Pricing renewables: Public power puts customers first

Renewable energy resources have enjoyed rapid growth over the past decade thanks to declining costs, escalating customer interest, and evolving state and federal policies. In 2016 alone, 22 gigawatts of renewables were added to the grid, according to Bloomberg New Energy Finance. As prices are expected to decline further, renewables are likely to continue to grow.

Customers in the United States purchased 95 million megawatt-hours of energy on the voluntary green power market — through community solar programs, power purchase agreements, contracts, and utility green pricing programs, according to the National Renewable Energy Laboratory.

Public power utilities play a big role in the renewables market, even though the compliance requirements set by state renewable portfolio standards often do not apply to them.

Six public power utilities are on NREL’s 2016 top 10 list of green pricing programs. Four public power utilities are in the top 10 for green power sales (by megawatt-hours): the Sacramento Municipal Utility District ranked second, Austin Energy fourth, Tennessee Valley Authority eighth, and Silicon Valley Power ninth.

In 2015, Austin Energy was the top public power utility in green sales in NREL’s listing and third among all utilities with 637 million kilowatt-hours of renewable energy sold. Austin Energy achieved that position solely through solar power acquisitions.

Amid all this growth, it can be complicated for utilities to figure out exactly how much renewable energy costs.


Balancing affordability and community values

In Missouri, Independence Power and Light’s goal is to mirror the state’s “15 percent by 2021” renewable portfolio standard, according to Andrew Boatright, the acting director of the utility. IPL is under no regulatory mandate but is doing what is “environmentally appropriate,” he said.

Years ago, IPL entered into a power purchase agreement to buy 15 MW of wind power from Enel Green Power North America’s Smoky Hills II wind farm near Salina, Kansas. Subsequently, IPL added 20MW from the Marshall Wind Energy project in northeast Kansas. From a cost perspective, the wind power purchase agreement was not a difficult decision. It was a competitive solicitation, enabling IPL to procure renewable energy at the lowest price and with no negative impact to rates, Boatright said.

Now, the utility plans to expand its community solar program from 3 MW to 11.5 MW, with 8.5 MW expected to come online next summer. Solar is not the cheapest resource by any means, but it is a negligible part of the utility’s overall system and does not result in higher rates, said Boatright.

“Part of remaining relevant in the next era is defined by what our customers need and want,” said Boatright, and “customers want a say in the type of electricity they buy.”

“Community solar hits on many cylinders,” he said. It gives customers the renewable energy they want, and it can come with flexible pricing options that do not impinge on customers who choose not to participate in the program. Unlike a net metering program that allows customers with rooftop solar to sell excess power back to a utility, the community solar customer pays to subscribe to a community solar program and buys power from the utility.

However, a community solar program does not immunize a utility from rate uncertainty. IPL also has a net metering program for rooftop solar customers in addition to energy efficiency and conservation programs. Those programs all eat into the utility’s fixed costs.

To explore ways to recover these costs, IPL is undertaking a cost of service and rate study, which should be ready to present to the city council by mid-2018. “We need and want to understand the impact of renewables,” said Boatright.


In Fairness to All

Net metering programs have been a driving force behind the growth of renewable energy, but problems arose as the programs grew in popularity. Some people argued that solar customers were paying less than their fair share of fixed utility costs, putting a burden on non-solar customers. Solar advocates argued that these valuations were flawed because they do not account for the non-environmental benefits of solar power, such as reduced transmission or distribution loads during peak hours.

In 2012, Austin Energy in Texas became the first utility in the United States to introduce a value of solar tariff, which replaced its net metering program.

Adopting a value of solar approach “gets us away from the net metering fight,” said Danielle Murray, Austin Energy’s solar program manager. “We bypass that whole conversation.”

A value of solar approach means that solar customers are not overcompensated for the solar power they sell back to the utility. Murray said this approach allows Austin Energy to move on to a more sustainable phase of its renewable energy program.

Austin Energy hired consulting firm Clean Power Research to conduct a value of solar study that includes five components: the offset costs of generation, transmission, distribution, operations and maintenance, and a value for environmental attributes.

For the generation component, Austin Energy uses forward prices in the Texas competitive power market and then uses production profile overlaid with forecast prices for specific times so that time-of-use rates are built into the calculation.

The environmental costs were originally based on Austin Energy’s green energy program and pegged at about $0.02/kWh, but they are now based on the Environmental Protection Agency’s social cost of carbon calculation, or about $0.015/kWh.

Another component of Austin Energy’s approach is what has become known as buy-all, sell-all. Solar customers buy all the electricity they use at their prevailing retail rate and get a credit for all the solar power they generate at the value of solar rate. On average, Murray said, about half of the residential solar output on Austin’s system is pushed back to the grid.

“The value of solar approach allows us to adopt renewable energy in a financially sustainable way,” said Murray.


Getting Ahead of the Wave

When Lincoln Electric System in Nebraska was trying to determine the cost of renewable energy on its system, it took a close look at the literature on value of solar studies, including the work that Clean Power Research did for Austin Energy. In the end, Lincoln Electric did its own value of solar study.

Lincoln Electric used the same basic parameters as Austin Energy — the value of generation, transmission and distribution offsets, plus a value for environmental benefits — but with its own take.

In broad strokes, Lincoln Electric established a base case that projects the cost of the utility’s energy needs 20 years into the future. It then modeled enough behind-the-meter solar to move the need for the next generating unit out one year. When that aggregate solar output is subtracted from the base case, it yields a solar base case. Capital costs for new generation and environmental benefits are added to the mix, and the difference between the base case and the solar case determines the levelized cost Lincoln Electric pays its solar customers.

For environmental benefits, Lincoln Electric used past sales of renewable energy credits to develop a price forecast. In particular, the public power utility used short-term prices for solar renewable energy certificates in a voluntary market. Nebraska has no renewable portfolio standard.

The aim of Lincoln Electric’s renewable generation rate is to put solar and non-solar customers on an equal footing, while compensating solar customers for the value of the capital expenditures they save the utility, said Scott Benson, Lincoln Electric’s manager of resource and transmission planning. The idea is “to pay all the value that solar brings and no more than that.”

Lincoln Electric does not currently pay solar customers the value of solar rate, but it does use the value of solar analysis to inform its renewable generation rates, Benson said. Value of solar is the fundamental building block of the utility’s renewable generation rates.

Right now, solar customers are paid the full retail rate for solar production they sell to the utility. That rate applies until Lincoln Electric reaches 1 MW of customer-installed renewable energy. After that, customers are paid at half the renewable generation rate until renewables on Lincoln Electric’s system reach 2 MW. After the 2 MW mark is hit, the rates will come down again. This last rate has not yet been set, but it might be the value of solar, said Benson.

If solar panel prices continue to drop, “we will see more solar installations, with or without incentives,” said Benson. “We are doing this before the wave hits. We want to get ahead of the wave.”