The Economics of Renewable Energy - Residential Solar Power David P. Brown

Assistant Professor University of Alberta Department of Economics

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Motivation

Photovoltaic (Solar) Potential

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Motivation

Photovoltaic (Solar) Potential

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Motivation

Photovoltaic (Solar) Potential

Source: McKenney et al. (2008), CanSIA (2010), and Natural Resources Canada

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Motivation

Industry Background Vertically Integrated Utility Structure: Generation, Transmission, and Distribution Traditionally - Centralized Large-Scale Production Facilities Distributed Generation Generation of Electricity from sources that are near the point of consumption, as opposed to centralized generation sources such as power plants Distributed Generation is used to serve on-site demand first, and excess production can be sent back to the grid David P. Brown

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Motivation

Distributed Generation Technologies

Distributed Generation - solar panels, wind turbines, or small gas-fired generators Substantial growth in Distributed Generation projected

Source: Energy Information Administration (2013b)

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Motivation

Solar Power - Statistics Worldwide Statistics (IEA, 2015; EIA, 2015) 178,000 Megawatts (178 Gigawatts) Installed Solar Capacity Supply approximately 1% of the worlds electricity demand Leaders: (i) Germany (38,200 MW); (ii) China (28,199 MW); (iii) U. S. (24,100 MW); (iv) Japan (23,300 MW) ... Canada (?, <450 MW) U.S. EIA (2015) Solar Statistics 24,100 Megawatts (2.27%) Installed Solar Capacity 3.6 million MWh of electricity generation (1%) 33% of all solar electricity generation from roof-top solar (1.19 million MWh) 6,691 MW of roof-top solar Capacity (3,057 MW in California) Anticipated solar growth of 7 - 10 % per year to 2025 (including DG) David P. Brown

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Motivation

U.S. Solar Investment

Escalating solar capacity in US (6,247 MW in 2014) Utility-Scale leads the way, in Q3 2015: 42% Utility-Scale 41 % Residential 17% Commercial Solar growth trends expected to continue

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Source: Solar Energy Industries Association (2015)

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Key Drivers of Growth

Solar Capacity Growth Key Drivers: Large Cost Reductions (Panel Efficiency, Financing, Economies of Scale, and Installation Improvements) - Reduction of 78% from 2008 to 2014 Favorable Compensation Policies (Retail Tariff Structures) Tax Credits and Subsidies (U.S. 30% Federal tax credit was just extended)

Lawrence Berkeley National Labs (2015a) David P. Brown

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Cost Comparisons

Levelized Cost of Energy - Lazard (2014) Cost comparison across generation technologies (U.S.)

Note: Assumed Natural Gas price $4.50 per MMBtu (2015 Henry Hub $2.63 per MMBtu) and assumed Coal price $1.99 per MMBtu (2016 Powder River Basin Coal $0.56 per MMBtu). Does not include social costs associated with carbon emissions. Comparable to LCOE in Alberta (Alberta Innovates - Energy and Environmental Solutions, 2015). David P. Brown

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Cost Comparisons

Levelized Cost of Energy: Solar V.S. Peaker NG - Lazard (2014) Solar PV is attractive relative to Peaker units (higher marginal cost - natural gas Combustion Turbine units) Key Issue: Solar PV is non-dispatchable

Note: Varying costs of solar based upon varying capacity factors, low-end solar cost reflects utility-scale, upper-end solar costs reflect C&I roof-top

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Costs and Benefits of Roof-Top

Benefits of Roof-Top Solar Roof-top solar cost exceeds utility-scale solar, but roof-top solar has additional potential benefits Avoided (peak) wholesale generation costs Reduced Environmental Emissions Reduce transmission losses (7 - 9 % electricity losses (EIA, 2013a)) Forgoing (traditional) generation, transmission, and distribution investments Increased Competition (and reduce transmission congestion) Rural Electrification Proponents contend that DG should be compensated generously in light of these benefits David P. Brown

