Transcript Economic Framework for Assessing Solar PV

Economic Framework for
Assessing Solar PV
In Electric Utility Industry
Jim Cater
Director, Economic &Financial Policy
1
Overview
 Main Topics
• Solar PV Basics
• Utility Ratemaking
• Customer Cross-subsidization
• Benefit/Cost Analysis
• Importance of Perspective
2
Overview
 Goal is not to promote or disparage solar PV
• No overall assessment is provided
 Solar PV is simply an energy resource with certain attributes and
impacts
• Can affect different individuals and/or groups in different ways
• Goal is to
• Present and discuss an economic framework for analysis
• Highlight some key dynamics
• Think about trade-offs and ways to manage them
 Decision makers must determine if, on balance, solar meets their
needs
3
Solar PV Basics
 Some attributes
• Low carbon and environmentally benign
• Financial hedge against fuel price volatility
• High consumer favorability
• Intermittent power supply
• Low energy output (capacity factor)
• Expensive
• Benefits form significant subsidies and incentives
Solar PV Basics
 Ways to Participate
• Rooftop systems
o Installed and produce electricity at the consumer’s premises
(residential or commercial).
o Most direct way for homeowners to participate
• Community solar PV systems
o Installed within a localized geographic region (neighborhood, town) and
provide energy to consumer participants who pay for a portion of the
system’s output
• Utility-scale systems
o Generally somewhat larger (1 MW and above)
o Energy is transmitted over the grid-usually at the distribution level.
o Utility sponsored programs such as “green tariffs” allow customers to
support utility-scale projects.
Solar PV Basics
 Currently, subsidies are crucial for the development of solar
PV
 Not suggesting that subsidies are inappropriate or that
solar PV is the only category of energy resource that enjoys
subsidies or gives rise to cost shifting
• Up to decision makers and the communities they serve
to determine what makes sense
 Merely acknowledging that subsidies exist for solar PV and
illustrating how they might affect economic analysis
10
Solar PV Basics
 Existing Subsidies
• Societal o Defray costs to solar investors (e.g., homeowners, utilities, third
parties)
o Include federal and state tax credits, grants, renewable energy
credits (REC), local property tax relief and more
• Cross Customer – Bill reductions for solar customers are offset, to
some degree, by increased costs and rates for non-solar customers
o Referred to as cost shifting
o Rates to solar customers might also rise even as bills fall
• All Customer Rate Impacts - Rates for all customers rise when costs
for utility owned projects exceed the private economic value of the
output
11
Rate Dynamics
 Three factors contribute to cost shifting and cross-customer
subsidies
• Displacement of utility production and sales
• Incentives and payments to solar customers
• Project costs in excess of avoided costs
 Usually take the form of rates that are higher than they would
have been without the solar project
 Average rate equals total cost divided by kWh sales
 Solar projects will affect both cost and sales, and hence average
rates, in different ways depending on the scale of the project
and the nature and magnitude of incentives
12
Basic Rate Dynamics
 Utility rates designed to yield revenues equal to the utility’s total
cost of service (COS), which includes all capital and operating
costs incurred to provide service to customers
 Ideally, revenues would exactly match COS, but that is difficult to
achieve
 Rates are usually set prior to the service and billing periods
o Therefore, designed to match estimated costs with estimated
revenues
 Actual costs and revenues fluctuate, to different degrees, with
actual production and sales
Rate Dynamics
 If revenues exceed the COS, customers are paying more
than necessary for the service provided.
