TODAY’S STUDY: How To Balance Competing Solar Interests

Show Me the Numbers A Framework for Balanced Distributed Solar Policies

Tim Woolf Melissa, Whited, Patrick Knight, Tommy Vitolo, Kenji Takahashi, November 10, 2016 (Synapse Energy Economics for Consumers Union)

Executive Summary

Jurisdictions across the country are grappling with the challenges and opportunities associated with increasing adoption of distributed solar resources. While distributed solar can provide many benefits— such as increased customer choice, decreased emissions, and decreased utility system costs—in some circumstances it may result in increased bills for non‐solar customers. In setting distributed solar policies, utility regulators and state policymakers should seek to strike a balance between ensuring that cost‐effective clean energy resources continue to be developed, and avoiding unreasonable rate and bill impacts for non‐solar customers.

To address this challenge, many jurisdictions are considering modifying distributed solar policies or implementing fundamental changes to rate design, such as increased fixed charges, residential demand charges, minimum bills, and time‐varying rates. While it is prudent to periodically review and modify rate designs and other policies to ensure that they continue to serve the public interest, decision‐makers frequently lack the full suite of information needed to evaluate distributed solar policies in a comprehensive manner. As this report demonstrates, it is critical to have accurate inputs, especially for “avoided costs” in order to identify whether a policy will increase or decrease rates for non‐solar customers.

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This report provides a framework for helping decision‐makers analyze distributed solar policy options comprehensively and concretely. This framework is grounded in addressing the three key questions that regulators should ask regarding any potential distributed solar policy:

1. How will the policy affect the development of distributed solar?

2. How cost‐effective are distributed solar resources?

3. To what extent does the policy mitigate or exacerbate any cost‐shifting to non‐solar customers?

Answering these questions will enable decision‐makers to determine which policy options best balance the protection of customers with the promotion of cost‐effective distributed solar resources. This report describes the analyses that can be used to answer these questions.

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Analysis 1: Development of Distributed Solar

Customer payback periods provide a useful metric to indicate the extent to which different solar policies will affect the growth, or lack of growth, of distributed solar resources. Policies that lead to very short customer payback periods will likely produce rapid growth in these resources, while policies that lead to very long customer payback periods will likely result in little growth. Market penetration curves can be used to estimate eventual customer adoption levels from customer payback periods. Changing a customer’s payback period will impact how economically attractive distributed solar is, and thereby affect how many customers ultimately adopt the technology.

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Analysis 2: Cost‐Effectiveness of Distributed Solar

Distributed solar can offer the electric utility system and society a host of benefits, ranging from avoided energy and capacity costs to reduced impacts on the environment and greater customer choice. At the same time, distributed solar may impose administration and integration costs on the utility system. Many recent studies have assessed whether the benefits of distributed solar outweigh the costs. These studies are most informative when they use clearly defined, consistent methodologies for assessing costs and benefits.

The most relevant cost‐effectiveness tests for evaluating distributed solar are the Utility Cost Test, the Total Resource Cost Test, and the Societal Cost Test, which are based on the cost‐effectiveness analyses long applied to energy efficiency resources.

• The Utility Cost Test indicates the extent to which distributed solar will reduce total electricity costs to all customers by affecting utility revenue requirements.

• The Societal Cost Test takes a broader look and indicates the extent to which distributed solar will help meet a state’s energy policy goals such as environmental protection and job creation, as well as reducing customer electricity costs.

• The Total Resource Cost Test, in theory, indicates the extent to which distributed solar will reduce utility system costs net of the host customer’s costs. This test should be used with caution, as it has some structural constraints that limit its usefulness.

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Analysis 3: Cost‐Shifting from Distributed Solar

Cost‐shifting from distributed solar customers to non‐solar customers occurs in the form of rate impacts. Distributed solar can cause rates to increase or decrease due to changes in electricity sales levels, costs, or both. A comprehensive rate impact analysis is the best way to analyze the potential for cost‐shifting from distributed solar.

When evaluating cost‐shifting, it is important to analyze both long‐ term and short‐term rate impacts to understand the full picture. Often, the benefits of distributed solar are not realized for several years, while a decrease in electricity sales occurs immediately, resulting in short‐term rate increases followed by long‐term rate decreases. Thus a short‐term rate impact analysis will not fully capture the impacts of distributed solar.

In their most simplified form, electricity rates are set by dividing the utility class’s revenue requirement by its electricity sales. Thus rate impacts are primarily caused by two factors:

1. Changes in costs: Holding all else constant, if a utility’s revenue requirement decreases, then rates will decrease. Conversely, if a utility’s revenue requirement increases, rates will increase. Distributed solar can avoid many utility costs, which can reduce utility revenue requirements. Distributed solar can also impose costs on the utility system (such as interconnection costs and distribution system upgrades).

2. Changes in electricity sales: If a utility must recover its revenues over fewer sales, rates will increase. This is commonly referred to as recovering “lost revenues,” and is an artifact of the decrease in sales, not any change in costs. Lost revenues should be accounted for in the rate impact analysis, but not in the cost‐effectiveness analysis.

Whether distributed solar increases or decreases rates will depend on the magnitude and direction of each of these factors.1 In very general terms, if the credits provided to solar customers exceed the average long‐term avoided costs, then average long‐term rates will increase, and vice versa.

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Summary of Analytical Framework for Assessing Distributed Solar Policies

The results of the three analyses described above can be pulled together into a single framework to evaluate different distributed solar resource policies in an open, data‐driven regulatory process. The framework proposed here includes several steps that policymakers, regulators, or other stakeholders can take to assess the implications of different distributed solar policies. These steps are summarized in Table ES.1.

To facilitate understanding and decision‐making, it is useful to summarize the results of the three analyses in a single table. Table ES.2 provides an example of how the results could be summarized for reporting and decision‐making purposes.

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The primary recommendation from this report is that regulators should require utility‐specific analyses of: (1) distributed solar development, (2) cost‐effectiveness, and (3) cost‐shifting impacts of relevant distributed solar policies. This will allow for a concrete, comprehensive, balanced, and robust discussion of the implications of the distributed solar policies.

Using the results of the analyses presented above, policymakers, regulators, or other stakeholders can review the projected impacts of various policy options to determine what course of action is in the public interest. Appropriate consideration of all relevant impacts will help decision‐makers to avoid implementing policies that have unintended consequences or that fail to achieve policy goals. The results of such analyses can also help to determine the point at which certain distributed solar policies should be reevaluated and modified over time.

Given that each jurisdiction has its own policy goals and unique context, the ultimate policy decision reached may be different in each jurisdiction, even when based on the same analytical results. Nonetheless, the framework articulated above will provide decision‐makers with the ability to balance protection of customers with overarching policy objectives in a transparent, data‐driven process.

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