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Costs and Benefits of Roof-Top

Costs of Integrating Roof-Top Solar Grid infrastructure improvements associated with incorporating roof-top solar (e.g., dual flow) Intermittency of solar, lack of storage, peak solar 6= peak demand Additional ancillary services sufficient instantaneous supply to meet instantaneous demand System Operator’s nightmare -“Look at those Ramps!” - Supply and Demand-Side Uncertainty David P. Brown

Source: Gowrisankaran et al. (2015)

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Roof-Top Solar Compensation

The Debate Over Roof-top Solar Critics argue that policy makers provide unduly generous compensation for roof-top solar “DG is the largest disruptive threat to utilities’ business models and financial health” - Edison Electric Institute “DG leads to the so-called death spiral. As more customers adopt DG, utilities’ costs to maintain and operate the grid are spread across a smaller demand base, raising customer rates and increasing customers’ economic incentive to cut the cord.” - Global Utilities Research Center of Debate: Roof-top solar output compensation - ongoing legal/policy debates in the U.S. in 40 out of the 50 states

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Roof-Top Solar Compensation

Roof-Top Solar Compensation: Net Metering Net Metering - 1980s electricity consumers supplying on-site generation only pay for the net energy the obtain from the utility Generation in excess of consumption can be sent back to the grid and compensated (retail or avoided cost rate) Net Metering - 43 states (now South Carolina and no longer in Hawaii) Canada - AB, BC, ON, SK, MB, NB, NL, NS, PE, QC, YT David P. Brown

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Roof-Top Solar Compensation

Roof-Top Solar Compensation: Net Metering Common Net Metering Examples: 1

A consumer imports 1,000 KWh from the utility and exports 900 KWh. The consumer is charged the energy tariff and distribution tariff for the net 100 KWh

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A consumer imports 900 KWh from the utility and exports 1000 KWh. The consumer is not charged the energy tariff and distribution tariff. The 100 KWh are “banked” until next period (or compensated at the prevailing retail rate or “avoided cost”).

Many variants on the net metering design (billing period length, banking credit rules, compensation for excess generation, etc.) 5% of DG solar consumers are net exporters after 12 month cycle California PG&E (Borenstein, 2015) David P. Brown

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Roof-Top Solar Compensation

Roof-Top Solar Compensation: Net Metering

Net Metering policies are: easy to implement in practice (simple, intuitive); often provides favorable compensation with high NPV’s and short(er) payback periods on investment (ex: 5 - 25 years); and provide revenue certainty to consumers (limited variation in retail rates).

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Roof-Top Solar Compensation

Roof-Top Solar Compensation: Net Metering Criticisms of this net metering rate design: 1

Retail rate not tied with the cost savings that a unit of roof-top solar provides (typically: 48 - 100% fixed cost included in retail rates)

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Retail rate often much higher than wholesale/PPA contract price provided to utility-scale resources

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“The Net Metering Subsidy” - DG consumers are not contributing to “their share” network capacity costs

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The cost of distributing the excess electricity is not internalized (and the utility acts as a free battery - reliablity is not costless)

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Distributed Generation from intermittent resources (limits the ability to reduce capacity - regulatory reliability criteria)

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Distributional Concerns - places additional pressure on consumers without DG to pay for the fixed costs associated with the grid David P. Brown

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Roof-Top Solar Compensation

Roof-Top Solar Compensation: Net Metering Recent research illustrates common net metering policies can generate sizable distortions (Brown and Sappington, 2015a, 2015b). Net metering can overcompensate solar DG if: fixed costs (included in retail rates) are sufficiently large; network management costs (benefits) of integrating solar DG into the grid are large (small); wholesale (peak) electricity costs are sufficiently low; and negative (pollution) externalities are sufficiently small. This can result in overinvestment in roof-top solar capacity and the classic “net metering subsidy” (transfers non-roof-top consumers to roof-top consumers) Distortions may be magnified in regions with increasing block retail tariffs David P. Brown