 If revenues fall below COS, at least one service provider
(e.g., the utility, its contractors or its power suppliers) will be
undercompensated and thus suffer a loss
 Costs and revenues routinely differ from the estimated
levels for a number of reasons, including weather, customer
migration and macroeconomic factors, but the impacts are
often relatively small
Rate Dynamics
 Solar PV can cause large discrepancies by displacing significant
amounts of utility production and sales
 Lower sales lead to lower revenues
 Costs also fall, but in many cases the reduction in revenue
reduction will exceed the cost reduction and the utility will
experience a loss in net revenue
 Net revenue loss means total revenue is below total COS and
someone in the supply chain is losing money
 Situation Is unsustainable in the long run
Rate Dynamics





Utilities have both fixed costs (e.g., poles & wires) and variable costs (e.g., fuel)
Utilities also have fixed and variable rates (charges)
Magnitude of net revenue loss will depend mainly on how well fixed and
variable rates match fixed and variable costs
• Mismatches affect various stakeholder and customer groups differently
If cost and rate components are perfectly aligned
• Total costs and total revenues will decline by equal amounts
• No net revenue loss
If cost and rate components fail to align, particularly when variable rate exceeds
variable cost
• Reduced sales will result in net revenue loss that grows larger as the gaps
between the cost and rate components widen
Rate Dynamics
 Utility rate design practices will affect the outcomes
 Some rate structures are better than others at matching
costs and revenues when production, sales and revenues
fluctuate
 Following table/graphs illustrate cost shifting dynamic
under two approaches to rate design
• Two-part tariff with fixed charge to recover fixed cost and
variable (volumetric) charge equal to actual variable cost
• One-part tariff with single volumetric charge to recover
all costs, fixed and variable
• Both are initially set to fully recover all costs at stated
level of sales
17
Solar kWh =
200
Fixed Cost =
$50
Variable Cost
($/kWh) =
$.070
Rate Design
Actual
Sales
$/kWh
Fixed
Grid
Cost
$$$
Two-part Tariff
No Solar
1,000
$50
$70
$120
One-part Tariff
No Solar
1,000
$50
$70
Two-part Tariff
With Solar
800
$50
800
$50
One-part Tariff
With Solar
Fixed Charge
$$$
Variable
Charge
$/kWh
Average
Charge
$/kWh
Customer
Bills/Utility
Revenues
$$$
$.120
$50
$.070
$.120
$120
$120
$.120
$0
$.120
$.120
$120
$56
$106
$.133
$50
$.070
$.133
$106
$56
$106
$.133
$0
$.120
$.120
$96
Variable
Average
Cost
Total Cost
Cost
$/kWh
$$$
$/kWh
Rate Dynamics





Persistent revenue shortfall is not sustainable and must be addressed
Utilities must decide how
Following tables and graph compare results for two contrasting rate
structures
Under a perfectly aligned two-part tariff
• Rates and bills for non-solar customers remain unchanged
• For solar customers, rates increase but bills decline
Under the one-part tariff
• Rates rise for both customer groups, but increase for solar customers is
less than under the two-part tariff
• Both rates and bills for non-solar customer rise
20
Solar kWh =
200
Fixed Charge $$$ =
$50
Variable Charge
$/kWh =
$.070
Two Part Tariff
Actual
Sales
$/kWh
Fixed
Grid
Cost
$$$
Customer A (Solar)
300
$25
$21
$46
$.153
$25
$.070
$.153
$46
Customer B (Nonsolar)
500
$25
$35
$60
$.120
$25
$.070
$.120
$60
Total Utility
800
$50
$56
$106
$.133
$50
$.070
$.133
$106
Variable
Cost
Total
$/kWh Cost $$$
Average
Cost
$/kWh
Fixed Variable Average
Charge Charge Charge
$$$
$/kWh $/kWh
Customer
Bills/Utility
Revenues
$$$
Solar kWh =
200
Fixed Charge $$$ =
$0
Variable Charge
$/kWh =
$0.133
One Part Tariff
Actual
Fixed Variable Total
Sales
Grid
Cost
Cost
$/kWh Cost$$$ $/kWh $$$
Average
Cost
$/kWh
Variable Average
Customer
Fixed
Charge Charge
Bills/Utility
Charge $$$ $/kWh $/kWh Revenues $$$
Customer A (Solar)
300
$25
$21
$46
$.153
$0
$.133
$.133
$40
Customer B (Nonsolar)
500
$25
$35
$60
$.120
$0
$.133
$.133
$66
Total Utility
800
$50
$56
$106
$.133
$0
$.133
$.133
$106
Rate Impacts - Percent Change
Variable Rate
$/Kwh
Variable Rate
$/Kwh
Variable Rate
$/Kwh
Project as % of Load
$0.120
$0.090
$0.070
5.00%
2.23%
0.90%
0.00%
10.00%
4.71%
1.88%
0.00%
15.00%
7.48%
2.99%
0.00%
20.00%
10.59%
4.24%
0.00%
Rate Dynamics
 Rate design will affect the relative economics of solar projects, leading
to benefits for some consumers while harming others
 Solar customers prefer the one-part tariff, and non-solar customers
prefer the two-part tariff
 Solar project will appear economic for the customer only if the bill
reduction exceeds their cost to install and operate the system
 By mitigating cross-customer subsidies, multi-part tariffs tend to lessen
the economic incentives for customers to adopt solar
• This may compromise other policy or resource planning goals
 There is no unambiguously “correct” or “best” approach.
