Steven Letendre, Ph.D., Prometheus Institute
February 19, 2007
Photovoltaic (PV) panels have long served as a cost-effective solution to provide power to remote cabins and homes built far from the power grid. To reduce the money spent on a home solar energy system, off grid system designers emphasize the importance of minimizing end use loads by using the most efficient lighting products and appliances available in the market, and foregoing certain unnecessary amenities.
The tiered rate system in California is an excellent mechanism to reward energy conscious households and penalize the energy hogs. However, an unintended consequence of this system with regards to the CSI is its bias toward creating a stronger financial incentive for residential energy hogs to invest in solar relative to their energy efficient counterparts.
Today, the important link between solar use in the home and energy conservation and efficiency is being lost. While many well-intentioned system integrators preach the virtues of energy efficiency, grid connected solar by its very nature does not necessitate a rigorous assessment of the trade offs between a larger system and investments in energy efficiency.
Furthermore, as is the case in California, rate structures and PV incentive program design can converge to make a given solar investment more financially attractive for those households with excessive consumption -- so called energy hogs -- relative to an energy efficient home.
Tiered Rates and Solar Investments
In the aftermath of the California electricity crisis, utilities were compelled by the Public Utilities Commission (CPUC) to institute tiered rate structures, which charge higher per kWh rates as consumption rises above a baseline. The baseline level of electricity consumption varies by season, region and type of service. Tiered rate structures serve as an effective mechanism to reward energy efficiency and conservation.
The top tier rate for California utilities is set very high to strongly discourage consumption at those levels. For example, Pacific Gas & Electric's (PG&E) standard residential rate E-1 has four tiers above the baseline, with the top tier rate of $0.37/kWh applying to all electricity usage over 300% of the baseline.
The baseline for a single family home in the greater Sacramento area is approximately 16 kWh per day during the summer months. Assuming 30 days in a billing cycle, the baseline monthly consumption would be approximately 480 kWh. A household with monthly electricity usage equal to or less than the baseline would be charged at the lowest rate, in this case about $0.11/kWh. An energy intensive household using over 300% of the baseline would be charged a rate of $0.37/kWh for all consumption above 1,440 kWh during the summer months. The design of tiered rates serves to reward low consuming households and penalize high consuming households.
*16 kWh per day summer baseline, 30-day billing cycle
|PG&E Schedule E-1-Residential Service|
|Baseline Usage||$0.11430||480 kWh|
|101% - 130% of Baseline||$0.12989||481 kWh - 625 kWh|
|131% - 200% of Baseline||$0.22944||626 kWh - 960 kWh|
|201% - 300% of Baseline||$0.32146||961 kWh - 1,440 kWh|
|Over 300% of Baseline||$0.36969||>1,440 kWh|
The California Solar Initiative in 2007 provides an expected performance based buy down for systems less than 100 kW in size. With optimal orientation and no shading, households investing in a PV system are eligible to receive a $2.50/watt incentive. This incentive level is the same regardless of whether the household consumes 480 kWh per month or 1,500 kWh per month.
The financial return, however, from an investment in solar by an "energy hog" household is better when compared to a similar investment by an energy efficient household. Solar generated electricity displaces energy purchased at the highest tier -- $.037/kWh -- for high consuming households. In contrast, a solar energy system installed on the home of a low energy consuming household displaces low cost electricity, in this case at $0.11/kWh. The more energy you consume the better your return on a given investment in solar.
The situation in California strikes me as fundamentally unjust. There is a disincentive for energy efficient households to invest in solar given the state's system of tiered rates and PV incentive program design. These households, however, have demonstrated a commitment to the central pillar of sustainable energy -- energy efficiency and conservation. A system to promote investments in solar that places these households at a comparative disadvantage is fundamentally flawed. Why should one household get "paid" $0.37/kWh while the house next door receives just $0.11 for each solar-generated kWh? This disparity is even more dramatic when time-of-use rates are considered, with peak period, top tier rates as high as $0.46/kWh.
A Fixed Price Tariff for Solar Generated Electricity
A simple and elegant solution to the apparent inequities in the much heralded California Solar Initiative (CSI) would be to replace the expected performance based buy down with a fixed price paid for each kWh of solar-generated electricity. This approach is often referred to as a performance-based incentive (PBI), and was adopted as part of the CSI to encourage investments in systems greater than 100 kW in size. A performance based incentive of $0.39/kWh is provided for each solar-generated kWh over five years for these large, commercial scale systems.
The CSI does allow households installing a system of any size to opt into the PBI program. This does not necessarily level the solar playing field for energy efficient households relative to the energy hogs however. The PBI would allow a household to get the net metering benefit of displacing $0.11/kWh, plus monthly payments for the solar-generated electricity at the $0.39/kWh rate. In contrast, the energy hog household will be displacing their highest tier energy consumption -- at rates close to or above the PBI incentive -- with solar over the entire life of the system at 25+ years.
In addition, a household opting for the PBI program must come up with more up front cash, given that the incentive is paid monthly over a five year timeframe. This can create an additional barrier for the energy efficient households seeking to maximize their investment in a home solar energy system.
A variant of a PBI has been in use in Europe for many years, which is known in most parts of the world as renewable energy feed in laws. Regular readers of RenewableEnergyAccess.com know that this policy tool has been extremely successful in a number of European countries, most notably in Germany. This approach differs from California's PBI approach in that feed-in laws typically don't include net metering and entail a much longer commitment to purchasing the output from a renewable energy generator -- often as long as 20 years. A key strength of this approach is its fundamental commitment to transparency and fairness.
The tiered rate system in California is an excellent mechanism to reward energy conscious households and penalize the energy hogs. However, an unintended consequence of this system with regards to the CSI is its bias toward creating a stronger financial incentive for residential energy hogs to invest in solar relative to their energy efficient counterparts. The CSI does contain a provision that encourages energy efficiency as a condition for receiving a solar incentive. However, it is unclear at this point how effective this provision will be at linking solar and energy efficiency.
No doubt the PV industry understands this dynamic and has targeted its marketing efforts toward California's energy hogs. Thus, it is necessary for consumer groups and grassroots activist to shine a bright light on this issue and demand that a new system be considered that creates an equal playing field for all households interested in investing in the clean and renewable form of energy that PV represents.
Steven Letendre, Ph.D. is an associate professor of business and environmental studies at Green Mountain, located in Poultney, VT. He is currently on leave from the College servings as the Director of Research at the Prometheus Institute. He has over a decade of research experience on a variety of energy related topics from solar energy to advanced vehicle technologies. Recent articles of his have appeared in The Electricity Journal, Solar Today and Public Utilities Fortnightly. Contact Steven at firstname.lastname@example.org.