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Roof-Top Solar Compensation

Roof-Top Solar Compensation: Net Metering Net metering can undercompensate solar DG if: fixed costs (included in retail rates) are sufficiently small; network management costs (benefits) of integrating solar DG into the grid are small (large); wholesale (peak) electricity costs are sufficiently large; and negative (pollution) externalities are sufficiently large. This can result in an inefficiently low level of payments to roof-top consumers ⇒ underinvestment in roof-top solar capacity Contradicts the classic “net metering subsidy” Particularly relevant in regions with decoupled retail tariffs, no carbon prices, and “dirty” centralized production David P. Brown

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Roof-Top Solar Compensation

Alternative Roof-Top Solar Compensation Net metering is only “optimal” in knife-edge cases Goal: Design a solar DG compensation mechanism to motivate the efficient level of roof-top solar investment A compensation mechanism that links payments to the (estimated) reductions in: Wholesale electricity generation costs; Transmission and Distribution (T&D) costs; and Avoided social losses from negative (pollution) externalities. This includes both variable and any foregone capacity investment costs

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Roof-Top Solar Compensation

Alternative Roof-Top Solar Compensation Value of Solar Mechanism Implemented by Austin Energy (Texas) and Minnesota utilities Being reviewed/discussed in an array states in the U.S. (e.g., Oregon, California, Hawaii) Bottom-up calculation of all of the costs and benefits that distributed (roof-top) solar provides to the electricity network Implemented as a “buy-all sell-all” contract - consumer pays the retail rate for all consumption - consumer is compensated at the VOS for all solar DG output - long-term or short-term VOS contracts Some related studies: Clean Power Research (2013); Minnesota Department of Commerce (2014); Farrell (2014); Taylor et al. (2015) David P. Brown

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Roof-Top Solar Compensation

Evaluating the Value of Solar Decompose the value that roof-top solar provides to the network Empirical Research into the VOS - “It’s Complicated” VOS varies greatly by region - Large-scale (Callaway et al., 2015) - Small-scale (sub-nodal) (Cohen et al., 2015) Current policies do not reflect this variation

Source: Farrell (2014)

Ongoing area of research complex algorithms estimate locational VOS David P. Brown

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Roof-Top Solar Compensation

Alternative Roof-Top DG Compensation Many other solar DG pricing mechanisms and instruments proposed: Time-of-Production compensation (at time-specific VOS rate) Demand Charges Minimum Bills DG Capacity charges Fixed Charges Net metering with alternative compensation for excess production Goal: Motivate the efficient level of roof-top solar capacity investment

Related Sources: Brown and Sappington (2015b), Faruqui and Hledik (2015), NCCETC (2015) David P. Brown

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Roof-Top Solar Compensation

Recap: Summary of Key Factors 1

Exponential growth in solar PV installations (roof-top and utility-scale)

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Driven by large cost reductions and favorable compensation policies

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Utility-scale is cheaper, but roof-top may provide additional benefits

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Prevailing net metering compensation is viewed as being rather arbitrary (yields over and under compensation)

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More robust solar compensation policies being proposed (heated debates)

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We need more engineering and economics research to understand the heterogeneous time and location varying value of roof-top solar David P. Brown

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The Case of Alberta

Alberta Market Design and Policies Key Market Features: Restructured Electricity Market Design Competition in the wholesale generation and retail markets Limited regulatory restrictions in the wholesale market Energy-Only market design Historically low wholesale spot market prices Low natural gas prices, low demand growth, large capacity reserve margins, and recent highly efficient natural gas CC capacity additions Electricity generation by fuel: Coal (55%); Natural Gas (35%), Wind (4%), Biomass (3%), and Hydro (2%) (Alberta Utility Commission, 2014)

