51st State: Rate Riders

51st State

 

Continuing with the issue of incorporating Distributed Energy Resources (DER) into the grid, a rate rider is a very innovative and practical idea that was proposed at the 51st State Discussion. Particularly discussed in Scott Madden Consulting’s submission. It drew my attention as being a more sustainable method than Net Energy Metering (NEM).

A rate rider is formally defined as an additional charge or credit on your utility bill. It is separate from the basic rate that is normally charged. It is used for costs that are location specific and temporary. Traditionally, it covers one-off costs outside of the control of the utility. In the case of DER, it would be used to price the benefit or cost of that DER to the grid. Rate riders would create long-term financial planning stability for both parties. Some negatives do arise, such as vagueness in the rate setting and increased power to the utilities.

One of the greatest strengths of a rate rider is in properly matching compensation to the value provided. The utility and regulators would be able to determine all the intricacies for the rate schedule. There are many factors which determine how much the feed-in energy is worth to the utility including location, time, system DER penetration, time of day contribution, and other influencing factors. These points contribute to determine the value that the DER provides. It could be the case that the distributed resource imposes a cost on the grid. An example case would be the grid having too much clean energy on a sunny, windy day. In such a scenario, the utility could be paid to take the extra energy from a producer. The amount of the rate rider would be very specific to that installation based on the value provided to the grid.

Another strength is that rate riders provide stability and certainty for both the user and the utility. The compensation structure would be determined at installation and not change for the life of the asset. It would be derived from the value of that system to the grid at that point in time. The user would have the financial certainty to invest in and install a solar panel knowing that they would be able to recover the costs. The utility can know exactly how much DER they need to incorporate into the electric system and the dollar amount they will transact. There is a huge financial benefit for both entities in reducing this risk. Exactly how stable the compensation is would depend on how the rider is set-up. The rider’s stability could vary along a spectrum; from being a fixed monthly compensation, to a fixed MWh rate, to a variable MWh rate. Monthly compensation seems unlikely as it is not connected to actual power flows. On the other extreme, variable rates wouldn’t make sense because they would be little different from a NEM system. Although those extremes could be made to work, the most likely design would be a lifetime fixed rate. Where the actual implementation lands would change the risk profile and whether the utility takes more risk or the user takes more risk.

 

Rate Rider Stability Spectrum

 

There are some downsides to a rate rider. The vagueness of how the rate is determined could be a major issue. It is very difficult to formulate a price for anything. Coming up with a price could get to be arbitrary. If there are too many variables in calculating the value of the compensation, it could become an opaque system. Valuing electricity at different times of the day is one thing, but to come up with a value for how much fed-in electricity varies (think the cost of ancillary services) could be difficult. Part of the problem is lacking a market to determine the price.

Going hand in hand with opaque pricing is the fact that the utilities would have a large say in coming up with the rider rates. Although the Public Utility Commissions would have a say in protecting users, the utilities could very easily over-exercise their power in the process. The effect would be unfair rates that don’t reflect the value provided.

All in all, rate riders provide an excellent mechanism for incorporating distributed resources. They are more sustainable than NEM, but still provide many of the benefits. The are advantageous because they can more accurately price the value provided to the grid and they provide financial certainty. The downsides are vague pricing structure and increased utility power. Overall, rate riders are a very innovative idea for incorporating DER into the grid.

Advertisements

51st State: Net Energy Metering

51st State

Last Thursday, I had the honored opportunity to partake in a discussion on the future of the electric grid. The 51st State initiative put on by the Smart Electric Power Association (SEPA) is meant to serve as a platform to re-imagine electricity generation, distribution, and use. The idea is to envision a completely new 51st State that would be unencumbered by existing structures. This year, the focus was on creating a roadmap to that future state. The submission included a paper, graphic, and poster. I made a submission along with 13 other authors for which you can see our work on the SEPA 51st State site. On Thursday, these authors, along with other industry players, gathered for a discussion in Denver. It consisted of panels, table break-outs, presentations, and lots of lively, back-and-forth discussion. From all the talk, there were three take-aways that particularly resonated with me for their ingenuity, sensibility, and recurrence. Those were:

  1. Net Energy Metering (NEM) being a good subsidy tool in the short-run.
  2. Rate Rider as being a good way to fix remuneration for the lifetime of a Distributed Energy Resource (DER).
  3. The idea that defining value will be very important for any change to the rate structure.

