost-based resource acquisition with value based compensation in a way that is efficient, transparent, and fair.