December 22, 2016

The Minnesota Solar Experiment — Value of Solar: Part III

Editor’s Note: This is the third in a series of articles focusing on Minnesota’s solar market. Past articles can be accessed here.

In addition to Solar Gardens initiative, Minnesota’s Value of Solar Tariff (VOST) initiative was seen as the first large-scale stage for the new calculation methodology originally pioneered by Austin Energy. The VOST method adds up multiple value streams for distributed solar, such as energy, capacity, and environmental benefits, to create a single purchasing rate that separates a solar customer’s consumption from their generation. Once the calculation methodology was developed, Minnesota investor-owned utilities (IOU) could use it to replace net metering, at their option.

In contrast to the Solar Gardens experience, which was mired in regulatory program design decisions for three years, the VOST discussion marched through a state-led public process quite efficiently in about one year. However, two years later it is effectively dead as a solar development tool. What happened?

Value of Solar

The 2013 legislation directed the Minnesota Department of Commerce (DOC) to develop the VOST methodology, which would then be approved by the Public Utilities Commission (PUC). Rather than calculating the solar purchase price based on the cost of a solar installation, as was done in Europe and Gainesville Regional Utilities in Florida with feed-in tariffs, the VOST is based on solar’s benefits to the electric grid, i.e. utilities, ratepayers and society. The calculations were to include “the value of energy and its delivery, generation capacity, transmission capacity, transmission and distribution line losses, and environmental value” and the DOC had about six months to do it.

By separating solar generation from consumer consumption, the VOST attempts to disentangle the issue of losing revenue from solar by replacing net energy metering (NEM) with a purchase rate that reflects solar’s value to the utilities. If the value is set correctly, all ratepayers would benefit from a VOST, in theory.

Bill Grant, the deputy commissioner of energy at the DOC, agreed in an interview on the subject saying, "[The VOST] was designed [to not shift] fixed costs from distributed generators onto the rest of the customer base. That is important because that has been a key part of the debate around distributed generation."

Notably, the IOUs would voluntarily decide whether to adopt the VOST, which couldn’t be less than retail rates for three years, after which, it would replace NEM altogether.

The DOC held four workshops attended by utilities, the solar industry, state government, and nonprofit advocates, among others, along with written comment periods. The DOC submitted the methodology report in January 2014 and the PUC approved it in April 2014. An example rate from the document calculates a 20-year contract at 12.7 cents/kWh (levelized), a number which is close to retail rates (see Figure1). 

25-Year Levelized Value ($/kWh)

The regulatory process was remarkably efficient at less than one year, building on a continuing history of healthy electricity policy debate in Minnesota. Holly Lahd, the then Energy Markets Director at the renewable energy advocacy group Fresh Energy, agreed, saying "I think the value of solar process...was really a model [for] other states. Both to develop a value of solar but also for thinking through rates and plans that encourage customers to make those choices rather than boxing them in with fixed charges. I think it was a very transparent stakeholder process.”

Points of Disagreement

That is not to say that everyone agreed with the final VOST method, which points to its short-comings.

The avoided environmental costs was the most controversial calculation, based on the social costs of pollution and carbon, and was the second largest rate component at 2.9 cents/kWh after avoided fuel costs at around 6 cents/kWh. It was driven in part by carbon costs, according to Mike Bull, Director of Policy and Communications, at the Minnesota Center for Energy and the Environment. "The department and then the commission approved an avoided environmental cost that’s based on the federal cost of carbon. And that turns out to be significant adder to utility costs, transmission and other infrastructure processes." However, calculated carbon savings are different from actual savings to the utility, since no functioning price of carbon exists in Minnesota or the region. Until that happens, it’s hard to know whether the VOST carbon component is expensive or cheap relative to a transparent market price.

The other issue was whether a VOST would actually solve the NEM revenue concerns that utilities had. In theory, a VOST is adaptable to changing markets, being recalculated each year. As more solar comes online, the value of each VOST component would face downward pressure over time as additional supplies depress prices or even start to add costs.

However, utilities are precedent-averse and the notion that a VOST is feasible at 1 percent penetration, might not hold true at higher percentages. Jon Brekke, Vice President at Great River Energy (GRE), a cooperative generation and transmission company, observed, “If the value of solar is calculated in such a way and we had 100 percent solar in the system, who's left to pay that value of solar? There isn't anybody. [Any solution] needs to be something that either you can ramp it up and it can work at a very vast scale, or you have safeguards in place that put in stops along the way."

And on the notion that solar isn’t large enough to materially impact utilities, Brekke said, "[GRE] really does believe in market forces. One of the concerns with a discussion around value of solar is the [solar] market is changing all the time. [Stakeholders, including GRE, can] get too fixed in our thinking and too fixed in our policy making, then we don't adapt quickly enough to how fast this market changes with technology, with fuels, and with regulations, and also consumer behaviors.”

Looking Backward and Forward

There hasn’t been a utility seeking a VOST rate, or follow-up from the legislature or PUC, so the concept is in a holding pattern. Given that the VOST rate is so high, it is unlikely that a utility will adopt VOST, barring a pricing or policy change.

It’s clear that within the Minnesota solar experiment, VOST held promise, but is no longer active, while Solar Gardens are ramping up significantly. Both efforts fit within the national conversation about solar and utilities’ rapidly evolving future. What can be learn from these two programs?

First, calculations are easier than programs. The VOST process moved quickly in part because the legislation was very specific to a calculation. If the VOST was picked up by a utility, there is no doubt that designing a workable program would have resulted in longer timeframes with hard decisions along the way, similar to the gardens program.

Second, above market rates attracts unintended consequences. The VOST rate is too high for any utility to be interested in using it. Similarly, the community solar rate created an unprecedented solar boom, and with it, a variety of complications. In both cases, new solar programs need to be usable and useful for both the solar and utility industries, and the consequences are most often time-delays.

Finally, not all programs will be successful. Minnesota approached building the market with a wide variety of new policies — solar gardens, VOST, in-state manufacturing, incentives, etc. That is probably okay. Other states will learn from the experience and adjust.

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