I’ll go over these three in ideas in separate posts, starting with Net Energy Metering.

 


 

Net Energy Metering (NEM) refers to the concept of selling electricity you produce into the grid. The net from what you bought reduces your electric bill. The typical scenario is a solar rooftop selling electricity during the day, then buying what they need when the sun isn’t shining. In effect, they use the grid as a battery.

NEM is a very controversial issue between utilities and solar advocates. It is very beneficial to solar producers while hurting the utility’s revenue. The user only pays for the net of what they use versus produce, even though they are using the connection all the time. This decreases overall revenue for the utility making it harder for them to cover their operations and maintenance cost which stay the same. It allows for users to make back a little more money.

My original thought on this is that it was a fair and good thing. You should be able to sell electricity just as easily as buying it, and at the same price. Shouldn’t the same product at the same location always be worth the same amount? NEM gives an added boost to the economics of solar energy. It seemed that the big utilities were trying to stick it to the little guys.

Very quickly, it’s easy to see how unsustainable it is. If everyone put the same amount of energy into the grid as they took out, then everyone’s bill would be zero. No one would pay anything and the utility would make no money, even though everyone was fully using the grid. Even at reasonably small percentages of penetration, it is an unwise idea. The non-solar producers have to pick up the costs by the amount that the solar producers reduce their bill. This creates an unfair subsidy from non-solar producers to solar producers. A new way of accommodating residential solar on the grid is required.

My next thought was to advocate for a fixed cost for using the grid. A monthly charge for the privilege of being hooked-up to the grid would ensure that the costs of maintaining the grid are covered. This seems logical because the costs associated with maintenance are fixed and independent of how much energy is used. In my paper, I call it a grid access fee, but essentially, would be a monthly charge based on the size of the connection. A fixed cost is already being implemented by some utilities. I still strongly advocate for this fixed fee because of the sustainability of the idea. In addition, it more closely matches the charges with the costs. However, it doesn’t actively promote solar.

The thing about current solar subsidies are that they’re being done inefficiently. Solar Investment Tax Credits are available, but most solar companies have difficulty making use of them because they aren’t making money, anyway. There are state’s that have Renewable Portfolio Standards (RFP) which essentially demand that a certain percentage of generation come from a specified source. This doesn’t let the market determine the best way to accomplish the goal of clean energy. Feed-In Tariffs (FIT) guarantee of payment for a specific clean power project. It also has the trouble of not letting the market decide what’s best in accomplishing outlined goals. The ideal way to promote clean power would be from a carbon tax, but this is unlikely with today’s political sentiment.

The apt point that was made during the conference was to think of NEM in terms of the short-term vs. long-term. Long-term, NEM won’t work. However, in the short-term, it is a very efficient subsidy for new solar generation. NEM is technology agnostic which means that solar doesn’t have to be used, but whatever works best. The boost to the economics will support its growth. This will lead to an increased number of clean power generators and decreased costs with technology developments and economies of scale.

Intermittency is one of the biggest problems with solar. The sun doesn’t shine all the time and can be unpredictable as to when it shines. The grid helps it overcome this problem. NEM allows the grid to be used as storage. This is a huge boon that is being provided for free with NEM. This benefit comes at a low cost at low penetrations. At small amounts, there isn’t much revenue being lost for the utility, and this storage service can be provided without a huge shock to the system.

NEM needs to be thought about in time periods. In the long-term it is an unsustainable rate structure. In the short-term, it is an efficient subsidy that can promote solar.