How Retail Rate Structures Impact the Economics of PV

Not all retail electricity rates are created equal for prospective solar photovoltaic (PV) customers, according to a report released July 4th by Lawrence Berkeley National Laboratory. The report analyzes factors that affect the ability of PV systems to reduce electricity bills using 20 different retail rate structures available to commercial customers in California.

“One of the surprising findings that emerged from the analysis is that the value of a commercial PV system in reducing retail electricity bills can vary by a factor of four within California,” says Ryan Wiser of Berkeley Lab, a co-author of the report.

The report uses data from 24 actual commercial PV installations in California to determine the impact of rate design on the customer-economics of PV. The authors chose to evaluate rates in California because of the large PV market and the diversity of retail rate structures offered in the State. Nonetheless, the report’s findings have applicability outside of California.

“Commercial PV owners often don’t know what to expect in terms of bill savings when they install a PV system. Our approach was to get data from systems currently in the field and find out for ourselves,” explains Andrew Mills of Berkeley Lab. The systematic and comprehensive nature of the report fills a gap in publicly available analysis of elements that affect the bill reduction value of commercial solar installations. The report offers a variety of recommendations to both policy-makers and potential PV customers.

Summary from the report:
To achieve a sizable and self-sustaining market for grid-connected, customer-sited photovoltaic (PV) systems, solar will likely need to be competitive with retail electricity rates. In this report, we examine the impact of retail rate design on the economic value of commercial PV systems in California. Using 15-minute interval building load and PV production data from 24 actual commercial PV installations, we compare the value of the bill savings across 20 commercial-customer retail rates currently offered in the state. We find that the specifics of the rate structure, combined with the characteristics of the customer’s underlying load and the size of the PV system, can have a substantial impact on the customer-economics of commercial PV systems.

Key conclusions for policymakers that emerge from the analysis are as follows:

    • Rate design is fundamental to the economics of commercial PV. The rate-reduction value of PV for our sample of commercial customers, considering all available retail tariffs, ranges from $0.05/kWh to $0.24/kWh, reflecting differences in rate structures, the revenue requirements of the various utilities, the size of the PV system relative to building load, and customer load shapes. For the average customer in our sample, differences in rate structure, alone, alter the value of PV by 25% to 75%, depending on the size of the PV system relative to building load.

    • TOU-based energy-focused rates can provide substantial value to many PV customers. Retail rates that wrap all or most utility cost recovery needs into time-of-use (TOU)-based volumetric energy rates, and which exclude or limit demand-based charges, provide the most value to PV systems across a wide variety of circumstances. Expanding the availability of such rates will increase the value of many commercial PV systems.

    • Offering commercial customers a variety of rate options would be of value to PV. Despite the advantages of energy-focused rates for PV, requiring the use of these tariffs would disadvantage some commercial PV installations. In particular, for PV systems that serve less than 25-50% of annual customer load, the characteristics of the customer’s underlying load profile often determine the most favorable rate structure, and energy-focused rate structures may not be ideal for many commercial-customer load shapes. Regulators that wish to establish rates that are beneficial to a range of PV applications should therefore consider allowing customers to choose from among a number of different rate structures.

    • Eliminating net metering can significantly degrade the economics of PV systems that serve a large percentage of building load. Under the assumptions stipulated in this report, we find that an elimination of net metering could, in some circumstances, result in more than a 25% loss in the rate-reduction value of commercial PV. As long as annual solar output is less than roughly 25% of customer load and excess PV production can be sold to the local utility at a rate above $0.05/kWh, however, elimination of net metering is found to rarely result in a financial loss of greater than 5% of the rate-reduction value of PV.

More detailed conclusions on the rate-reduction value of commercial PV include:

    • Commercial PV systems can sometimes greatly reduce demand charges. Though energy-focused retail rates often offer the greatest rate reduction value, commercial PV installations can generate significant reductions in demand charges, in some cases constituting 10-50% of the total rate savings derived from PV installations. These savings, however, depend highly on the size of the PV system relative to building load, on the customer’s load shape, and on the design of the demand charge itself.

    • The value of demand charge reductions declines with PV system size. At high levels of PV penetration, the value of PV-induced demand charge savings on a $/kWh basis can drop substantially. As a result, the rate-reduction value of PV can decline by up to one-half when a PV system meets 75% rather than 2% of total building load. Thus, for rates with significant demand charges, the drop in demand charge savings dramatically reduces the overall rate-reduction value of PV as system size increases relative to customer load.

    • The ability of PV to offset demand charges is highly customer-specific. Customers with loads that peak in the afternoon are often able to receive significant demand charge savings across a wide variety of circumstances, at least at lower levels of PV output relative to building load. In contrast, facilities with flat or inverted load profiles will often not earn much demand charge reduction value, regardless of PV system size.

    • The type of demand charge can impact the ability of PV to offer savings. Time-of-day (TOD)-based demand charges are found to be more favorable to PV under a broad range of customer load shapes than are those based on monthly or annual peak customer demand.

    • The type and design of energy-charges has an important impact on PV value. TOU-based energy charges with a high spread between peak and off-peak prices are found to offer greater value to commercial PV than rates with seasonal or flat energy charges. In particular, TOU-based energy charges with a large price spread between peak and off-peak prices are shown to offer 20% greater energy charge savings compared to seasonal or flat energy charges.

    • Differences in temporal PV production profiles have a relatively modest impact on PV value. We find that the specific temporal profile of PV production, at least among the 24 systems in our sample, has an impact on the value of PV of less than $0.01/kWh in most instances for both energy and demand charges. This suggests that, when one conducts customer-specific analysis, it may not be essential to use a highly-tuned estimate of the site-specific PV production profile for the purpose of deriving the $/kWh rate reduction value.

The findings suggest that choices made by utility regulators in establishing or revising retail rates can have a profound impact on the future viability of customer-sited commercial PV markets.

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