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The Case of Alberta

Alberta Market Design and Policies Proposed Climate Leadership Plan (2015) Induce carbon pricing and coal phase out Anticipate various unit-retirements Anticipate investments in large natural gas CC plants Degree of increase in wholesale market prices unknown (forecasting assumptions) Need to provide appropriate incentives for capacity investment Energy-Only Market Design - Goal: Replace 50 - 75% of all Coal retirements with renewables - Proposed Clean Power Call Mechanism (price collar of $35/MWh) - Utility-scale renewable resources compete as wholesale suppliers

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The Case of Alberta

Utility-Scale Solar Opportunities and Policy in Alberta Opportunities for utility-scale solar (PPAs in the Southern U.S. 5-7 cents per KWh) Alberta’s 2015 wholesale prices avg 3.7 cents per KWh Proposed Investment up to 2021 (AESO, 2016): Natural Gas CC (5,560 MW; 901 MW under construction) Wind (1,182 MW)

Source: Lawrence Berkeley National Labs (2015b)

Utility-Scale Solar (15 MW; 39 MW waiting approval)

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The Case of Alberta

Roof-Top Solar Opportunities and Policy in Alberta 8.67 MW of roof-top solar capacity (1,253 sites) Net metering (Micro-Gen): - Monthly net metering (charged for net consumption) -Roll over credits for excess electricity - Credits may be carried forward for 12 months - Annual payment for unused credits reflects retail energy rate (not including volumetric T&D costs)

Source: AESO (2015)

Sources: AUC (2013), Navigant (2014), AESO (2015) David P. Brown

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The Case of Alberta

Roof-Top Solar Opportunities and Policy in Alberta Some thoughts... Motivating the “right” (efficient) solar investment is essential at both the roof-top and utility-scale levels - avoid costly over subsidization Potential distortions associated with net metering in Alberta minimal at low levels of penetration (and given the rate structure) Net metering - reflects retail energy rate (largely decoupled fixed costs) May result in inefficient investment in roof-top solar capacity Rely on market-based mechanisms for utility-scale (CPC) and investigate the “value of solar” to motivate the appropriate level of roof-top solar Complications: (i) The “value of solar” is likely to be heterogenous flexible region and time-varying compensation; (ii) long-term or short-term value of solar payments?; (iii) decomposing and determining the “value of solar” is complex; and (iv) retail competition (Barnes and Varnado, 2012) David P. Brown

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Conclusion & Policy Discussion

Highlights

Major cost reductions (< $3 per watt for roof-top solar by 2020 - EIA) Design compensation policies to reflect the associated cost and benefits of roof-top solar - growing body of research Changes in Alberta ⇒ utility-scale and roof-top solar opportunities Alberta’s growth and investment in solar depends largely on the prevailing market conditions and compensation policies going forward - Natural gas prices and investment, impact of carbon prices, coal retirements, and federal and provincial subsidies (tax credits) Avoid costly regulatory processes for roof-top solar (AUC, 2013)

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Conclusion & Policy Discussion

Ongoing Policy Debates Major U. S. Debates - Maintain Net Metering, but use residential demand charges, minimum bills, and/or fixed charges to alleviate the “net metering subsidy” - Move to a “value of solar” type design (long-term versus short-term contracts?) - Adopt more robust compensation mechanisms (e.g., time-of-production and locational pricing) - State and Federal Subsidies (e.g., 30% Federal Tax Credit) Other Important Debates: - Third-Party Roof-Top Leasing Options; - Community Solar Retailers; and - Storage Technology Improvements David P. Brown

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Thank You!

Feel free to email me at [email protected].