 Decision makers will have to manage trade-offs
Benefit-Cost Framework
 Numerous ways to think about project economics
 One common approach is to derive a benefit-cost (B/C)
ratio
 Net present value (NPV) of project benefits in the
numerator and NPV of costs in the denominator
• B/C Ratio = Net present value of project benefits
Net present value of project costs
 Basically comparing the levelized cost of electricity (LCOE)
produced with a PV system to the leveled value of its output
26
B/C Framework
 Economics of solar PV can be viewed from at least three broad
stakeholder perspectives
• Solar customers
• Non-solar customers and
• Society as a whole
o No one definition of society, refers to identifiable group
including some who are not direct parties to the utility
transactions (e.g., town, state, nation, world)
 Terms included in B/C equation and associated values can vary
across stakeholder groups
 Cost shifting and cross-customer subsidization can have
significant impacts on results
27
B/C Analysis
 Following tables illustrate B/C analysis and show how
project economics can vary across stakeholder groups
 Two key Points
• Project economics vary according to stakeholder
perspective
• Magnitude of cost shifting affects results
 Comparison between rate designs
• One-Part tariff with single volumetric rate
• Two-Part tariff with volumetric rate equal to variable cost
28
B/C Analysis

Inputs
• Average cost/rate, $.12/kWh
• Fixed component, $50 or $.05/kWh @ 1,000
kWh
• Variable component, $.07/kWh
• Solar project cost, $.15/kWh
• Environmental benefit, $.08/kWh
29
B/C Table I
One-Part
Tariff
Project
Cost
$/kWh
ITC and Revenue
Incentives
Loss
$/kWh
$/kWh
Net Cost
$/kWh
Utility
Avoided
Cost
$/kWh
Bill
Environme
Net
Savings
ntal
Benefit
$/kWh
$/kWh
$/kWh
B/C
Ratio
Solar Customer
$.15
($.04)
$0
$.11
$.00
$.12
$0
$.12
1.07
Other
Customers/Utility
$.00
$.00
$.12
$.12
$.07
$.00
$0
$.07
0.58
Society
$.15
$.00
$.00
$.15
$.07
$.00
$0
$.07
0.47
B/C Table II
One-Part
Tariff
Project
Cost
$/kWh
ITC and Revenue
Incentives
Loss
$/kWh
$/kWh
Net Cost
$/kWh
Utility
Avoided
Cost
$/kWh
Bill
Savings
$/kWh
Environme
ntal
Net
Benefit
Benefit
$/kWh
$/kWh
B/C
Ratio
Solar Customer
$.15
($.04)
$.00
$.11
$.00
$.12
$0
$.12
1.07
Other
Customers/Utility
$.00
$0
$.12
$.12
$.07
$0
$0
$.07
0.58
Society
$.15
$0
$0
$.15
$.07
$0
$.08
$.15
1.00
B/C Table III
Two-Part
Tariff
Project
Cost
$/kWh
ITC and Revenue
Incentives
Loss
$/kWh
$/kWh
Net Cost
$/kWh
Utility
Avoided
Cost
$/kWh
Bill
Net
Savings Environment Benefit
$/kWh
$/kWh
$/kWh
B/C
Ratio
Solar Customer
$.15
($0.04)
$.00
$.11
$0
$.07
$0
$.07
0.62
Other
Customers/Utility
$0
$0
$.07
$.07
$.07
$0
$0
$.07
1.00
Society
$0
$0
$0
$.15
$.07
$0
$.08
$.15
1.00
B/C Table IV
Project
Cost
$/kWh
ITC and Revenue
Incentives
Loss
$/kWh
$/kWh
Net Cost
$/kWh
Utility
Avoided
Cost
$/kWh
Bill
Environme
Net
Savings
ntal
Benefit
$/kWh
$/kWh
$/kWh
B/C
Ratio
Customers
$.15
($.04)
$0
$.11
$.07
$.00
$.00
$.07
0.62
Society
$.15
$0
$0
$.15
$.07
$.00
$.08
$.15
1.00
Environme
Bill
ntal
Net
Savings
Benefit
Benefit
$/kWh
$/kWh
$/kWh
B/C
Ratio
B/C Table V
Project
Cost
$/kWh
ITC and Revenue
Incentives
Loss
$/kWh
$/kWh
Net Cost
$/kWh
Utility
Avoided
Cost
$/kWh
Customers
$.15
($.04)
$.00
$.11
$.12
$0
$0
$0.12
1.07
Society
$.15
$.00
$.00
$.15
$.12
$0
$.08
$0.20
1.33
Conclusions
 Adoption of solar PV poses trade-offs, and will likely result in
both gainers and losers
 Impacts can be quantified and evaluated
 Making trade-offs explicit facilitates better decision making
• Allows decision makers to balance interests in pursuit of goals
 Factors to consider while deploying solar
• Community Preferences
• Fairness
• Economic Efficiency
 Traditional utility rate design provides effective tool for
managing impacts
37