Utilities Don’t Have the Incentive to Promote Solar. That’s Changing.

Why isn’t there more community solar in the US? Because utilities need to disrupt their business models to incorporate more solar and right now they don’t have the incentive to do that. In the past two blogs in this series, we’ve discussed how the electricity grid works and why the grid needs to evolve. In this article, we’re going to explore how some states are incentivizing utilities to adopt more solar power and encourage ratepayers to reduce consumption.

Utilities make money by building stuff

To understand the problem with the existing model for utilities there is one important point to consider: utilities aren’t in the business of selling electricity. Utilities make money by investing in grid infrastructure, including substations, transmission towers and power plants, and then charging customers for the cost of investment, plus a fair rate of return determined by the state. Utilities charge customers a flat-volumetric rate. That means all customers are charged the same amount throughout the day but those who consume more, pay more. The flat-volumetric rate does not reflect the cost of electricity, but the cost of the infrastructure that transfers electricity from a power plant to your home.

If utilities are constantly investing in the grid, why is it so outdated? The grid that utilities continue to expand is built around peak-demand (the time when everyone is consuming electricity the most). If people are consuming more electricity, especially at peak times, such as 3 p.m. at the height of summer, the grid is being pushed to its capacity. Utilities then have the incentive to invest in new power plants and power lines. But building a power plant simply to meet the few hottest days of the year when electricity consumption is at its highest is tremendously expensive. Utilities keep investing in a grid that is fundamentally inefficient because that’s how they make money. As Jesse Jenkins, a doctoral student working on the MIT Energy Initiative, explained to Vox, building a grid around peak demand “would be like trying to build a highway that never has congestion, or traffic jams. You might need forty lanes, to make sure that on no day during the year would you ever have a traffic jam.”

Solar power disrupts the utility business

Smaller, non-utility sources, such as rooftop and community solar, are called distributed energy resources (DERs). Under their current business model, utilities have little incentive to encourage DERs. DERs decrease the demand for electricity from utilities. If demand is lower, utilities have no reason to make investments in expanding the grid. Yet, those investments are where their revenue comes from. that DERs push the cost of grid maintenance onto non-solar customers. In some cases, all subscribers to a community solar garden pay their utility is a minimum fee to be hooked up to the grid. That doesn’t cover the cost of grid upkeep and so utilities are worried they’ll need to increase the rates among non-solar customers, which But DERs actually make the grid more efficient and reduce costs, as Maine’s Value of Solar study has shown. A study by New Hampshire’s the Acadia Centre determined that the “value of solar to the grid—and ratepayers connected to the grid—ranges from 19-24 cents/kWh, with additional societal values of 6.7 cents/kWh.” Solar reduces demand for utility power (from fossil fuels in most states) and reduces power at peak times. The hottest days of the year, when utilities call on expensive and polluting peaker plants to meet demand, also happen to be when solar panels are producing their maximum output. Delivering electricity from solar panels instead of peaker plants saves all ratepayers money.

DERs support a more efficient, economical and cleaner grid. But until utilities have a new revenue stream—one that’s not based on households consuming more energy—they have no incentive to support DERs. To achieve a grid fit for the 21st century, state policymakers need to change how they incent utilities.

Reforming the Energy Vision in New York

New York’s Public Service Commission (PSC), the state-owned entity that regulates and oversees the electric industry, realizes utilities cannot function the same way they used to.  Former Chair of the New York PSC, Audrey Zibelman, explained to Utility Dive, “We recognized we can achieve deep decarbonization and do it in a way that makes the grid more resilient, efficient and economic. But we have to change the model.” In the aftermath of Hurricane Sandy, a devastating storm which revealed the grid’s aging infrastructure, New York Governor Andrew Cuomo initiated a plan to modernize and strengthen the New York grid, called Reforming the Energy Vision (REV).

