Social Cost of Carbon

How much value should owners of rooftop solar systems receive credit for in reducing their use -- and the environmental impact -- of utility-generated electricity?  That is THE question Minnesota is tackling this month, the first state ever to do so.

Minnesota’s Department of Commerce is due by January 31 to submit a methodology for figuring the value of solar to the Minnesota Public Utilities Commission. It is one of the most closely-watched state energy initiatives in the U.S. because of the impacts it could have on the solar industry and tradition-bound electric utilities that see solar as a threat to their 100+ year-old business model.

Should a ruling and a rate emerge from the Commission later this year, it is expected only to be a voluntary alternative that utilities could choose if they don’t want to credit homeowners through net metering for the surplus power their solar systems push back out on to the grid. Either way, a rate case could provide a more practical path forward for valuing rooftop solar systems while providing a real-world example for other states to do something similar.

Because the Minnesota Legislature launched this initiative while requiring investor-owned utilities in the state to supply at least 1.5 percent of their energy output from solar power by 2020, the push for cleaner energy in “The Land of 10,000 Lakes” appears to be strengthening; I’m guessing that green ethic will be reflected in the Commission’s decision and it will withstand the predictable onslaught of critics trying to defeat it.

The Legislature is requiring that any formula include the projected damage to the climate that can be attributed to power plant carbon emissions. Because carbon-free solar power reduces that damage, solar owners could receive a different, but not additional, benefit from their utility. Either way, stakeholders on all sides are watching the proceedings very closely.

So how DOES a state calculate the value of a rooftop solar system?

Clean Power Research, a consulting firm, drafted the methodology for the Department of Commerce. The firm based it on a computer modeling of the “social cost of carbon” developed under appointees of President Barack Obama at the Environmental Protection Agency (EPA).  EPA acknowledges, as several critics of the effort have asserted, that it raises questions about climate science and environmental economics, along with a host of ethical considerations.  

The value of solar calculation is supposed to determine the pro-rated costs that a solar system spares the utility from incurring. These are known as “avoided costs.”  The biggest avoided costs are the fuel purchases displaced by the solar generated electricity. Avoided costs also include the cost of maintaining and, if necessary, adding to the high-voltage lines that make up its transmission network;  the distribution lines that deliver grid power into homes and businesses; and upgrading meters to help utilities and their ratepayers get smarter about their usage.

No matter which way you approach it, the value of solar will be a subjective calculation. And therein lies the rub. If there is no actual cost to avoid (e.g. a carbon tax), utilities will be quick to argue there is no cost to avoid.  Furthermore, the final number depends greatly on how to discount future damage and convert it into current-day dollars (aka “present value).

That’s precisely the point made by Brian Draxten, manager of resource planning for Otter Tail Power in Fergus Falls, Minn., who argued that because the utility currently pays no money, it’s only a cost in theory. “Until there is money we’re avoiding, the whole thing should be zero,” he told Energy & Environment Publishing earlier this month.

The draft formula drawn up by Clean Power Research results in a solar value of 12.6 cents per kilowatt hour. About half of that amount comes from costs avoided for coal, natural gas and other fuels burned to run generators in Minnesota. For the damage to the climate avoided, the formula assigns a value of just under 3 cents per kilowatt hour.  See table for the complete breakdown.

Sample Value of Solar - Levelized Calculation Chart for Minnesota by Clean Power Research, 2013

25-Year

Levelized Value

Economic

Value

($/kWh)

Load Match

(No Losses)

(%)

Distributed

Loss Savings

(%)

Distributed

PV Value

($/kWh)

Avoided Fuel Cost

$0.060

na

8%

$0.065

Avoided Plant O&M – Fixed

$0.003

40%

9%

$0.001

Avoided Plant O&M – Variable

$0.001

na

8%

$0.001

Avoided Generation Capacity Cost

$0.048

40%

9%

$0.021

Avoided Reserve Capacity Cost

$0.007

40%

9%

$0.003

Avoided Transmission Capacity Cost

$0.009

40%

9%

$0.004

Avoided Distribution Capacity Cost

$0.008

30%

5%

$0.003

Avoided Environmental Cost

$0.026

na

8%

$0.029

Avoided Voltage Control Cost

na

na

na

na

Solar Integration Cost

na

na

na

na

na: not applied

 

 

 

 

TOTAL

$0.163

 

 

$0.126


Minnesota may be the first state to value solar power in the context of climate change. (Track comments and future developments here.) But Austin Energy, the municipal utility in the Texas capitol city, established a value that this year is set at 10.7 cents per kilowatt hour. (It was 12.8 cents in 2012 and 2013.) That’s about 1 cent per kilowatt hour higher than the standard rate customers pay for power there due to the city’s growing reliance on relatively low-cost natural gas. Even so, the differential has triggered a wide range of supportive and critical responses as I predict the Minnesota effort will.

A controversial 2013 report about disruptive challenges facing investor-owned utilities for the industry’s trade association calculates the average residential customer pays an electric bill of $110 per month, $60 of which it asserts are fixed costs. Solar advocates challenge that number arguing that the amount is far smaller when all the benefits of on-site generation are accounted for.  While there is no groundswell yet pushing to value rooftop solar, the very attempts to value solar are setting the stage for a substantive discussion that is almost certain to gain momentum.

Karl Rábago, who served as the Vice President of Distributed Energy Services at Austin Energy and now consults about cleaner and smarter energy, urged stakeholders to keep an eye on how the California utility commission follows through on the state’s new AB 327 law and next steps in Georgia Power’s Advanced Solar Power Initiative.

This generally is how substantive changes in utility rates take root, get refined and over several years get adopted as more utility commissioners consider the rationale but also the data to consider such valuations. The upshot: five years from now, we’ll look back on what Austin has done and what Minnesota is trying to do as the game-changing sequence of new policies that that will give solar power its due.