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References AESO (2015). Micro-Generation in Alberta: November 2015. Alberta Electric System Operator. AESO (2016). Long-Term Adequacy Metrics: February 2016. Alberta Electric System Operator. Alberta Innovates Energy and Environmental Solutions. 2015. Sustainable Clean Power Generation. AUC (2013). Micro-Generation Application Guideline. Version 1.3. Alberta Utilities Commission. Barnes, J. and L. Varnado (2012). The Intersection of Net Metering & Retail Choice: An Overview of Policy, Practice, and Issues. Interstate Renewable Energy Council. Brown, D. and D. Sappington (2015a). “Designing Compensation for Distributed Solar Generation: Are Common Net Metering Policies Optimal?” University of Alberta Working Paper Series. Brown, D. and D. Sappington (2015b). “Optimal Policies to Promote Efficient Distributed Generation of Electricity” University of Alberta Working Paper Series. Callaway, D., Fowlie, M., and G. McCormick. (2015). “Location, Location, Location: The Variable Value of Renewable Energy and Demand-Side Efficiency Resources,” University of California at Berkeley Working Paper Series. CanSIA (2010). Solar Vision 2025. Canadian Solar Industries Association. Clean Power Research (2013). 2014 Value of Solar at Austin Energy. Austin Energy. Climate Leadership Plan (2015). Climate Leadership Report to Minister. Alberta Government. Cohen, M., Kauzmann, P., D. Callaway (2015). “Economic Effects of Distributed PV Generation on California’s Distribution System,” Energy Institute at HAAS Working Paper Series. EIA (2013a). State Electricity Profiles. Energy Information Administration. EIA (2013b). Annual Energy Outlook 2013. Energy Information Administration. EIA (2015). Estimated Small-Scale Solar PV Capacity and Generation. Energy Information Administration. (Available at: http://www.eia.gov/todayinenergy/detail.cfm?id=23972&src=email#) David P. Brown

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References Farrell, J. (2014). “Minnesota’s Value of Solar Program: Can a Northern State’s New Solar Policy Defuse Distributed Generation Battles?” Institute for Local Self-Reliance Report. Faruqui, A. and R. Hledik (2015). An Evaluation of SRP’s Electric Rate Proposal for Residential Consumers with Distributed Generation. Prepared for the Salt River Project by The Brattle Group. Gowrisankaran, G., Reynolds, S., Samano, M. (2015). “Intermittency and the Value of Renewable Energy,” Journal of Political Economy, forthcoming. IEA (2015). Snapshot of Global PV 1992- 2014. International Energy Agency. Lawrence Berkeley National Labs (2015a). Tracking the Sun VIII: The Installed Price of Residential and Non-Residential Photovoltaic Systems in the United States. (Available at: https://emp.lbl.gov/sites/all/files/lbnl-188238 2.pdf) Lawrence Berkeley National Labs (2015b). Utility-Scale Solar 2014. An Empirical Analysis of Project Costs, Performance, and Pricing Trends in the United States. Lazard (2014). Lazard’s Levelized Cost of Energy Analysis - Version 8.0. McKenney, D., Pelland, S., Poissan, Y., Morris, R., Hutchinson, M., Papadopol, P., Lawrence, K., and K. Campbell. (2008). “Spatial Insolation Models for Photovoltaic Energy in Canada” Solar Energy, 82(11): 1049 - 1061. Minnesota Department of Commerce (2014). Minnesota Value of Solar: Methodology. Prepared for Minnesota Department of Commerce, Division of Energy Resources by Clean Power Research. Navigant (2014). Net Metering Standard Industry Practices Study. Prepared for Government of Newfoundland and Labrador, Deparment of Natural Resources. NCCETC (2015). The 50 States of Solar: A Quarterly Look at America’s Fast-Evolving Distributed Solar Policy Conversation. North Carolina Clean Energy Technology Center. SEIA (2015). U.S. Solar Market Prepares for Biggest Quarter in History. Solar Energy Industries Association (Available at: http://www.seia.org/news/us-solar-market-prepares-biggest-quarter-history) Taylor, M., McLaren, J., Cory, K., Davidovich, T., Sterling, J., and M. Makhyoun (2015). “Value of Solar: Program Design and Implementation Considerations,” National Renewable Energy Labratory, NREL/TP-6A20-62361. David P. Brown

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