New York has a mandate to receive 50% of its power from renewable sources by 2030. As most Americans have a roof unsuitable for solar panels, don’t own their roof, or cannot finance rooftop solar, scaling-up community solar is essential to reaching this “50 by 30” target. Through REV, the state is trying to increase the deployment of DERs, like community and rooftop solar, by changing utilities’ incentives. In the first phase of the initiative (“Track 1”), regulators focused on creating DER markets with utilities playing the central role of allowing and facilitating DER interconnection. Track 2 involves designing new rates and revenue streams for utilities. The idea is that New York utilities will earn a rate of return from investing in DERs and helping achieve societal and energy goals, instead of receiving a rate of return based on traditional infrastructure investments. The vision is that utilities can begin to operate more as platform providers, allowing DER third-party companies to offer their services that make the grid cleaner and more efficient.

From December 2011 to December 2016, state-supported solar power increased by almost 800% in New York. At the end of 2016, almost 65,000 solar projects were installed in New York—enough solar power to meet the energy requirements of more than 121,000 average homes. This year, New York will continue to scale-up DERs, promote energy storage, serve as a pilot ground for microgrid projects and more.

California’s path to a 100% renewable-powered future

California has taken similar action to reform its utilities’ business models. Like New York, California aims to receive 50% of its energy from renewables by 2030. But by 2045, California has an even bolder target to meet: the state must receive 100% of its power from renewables. In sunny California, leveraging DERs like rooftop and community solar is essential to meeting both clean energy targets. As a result, state policymakers are changing the way utilities make money and prioritizing DERs.

A pilot program allows California utilities to earn 4% annually on expenses, as long as they can prove the investments weren’t in traditional energy infrastructure. The state’s Distribution Resource Plan (DRP) directs California utilities on how to site, value and integrate renewable energy into the grid. As well, California’s Integrated Demand-Side Resource (IDER) mandates that utilities investigate how to manage DERs on the grid through demand-side management. Demand-side management uses incentives to encourage consumers to shift their energy usage away from peak times to non-peak times. The goal is more focused on decreasing reliance on polluting peaker plants than reducing energy consumption. Scaling-up energy storage and better managing the intermittent generation from renewables are forms of demand-side management and will be part of the future “smart grid.”

Over a third of solar power in California comes from small rooftop installations, according to the GW Solar Institute. According to the US Energy Information Administration (EIA), on March 11, 2017, more than half of the state’s power needs were provided by renewable energy for a few hours. Those few hours gave a glimpse of how the future grid will run. Right now, utilities are evaluating community solar project proposals, with select projects to be announced in the fall. California is on it its way to a green energy future due to forward-thinking policy that has pushed utilities to innovate. Recently, the Chairman of California’s Public Utilities Commission, Michael Picker, published the state’s Action Plan for integrating DERs into the grid to create a more resilient and cleaner electricity system. 2017 will see DER pilot projects and new rate structures for California DER-owners.

Community solar needs utilities, a modern grid, and you

Utilities in other states have taken measures to modernize their grids and incorporate more DERs. Massachusetts’ largest utility, Eversource, filed a $400 million grid modernization plan with the state this year. Ohio is investigating how to upgrade its grid to improve resiliency in its PowerForward program. Even in the vertically-integrated state of Minnesota, where the utility Xcel Energy owns generation, transmission and distribution, grid modernization proceedings are underway. The electricity grid—and the way we think about producing and consuming energy—is rapidly changing. Utilities have a lot to gain from a grid powered by renewables, as New York and California have recognized. But to reap those benefits, and be relevant in the 21st century grid, utility business models must evolve.

Our Power is a gateway to community solar, where people can learn about how it works, find out about new community solar projects in their area, and sign up when those projects become operational. Our Power works with utilities to enable households to support solar without having to put panels on their roofs. By subscribing to a community solar project, participants receive solar credits on their utility bills, saving them money. At the same time, subscribers are supporting the growth of clean energy in their community. Progressive state policy and a group of utilities’ willingness to evolve has allowed community solar to achieve tremendous growth across America. Navigant Research predicts that there will be 1.5 GW of community solar by 2020, which would be roughly equal to 6.9 million photovoltaic solar panels. Community solar supports the “smart grid” of the future—a grid that will make our electricity system more reliable and mitigate the effects of climate change.

Are you ready to take part in America’s clean energy future? Now is the perfect time to get involved. Start by joining Our Power’s Insiders’ List at www.ourpower.solar.

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