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SMUD is overpaying rooftop solar customers, study says (updated)

Rooftop Solar

[first published 8/4 and updated 8/7 with Vote Solar comments]

Cost-shift to non-solar customers is at least $25M annually, study adds.

Yesterday, Energy + Environmental Economics (E3) – an energy consulting firm commissioned by SMUD to study the value of solar in its service territory – released an independent study that evaluated the true value of solar in the Sacramento area.

The study, which SMUD will use for future solar pricing structures attempted to place a value on these scenarios:

  • Solar only
  • Solar plus customer-managed storage
  • Solar plus utility-managed storage
  • Societal benefits of solar

The study found that the value of solar is 7 cents per kilowatt-hour (kWh) in 2020 and steadily declines through 2030, as additional solar hits the market. SMUD currently pays its solar customers retail rates for their solar generation – 12 cents per kWh on average – creating a cost shift to non-solar customers in the amount of $25 to $41 million annually. This amounts to $26 to $45 per customer, per year and disproportionately impacts low-income customers. That will continue to grow exponentially to $94 million or $92 per customer, per year by 2030 if not addressed.

“Our goal is to deliver the cleanest energy at the most cost-effective rate to our customers,” said SMUD CEO and General Manager Arlen Orchard. “To do that, we must find a solution that is fair and equitable to both our rooftop and non-solar customers. We will continue conversations with a broad range of stakeholders in the coming months as we work toward a comprehensive solution that’s fair to all of our customers.” 

E3 came up with the following:

  • The value of rooftop solar in 2020 is 3-7 cents per kWh, depending upon how you calculate the benefits of rooftop solar. The value drops significantly by 2030 to 3-4 cents per kWh because of the expected growth of solar in California
  • SMUD pays retail rates of 12 cents per kWh, on average, for rooftop solar generation, creating a cost shift that is passed on to non-solar customers in the amount of $25 to $41 million in 2020 or $26 to $45 per customer per year. That cost-shift grows to $94 million in 2030 or $92 per customer per year. This cost-shift is reflected in customers’ bills.
  • Value of rooftop solar increases with energy storage. Value is highest when the utility can optimize the storage to the benefit of all SMUD customers.   
  • Declining value of solar over the next decade is due to substantial new utility-scale and rooftop solar being installed over the next decade. 

In an attempt to right-size its rates for both solar and non-solar customers, SMUD will consider options for a new rooftop solar rate that fairly compensates our rooftop solar customers for the benefits of their systems. As part of this process, SMUD will ensure there are substantial opportunities for stakeholders and customers to provide input on this important issue. 

Background information

SMUD was required to keep Net Energy Metering (NEM) in place until it reached a 180-MW cap, which it reached in 2017. Under NEM, rooftop solar customers are compensated via bill credits for any excess generation they produce. The bill credits are equal to the retail rate the customer pays to purchase electricity.

Since 2017, SMUD has been re-evaluating and this study will be used to re-set rates, it said. The utility says it has already helped grow the rooftop solar industry in Sacramento, having spent $250 million to support customer-owned solar units resulting in 216 MW of rooftop solar on the grid. Further, SMUD plans to invest $1.5 billion in new utility-scale solar farms through 2040, much of it in the Sacramento region. This will help SMUD reach its carbon reduction goals, as quickly as possible and at about 25 percent of the cost of rooftop solar. 

Opponents disagree

Solar advocates have long argued that rooftop solar customers are simply reducing their demand for grid electricity and that using less electricity (because they generate their own), is no different than being energy efficient. They add that by producing electricity at the edge of the grid, they reduce strain on transmission lines since physics dictates that any excess energy they produce flows within their neighborhood. Further, if they are essentially selling their energy to their neighbors, who are paying retail rates for energy to the utility, why shouldn’t rooftop solar owners also receive that retail rate?

According to Sachu Constantine, Managing Director, Regulatory with Vote Solar, the study itself is deeply flawed for many reasons. First, he points out that the argument that solar NEM results in a cost shift is “a theoretical observation” and to state that solar doesn’t contribute to lower overall grid costs and lower overall energy costs is “demonstrably untrue,” he said in an interview.

First of all, there are cost shifts all over the grid, he said. That’s why commercial customers pay demand charges; the costs to serve rural and urban households are different but they pay the same rates within a utility’s territory.

“We shift costs between rural and urban [households], single family and multi family,” he said.

“We want to share the burden of the grid and we want to ultimately come up with the most efficient, most resilient, most reliable grid and energy supply that we can,” he said. “This idea that the cost shift is unique to solar and is somehow egregious is simply not backed up by what we see in our observations of people’s load.”

Other studies have shown that utility customers with residential solar are cheaper to serve for the utility, said Constantine. He said that Vote Solar is currently working on a case in Utah and has found that the utility is recovering more of its costs by serving rooftop solar customers via NEM than it is for non-solar customers. (Electricity rates are lower in Utah, however, which is important to keep in mind.)

In general, rooftop solar customers are more energy conscious and more likely to have better insulation and more efficient appliances, said Constantine but also, “solar offsets your energy consumption even into those early evening summer hours,” he added.

Fundamentally, as most readers of Renewable Energy World and POWERGRID International understand, it’s peak demand that utilities worry about — that’s when electricity is most expensive, and the system is the most taxed. Those times usually occur toward the end of the day in the summer when it’s very hot and customers turn up their air conditioners to cool their homes.  Even though the sun is setting, said Constantine, solar “is still producing all the way up until the sun sets,” he said.

Other study flaws

Constantine admitted that at the time of our interview he had just given the study a cursory glance and hadn’t fully dug into it yet, but he did point out a couple of other flaws that he said were very worrisome.

For one, E3 isn’t giving enough credit to avoided greenhouse gas (GHG) emissions. The study looks out to 2030 but stops there and according to Constantine who is working on another avoided cost study with the California PUC “we know that the value of avoided GHG emissions escalates sharply after 2030,” he said. So he questions why E3 and SMUD put a hard stop after 2030 in the study.

“So they are not looking at the full 25-year lifecycle of solar and they are not looking out past 2030,” he said, “so they are undervaluing the avoided GHG emissions,” which he said are already at about 6-8 cents per kWh based on the 2020 avoided cost calculator.

“Just that [GHG avoided cost] takes it up to almost the retail rate,” he said, adding “We think that is one big problem.”

Next, said Constantine, E3 is using what he says are “very optimistic” price forecasts for fossil gas with no escalation in the transport rates. And that is strange, he said, because in other studies by E3, the research firm has included an escalation rate for transporting natural gas, he said.

“That’s exactly our concern. E3 has been doing what we think is pretty decent work on this avoided cost calculator for the PUC, which doesn’t have jurisdiction over SMUD, interestingly.”

He’s seen E3 incorporate methane leakage numbers and higher price volatility adders for the price of gas in other reports, but they are absent in this SMUD report, he said. In addition, there is no adder for resiliency, which Constantine admits, is hard to calculate but still important especially in light of the Public Safety Power Shutoffs that take place in California.

“It seems to be a directed attack,” he said.

“It’s not an objective analysis of the situation to create a very low number for solar by explicitly excluding values that could favorably be attributed to rooftop solar that are some of the benefits as a society for the environment that we get from people adopting rooftop solar.”

One of the most disappointing and threatening aspects of the E3/SMUD Net-Metering Report is that SMUD has a good reputation nationwide as an early solar adopter, said Constantine.

“We’d really like to see stronger leadership and much more thought leadership from SMUD than this study represents,” he said.