What’s the true value of residential solar power?

If you’ve ever considered installing solar panels on your roof, you’ve probably asked two basic questions: How much does it cost? And how long before I earn back my investment? The short answer is: it depends.

Solar costs are declining rapidly, the industry is booming, and millions of new customers are adopting solar for their homes. Rebates, incentives, and other programs to decrease upfront costs and increase electricity bill savings are also being tested across the country. But these markets and policies vary from state to state — sometimes even between utilities within a state — and this means the costs and payback periods also vary.

The NEM Question

One of the policies that has helped make residential solar appealing is net energy metering (NEM), which allows customers to simply subtract the energy their panels produce from the energy they have to buy from their utility. Currently, 39 US states and the District of Columbia have some type of NEM policy.

While NEM has enabled the solar industry to flourish by providing a straightforward way for customers to earn money from their panels, many utilities and other stakeholders have called for its revision or replacement. NEM programs, they argue, don’t reflect the true costs of solar customers who rely on the grid for a portion of their electricity. They also argue that under certain tiered rate structures — where customers are charged more for electricity at higher levels of consumption — NEM could actually encourage consumption since solar customers’ meters “spin backwards” when their panels produce electricity, enabling them to pay lower-tier rates. Meanwhile, solar advocates contend that the value solar provides for utilities is underestimated, and in fact solar customers may not be compensated enough.

Valuing Solar

Dozens of organizations over the past several years have published studies that attribute quantitative value to distributed solar resources, seeking to put to rest the debate over whether they provide benefits or impose costs on electric utilities and the grid. Although the results of these studies vary widely, there are a few common themes.

Each study breaks the value of solar into its component parts to answer a set of questions: if more solar is installed, to what extent will that offset the need to invest in other generation facilities or transmission equipment? How much can be saved in fuel and maintenance costs by having more decentralized generation? To what extent does increased distributed solar make the electric grid more or less reliable? How should environmental benefits be valued? These questions are not only important to utility companies; solar customers and non-solar customers alike are greatly affected by the answers, as they influence energy costs and credits.

An Alternative to NEM?

In 2012, Austin Energy — one of the largest publicly-owned utilities in the US — tried to more fairly value distributed solar resources while maintaining a vibrant solar market for its customers. They replaced NEM with a new “Value-of-Solar” (VOS) rate. Austin solar customers are now billed for their use of electricity from the grid like any other customer, but then separately credited for each unit of solar electricity they produce. This credit is based on an average annual calculation of the value that solar provides to the grid, including several components such as reduced fuel use at power plants. Despite this change, Austin Energy’s VOS program has continued to see a steady increase in solar installations — from around 12 megawatts in 2012 to almost 29 megawatts in 2016.

This looks promising: the rate of solar adoption continues to accelerate with compensation that’s ostensibly fair for utilities, solar developers, and customers. But it leads to an important question: Is Austin somehow special, or could the VOS methodology work elsewhere?

In 2013, Minnesota adopted its own optional VOS rate, a cousin to Austin’s methodology. (To date, no Minnesota utilities have offered the VOS rate, as it would currently credit solar energy more than NEM.) Other states, such as Maine, have conducted VOS studies using similar approaches to Austin and Minnesota, but so far, none have implemented a VOS rate.

Utilities, regulators, and other stakeholders who are considering replacing NEM with a VOS program, should pay close attention to two important details:

• Stakeholder buy-in: Perhaps the most important features of a VOS program are transparency and objectivity — everyone can see exactly how the rate of the credit is determined, and VOS doesn’t favor any particular party. But it can be challenging to get stakeholders to agree on how the calculation is structured. Stakeholders support VOS for a variety of reasons and some utilities are employing the VOS model to quantify what they see as the high costs of distributed solar to the grid, with the likely effect of slowing solar adoption. Others support VOS as a method to sustain solar development. Some components of VOS, like valuing environmental benefits, remain controversial. However, having all parties at the table working in good faith to determine how to calculate the true value of solar is critical to the lasting success of a VOS program.
• Location, location, location: The value of distributed energy varies significantly by geography. Local electricity infrastructure, capacity for additional local resources, fuel mix, and power line congestion can all change the VOS calculation. Higher penetrations of solar can impact each of these variables in different ways. In its current Reforming the Energy Vision proceedings, the state of New York is proposing a locational component in their calculations to account for these differences.

As more utilities, regulators, and other stakeholders find consensus and demonstrate the success of innovative new programs — for solar customers, non-solar customers, and utilities alike — other regions can adopt similar approaches that ideally preserve utility financials while supporting a vibrant market for residential solar.  And that would provide value to everyone.

This work was supported by the U.S. Department of Energy SunShot Initiative under Award Number DE-EE0007657.