Over the past two years, Hawaii has been ground zero of a historic battle between solar and utilities. With solar penetration at a level unseen in the rest of the country – an estimated 12 percent of all homes – Hawaiian utilities are facing unprecedented challenges in figuring out how to integrate such a large quantity of renewables into their existing electricity grid, and how to get customers to pay for it.
Given residential solar’s exponential growth across the U.S., the new technologies, business models and regulations that emerge from Hawaii’s experience are seen by many as a preview of what’s to come elsewhere.
Over the past two months, the Hawaii Public Utility Commission (HPUC), which regulates the utilities in Hawaii, took its first steps to resolve this fight by introducing a set of regulations (Phase 1 Decision and Order, Docket No. 2014-012) that could drastically change the energy incentive structure in the state. In doing so, they are laying the foundation for a new economic model of how solar and energy storage will work for decades to come.
In this post, I will outline how this first set of regulations have the potential to make storage economically viable, addresses key challenges with the current solar business model, and set up the industry for a brighter tomorrow.
The new rules would make energy storage an economically viable value proposition. It is likely that most new solar installations in Hawaii will have energy storage.
Under the existing net energy metering (NEM) tariff that sunsets for new residential solar applications, homeowners are allowed to sell their unused solar energy to the utility at the same price that the utility charged them to buy energy. So if the utility charges a customer $0.25/kWh for electricity, that customer can sell excess solar energy to the utility at the same price.
Since most solar is produced during the middle of the day, and most homes aren’t using much energy during the middle of the day, the average solar homeowner is selling a meaningful portion of their solar energy back into the grid. In the example below for an average solar home in Honolulu, 56 percent of solar electricity is sold back into the grid.
Note: Average annual residential load and PV production for Honolulu
Source: Open EI, PV Watts
Since their retail electricity rates were very high, and homeowners were selling a lot of energy into the grid, they were saving a lot on their energy bills.
For new residential solar applicants that are not grandfathered under the existing NEM tariff, three new options have been proposed in the new regulations (Phase 1 Order and Decision), all of which have the potential to incentivize energy storage:
- Self-supply: Consume all of the solar energy you generate, and don’t sell anything back to the grid. If you don’t use it, you lose it. This option incentivizes energy storage, as the excess solar energy generated during the day can be saved for use at night. Each kilowatt-hour you store saves you $0.25+/kWh when it is used later.
- Grid-supply: Consume all of the energy you generate, and sell the excess back into the grid at a reduced rate. This option also incentivizes storage because the savings received by using the energy yourself are greater than the savings from selling the energy back into the grid. For context, grid supply compensation for Honolulu is $0.15/kWh, whereas the retail electricity rate is $0.25+/kWh.
- Time-of-use rates: Pay a different price for energy you use, depending on the time of day you use it. This rate structure allows customers with solar and storage to benefit from energy arbitrage – generate and store energy when it’s cheap, use energy when it’s expensive.
For both of the self-supply and grid-supply options, savings will be the greatest for consumers who store the excess energy generated by solar.
Note: Example economics for Oahu
Source: HPUC Order No. 33258, Hawaiian Electric Rate Summary 10/2/15
Under the time-of-use option, customers can save over $0.20/kWh by avoiding or shifting consumption away from peak times. That option is most easily accomplished with solar and storage.
The details of the time-of-use option are still being finalized by the HPUC; however, the current proposal establishes three different residential electricity rates for energy purchased from the utility: $0.16 /kWh for “off-peak” electricity used between midnight and 9 a.m.; $0.134/kWh for “mid-day” electricity used between 9 a.m. and 4 p.m., and $0. 385/kWh “on-peak” for electricity used between 4 p.m. and midnight.
Consumers who are willing to change their lifestyle can take advantage of time of use rates by either avoiding electricity use when utility charges are high or shifting their electricity use to times when utility electricity is less expensive. However, these changes may either be unpleasant (i.e., shutting off the air conditioner at 4 p.m.) or unrealistic (i.e., unplugging the refrigerator and freezer).
The real breakthrough is that customers with solar and storage can generate these savings without making lifestyle modifications. Instead of turning off appliances when utility electricity is expensive, they can avoid buying energy from the utility by using energy from either solar or their batteries. Instead of waiting until energy is cheapest to run the air conditioner, they can charge their batteries when energy is cheapest (mid-day hours) and then discharge their batteries when energy is more expensive (peak or off-peak hours) to offset the energy drawn by the air conditioner – in effect, allowing them to use the same amount of energy but pay a cheaper price.
Note: Example economics for Oahu
Source: Hawaiian Electric Company press release 10/13/15
Storage only makes sense if these benefits outweigh the costs, which depend on the upfront cost of the system and the useful life (number of cycles)
While customers would be able to avoid utility bill charges of $0.25+/kWh by using storage, it doesn’t make economic sense to use storage if the effective cost of storage is higher than what they are paying. Said another way, you wouldn’t pay 26 cents to save 25 cents.
The effective costs of storage are based on two factors: the upfront cost net of incentives, and the number of cycles that the storage system will operate.
You can think of the cycle life of storage like the number of uses. If you can use the storage a lot, then the cost per use goes down. And the lower your cost per use, the more you will save. Additionally, if the cost per use is higher than the savings you receive, it doesn’t make sense to go with storage.
These basic economics explain why energy storage companies are a) driving to lower costs, and b) guaranteeing a minimum number of battery cycles, or providing a long-term warranty that would – in their estimation – cover enough cycles for storage to repay the initial cost of purchasing the system.
Why adding storage to solar is good for the industry: A small price to pay for a sustainable long-term business model
It is important to note that solar plus storage is required to monetize benefits that were previously provided by solar alone under net metering, and hence has raised the costs of solar without increasing the benefits. Said another way, to get the same amount of savings, you will have to add storage to a solar energy system, which by definition increases costs.
Why is this a good thing? Because these additional costs are minimal and the benefits for the industry are great.
In exchange for a few thousand dollars per system, some of which is covered by state incentives, the solar industry will be gaining something much more valuable: a sustainable long-term business model.
Example Cost for a Residential Solar Energy System in Hawaii With and Without Storage
Source: Solar $/W price from Greentech Media, Storage $/kWh price based on “Low Cost, Many Cycles” example above, incentives from federal and state tax code
In the case of Hawaii, the consequences of an unsustainable business model were real, tangible and painful. As solar penetration grew, the local utility (Hawaiian Electric Company) began dramatically slowing down the number of solar permits it issued, which destabilized the Hawaiian solar industry. Homeowners were waiting for months – in some cases, years – to get their systems installed, which means that many contractors were waiting for that same amount of time to get paid for their installations.
Source: Greentech Media
In 2Q15, after five consecutive quarters of declines in permit issuances, that negative trend reversed due to changes made to existing residential solar PV system settings that allowed for installs to continue while mitigating reliability issues. However, there are still significant limitations to how much residential solar PV can be installed without requiring additional measures to ensure grid reliability standards are met, particularly as Hawaii moves quickly towards a 100 percent renewables future.
The Phase 1 Decision and Order is Hawaii’s first step towards a long-term, sustainable solar market, and the U.S. solar industry’s biggest test case for the business models and technologies that could spread to the rest of the country. It also represents the dawn of a new era for energy storage, which could forever change the global energy landscape.
Lead image: King Kamehameha statue. Credit: blvdone / Shutterstock.com
