How can utilities account for the climate and financial benefits of solar power? For years, Minnesota has been considering this question. And on Mar. 12, the state authorized a value-of-solar tariff that utilities can use to credit solar power producers for the benefits they are providing to utilities and society.
If individual utilities opt in to the tariff as an alternative to net metering, the solar power producers they serve will be able to claim a credit based on the annually-adjusted combined savings from fuel, plant operations and maintenance, generation capacity, transmission capacity, reserve capacity, distribution capacity, and environmental benefits — including a conservative estimate of the avoided costs of climate change.
The potential environmental benefits will be calculated in dollars. They will include both carbon dioxide and other air pollutants. Carbon dioxide’s climate change cost will be calculated using the Social Cost of Carbon developed by the United States Environmental Protection Agency (EPA). This estimate accounts for many social changes including human health problems, property damage, and agricultural disruption. Other air pollutants’ costs will be calculated using estimates developed in Minnesota.
Utilities can use an economic equation specified in the value-of-solar framework to determine how much to credit power producers. The credit will be calculated as the present value of all of the costs above, levelized over 25 years with a discount rate of three percent, adjusted for inflation, and updated annually. (In this equation, 25 years is the estimated lifetime of a solar photovoltaic panel.)
According to preliminary data from the Institute for Local Self-Reliance, the value-of-solar tariff will lead to 5-kW solar producers earning approximately $200/year in 2014 above what they would earn through net metering. However, the cost of net metering is projected to increase substantially in future years.
“The value-of-solar framework has the potential to successfully expand solar in Minnesota,” said Christopher Clark, regional vice president of rates and regulatory affairs at Xcel Energy, in a statement. “Unlocking that success will largely depend on how accurately the methodology reflects the real value of distributed solar and how well we utilize incentives to drive market adoption.”
A number of organizations have considered putting value-of-solar tariffs in place. Austin, Texas has implemented one. Karl Rabago, former vice president of distributed energy services at Austin Energy, consulted with the developers of the Minnesota tariff.
An Alternative to Net Metering
Net metering, a practice in which utilities compensate solar power producers, has been controversial in many parts of the United States. A tug-of-war is taking place in which utilities and solar power advocates struggle to obtain terms that will be favorable for both parties. A Jan. 2013 report from the Edison Electric Institute, “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business,” said net metering puts non-solar-owning utility customers at a financial disadvantage and is not favorable for utility investors.
Value-of-solar tariffs like Minnesota’s can offer advantages that net metering does not provide. First, this tariff disconnects compensation from incentives. It is not an incentive program and is designed to reduce the need for incentives. Second, it separates compensation from consumption, leading to greater efficiency and reducing energy use during times when demand is high.
Clark said he sees the tariff and incentives as complementary. “Incentives complement the value-of-solar tariff by providing a flexible mechanism to offset the incremental costs of small-scale solar installations, while allowing the [tariff] to serve its intended purpose of reflecting the value of solar energy on the system. We believe this complementary package will result in a robust, vibrant solar industry.”
The tariff separates compensation from consumption because utilities will not buy the energy that producers generate. Instead, utilities will give producers credits at the value-of-solar rate while still billing them for the energy they use.
A Way to Account for Climate Change
The climate change cost estimates included in the tariff have been a subject of debate. Some utilities initially expressed skepticism over the EPA’s methodology. On the other hand, a group of environmental and business organizations issued a statement saying that the EPA’s cost estimates are quite conservative.
According to the EPA and the Minnesota Department of Commerce, the Social Cost of Carbon is an estimate developed by a federal interagency working group including the EPA, the United States Department of Energy, and other agencies. The tool was created as a basis for government estimates of the cost impacts of decisions that will have climate change effects.
The Social Cost of Carbon values were first released in May 2013. They tend to increase over time. For example, using a discount rate of three percent, the social cost of a metric ton of carbon dioxide varies from $39 in 2015 to $76 in 2050. These figures differ from the cost estimates used by the Regional Greenhouse Gas Initiative and the State of California because the numbers are calculated with different goals in mind.
The EPA website acknowledges that these estimates of climate impact costs are imperfect and are being refined as new research becomes available. Since last year, agencies have asked for public comments on the estimates several times.
Brian Draxten, manager of resource planning at Otter Tail Power Company, an electric company that serves three states, said in a statement that he disagreed with the new tariff’s inclusion of environmental cost estimates. This is partly because Minnesota currently does not charge utilities for carbon emissions.
“The avoided environmental externality cost is zero for two reasons,” Draxten said. “First, there is no actual monetary cost currently assessed to a utility for carbon emissions. In addition, the cost of carbon dioxide is today not ‘known and measurable.’ Minnesota ratepayers should not be charged for externality costs that have not been quantified or societal benefits that have not been realized.”
However, a group of environmental and business organizations — Fresh Energy, Environmental Law and Policy Center, Institute for Local Self-Reliance, Vote Solar, Izaak Walton League of America, SunEdison, and Interstate Renewable Energy Council — said in a statement that the EPA’s estimates are very conservative because the costs of droughts, forest fires, smog, power outages, lost tourism, increased food prices, and forest pest infestations are not included.
The decision to use these calculation methods was the outcome of a two-year-long stakeholder discussion, according to the Minnesota Department of Commerce. Minnesota has been gradually introducing net metering and distributed generation policies over the past 30 years.
Instead of internalizing the costs of fossil fuel production and use, this policy seeks to account for the hidden benefits of solar photovoltaic power that serve utilities, power producers, and society. In this way, the tariff is similar to a renewable energy certificate, which also accounts for the benefits of solar power.
This tariff changes the tenor of the national conversation on net metering and carbon cost accounting. It also raises questions about accountability for the social and environmental costs of energy resource use. As Minnesota breaks new ground, other states may consider similar policies.
This article was originally published by the Clean Energy Finance Forum, a publication produced by the Yale Center for Business and the Environment. You can subscribe to our newsletter by visiting here.
Lead image: Minnesota flag via Shutterstock