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The Value of Solar: Old Wine in New Bottles

The “Value of Solar” has emerged as a flash point in the debate over the future of solar PV in the U.S. This has culminated in the recent introduction in Minnesota of a Value of Solar (VoS) policy, which will pay a per-kWh price for solar PV output over a 25-year period. This price is based on a detailed calculation of the estimated value of solar to the State’s electricity system.

Some have heralded this as a path breaking development for the U.S. solar industry, providing system owners with a clear, transparent price for their solar output. Others fear it will undermine the successful third-party solar business model by allowing individuals and communities to develop projects on their own, effectively cutting out the middleman, similar to how residential PV projects have long been built and financed here in Germany.

Whatever may be said about the new Value of Solar policy, one thing that it is not is new.

Nothing New Under the Sun

The value of solar methodology is comprised of a stack of values that is intended to represent the true value of solar to the electric system. In Minnesota’s case, there are no fewer than eight different components that make up the value of solar price: these include the avoided fuel cost, avoided O&M costs, avoided distribution and transmission costs, as well as avoided environmental costs, among others.

Quantifying these various ‘values of solar”, while somewhat academic, can be a revelatory exercise: by combining a clear methodology with a clear (if contested) set of inputs, it provides regulators and policymakers with a relatively transparent way to establish a price for solar. And getting a clear price is one of the key components for reducing barriers to entry for citizens and communities, and facilitating access to capital.

However, as the title of this article suggests, we’ve been here before.

The value-based approach is alive and well, and living in Portugal. Under Portugal’s policy, which has been in place since 2001, the rate paid to renewable energy producers is also based on a detailed value-based calculation that includes several different elements:

  • A fixed component representing the avoided power plant investment costs
  • A variable component (per kWh) corresponding to the generation costs of those hypothetical power plants
  • An environmental adder to reflect the avoided CO2
  • A technology specific coefficient
  • And a final component representing the avoided electrical losses in the system due to the individual project’s ability to reduce line losses

These different components are combined together to create a set of value-based prices for a wide range of renewable energy technologies.

Key Differences

There are a few key differences between Minnesota’s VoS policy and Portugal’s:

One crucial difference is that Minnesota’s policy is limited to solar. Another is that in contrast to Portugal, the Value of Solar rates bear no relationship to the actual costs of generation from solar projects. They may be higher, or lower, irrespective of changes in module or balance of system costs. This means that if PV prices continue to decline, the VoS rates could fuel criticism that project owners are being overpaid.

The source of both differences can be traced back to a technology specific coefficient, or multiplier, that Portugal uses in its policy framework: this multiplier enables it to ensure that the prices it pays to different renewable energy technologies retain a link to underlying generation costs.

This approach has allowed Portugal to offer attractive purchase prices — without overpaying. According to an EU-wide analysis, Portugal’s policy is actually one of the most cost-efficient on the continent in almost every technology category (where "cost-efficiency" is understood as akin to the Goldilocks principle: paying just enough, but not too much).                                                                                              

Lessons for the Value of Solar debate

On one hand, the fact that a value-based methodology like Portugal’s was able to produce such a positive outcome (both for the sector and for ratepayers) is good news for supporters of the Value of Solar policy.

However, it also suggests a few areas for improvement:

First, without a multiplier to retain the link to underlying generation costs, the risks of overpayment are high — particularly in the current proposal, where the value of solar payments will be indexed to the consumer price index (CPI) for 25 years.

A second challenge is that while the VoS is ostensibly about the value of solar, it is ultimately about its value to the electricity system. And because the latter changes over time, the relative value of solar will also change as penetration levels grow, demand patterns change, and load either increases or decreases. This further increases the risk that ratepayers will end up paying too much in the long run.

This may be good for the industry in the short term, but experience from other jurisdictions suggests that overpayment is one of the primary factors that lead policies to crash in the medium to long term.  

With that in mind, supporters of the Value of Solar policy should be cautious: the very policy that may help solar get off the ground may ultimately prevent it from ever getting wings. 

Lead image: Wine bottles via Shutterstock

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Toby Couture is Founder and Director of E3 Analytics, a leading energy consultancy based in Berlin. He works on a wide range of topics in renewable energy, including policy and regulatory support, energy strategy, market research, and economic and...

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