TODAY’S STUDY: How Utility Rates Can Let New Energy Make The Grid Stronger
Rate Design for a Distributed Grid; Recommendations for Electric Rate Design in the Era of Distributed Generation
July 21, 2016 (TechNet, Sierra Club, SEIA, Vote Solar, The Alliance for Solar Choice, CalSEIA, SolarCity)
In response to the growing popularity of rooftop solar and other distributed energy resources (DERs), 1 some electric utilities have recently begun seeking ratemaking changes that would discourage customers from generating their own power and otherwise buying less electricity from their utility. These changes – which include higher fixed charges and reduced compensation for exported energy – are justified by a purported concern about costs being shifted among customers of the same rate class.
The utilities’ ratemaking ideas are often expressed by the Edison Electric Institute (EEI), most recently in a rate design “Primer” sent to the National Association of Regulatory Utility Commissions (NARUC). 2 In that document, EEI makes three fundamentally incorrect assumptions about rate design: (1) that a very large proportion of a utility’s costs should be considered “fixed” costs; (2) that distributed generation and conservation do not substantially reduce those “fixed” costs or provide other benefits beyond avoiding the short-run energy cost; and (3) that rates based on volumetric energy usage and net metering invariably cause costs to be shifted from low-usage customers and those who self-generate to high-usage ones.
This paper responds to EEI first by examining the allegation that rooftop solar shifts costs onto other utility customers. We point out that the assumption of a cross-subsidy rests largely on the premise that self-generation provides no benefit to the utility and its ratepayers other than reducing the short-run cost to buy or generate power. To the contrary, we show that rooftop solar provides a wide range of benefits, including avoided generation, transmission and distribution capacity, lower wholesale market prices, reduced volatility, and avoided pollution.
In fact, when the full range of avoided costs and other benefits is considered in a complete cost-benefit analysis, solar net energy metering (NEM) – which provides retail credit for solar energy exported to the grid – has been shown to convey net benefits to non-participating ratepayers. A recent meta-analysis of net metering cost-benefit studies by the Brookings Institution concluded that “net metering is more often than not a net benefit to the grid and all ratepayers.”
Next, we offer some rate design principles aimed at achieving broad ratepayer and societal benefits. Good rate design empowers customers to control their energy costs through conservation and adoption of emerging technologies while sending price signals that efficiently allocate capital investment, which can lower costs for all ratepayers. Rates should not be designed simply to protect utilities from competition, and customers are entitled to universal service, usage-based pricing, and fair compensation for energy exports.
Finally, we offer a series of reforms that that could better integrate DERs into the electric grid and maximize their value to ratepayers. In particular, DERs should be included in long-term resource planning so that utilities are not building new infrastructure, such as power plants and transmission lines that could be replaced by DERs at lower cost. In tandem with incorporating DERs into utility planning, regulators should consider changes to the utility business model – including revenue decoupling and new ratemaking mechanisms – that would mitigate the utility’s financial incentive to choose rate-based capital expenses over customer-owned resources as a means to satisfy infrastructure needs.
We conclude this paper by offering the following recommendations:
Ø Study the impact of distributed resources by conducting a rigorous analysis of the costs and benefits
Ø Design electricity rates that empower customers to control energy costs and adopt new technologies that provide system benefits
Ø Implement technology standards to gradually increase the functionality and benefits of distributed resources
Ø Incorporate distributed resources into utility planning in order to defer or replace traditional infrastructure
Ø Update utility business models so that utilities have greater financial incentive to rely upon customer-sited distributed resources to meet infrastructure needs
Ø Implement rate changes gradually and incrementally, with grandfathering for customers who made long-term capital investments on the basis of previously existing rates…
Distributed Energy Resources bring much needed technological innovation, competition, and customer engagement to the utility sector, and the benefits of these resources to both participating and nonparticipating ratepayers is likely to be substantial. Thus, regulators should not adopt a one-size-fits-all approach to rate design, but should instead devise solutions that are appropriate for ratepayers and also appropriately reflect state and federal energy policy goals, including:
• Studying the impacts: States should conduct a rigorous independent cost-effectiveness study to determine whether distributed solar under current rate structures imposes a net benefit or a net cost on all of their ratepayers and how distributed solar impacts total system costs. Policymakers can play an important role by seeking to standardize which costs and benefits are considered and how they are evaluated.
• Modernizing utility planning: Regulators should seek ways to incorporate solar and other DERs into utility planning so that these resources can be used to defer traditional infrastructure investments and reduce total system costs. Integrated Resource Planning and Distribution Resource Planning processes can be an effective way to accomplish this.
• Updating utility business models: States may consider implementing revenue decoupling, in addition to more extensive changes to utility business models and revenue mechanisms in order to provide an incentive for utilities to rely upon customer-sited DERs to meet infrastructure needs.
• Implementing technology standards: States may wish to consider implementing technology standards developed by national or international standards-making bodies, programs, and best practices to enhance the value of the resources. For example, at 5% solar PV penetration, a state may wish to mandate solar smart inverters that can provide reactive power and voltage control as a condition of interconnecting under the NEM tariff.
• Encouraging choice: Regulators should design electric rates to encourage customers to choose distributed generation and foster emerging technologies that have the potential to reduce electricity costs and environmental impacts. For example, time-of-use rates can encourage customers to adopt energy storage or load-shifting technologies capable of reducing the need for central generating capacity and distribution system upgrades.
• Gradualism, grandfathering, and predictability: Rate changes, if deemed necessary, should be introduced gradually so that sellers of retail energy services have a stable business climate in which to operate. Existing customers should be grandfathered into pre-existing rates so as not to destroy the value of systems already installed and any new rates should be stable and predictable to ensure that customer investments can lock-in value for the life of the system.
Finally, regulators should design rates with an eye to the benefits of emerging technology and competition in the utility space. With little competition over the past 100 years, monopoly utilities have had little incentive to innovate, and the technologies used to generate and transmit electricity have changed little during that time. The emergence of distributed energy resources offers the promise of a cleaner and more competitive electric industry, providing consumers with the benefits of innovation and efficiency that accompany competitive markets. Regulators should resist allowing incumbent monopolies to use rate design as a means to squelch innovation and stifle customer choice