Why We Should Pay Attention to Utility Rate Design and How It Affects Distributed Solar

In the new report Rate Design Matters: The Impact of Tariff Structure on Solar Project Economics in the U.S., GTM Research uncovers the often-not-discussed effect of utility rate structures on distributed solar generation.

In the report, GTM analyzes the electricity rates charged by Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E) and calculates the avoided cost (i.e. rate savings) for a 500-kilowatt commercial photovoltaics (PV) system within each utility. This is where the importance of rate design comes in.

Generally, there are three types of utility rates for commercial electricity customers: fixed charges, which are set fees; demand charges, which are calculated based on the customer’s maximum kilowatt usage (usually measured in 15-minute intervals); and consumption charges, which are based on total kilowatt-hours of energy used. Consumption charges offer customers with installed solar the highest potential for avoided cost, especially when time-of-use pricing (rates increase when electric demand is higher) is in effect since solar can help to avoid the higher costs during peak hours.

The bottom line is that when fixed and demand charges are a large share of the commercial utility rates, distributed solar does not make as much economic sense for the commercial customer. Alternatively, when demand charges are reduced and time-of-use rates apply (what GTM calls a “solar-friendly tariff structure”), distributed solar becomes an attractive investment that can provide electricity at lower-than-retail rates.

GTM came to this conclusion by analyzing the effect of two rate scenarios at SCE and SDG&E: a default (incentive-free) rate structure and a solar-friendly rate structure. The results from their analysis are included in the figure below (Figure 2.8 on page 13 of the report).

Commercial Solar Discount to Retail Rates, 2013 & 2017

Source: GTM Research

The figure above demonstrates the role that utility rate structures can play when it comes to determining the cost effectiveness of installing a commercial PV system. Note that the dotted line at 10 percent represents GTM’s assumption that solar would become competitive with traditional generation at that point and the solar discount in 2017 takes into account the decline in investment tax credit (ITC) from 30 percent to 10 percent.

Even though “rate design” doesn’t sound quite as exciting as net metering, the GTM report points out that it is just as important in “determining the long-term viability of distributed generation, particularly as the U.S. transitions to a post-subsidy reality.”

As we consider the policies that are needed to incentivize distributed generation, it’s clear that we should also consider how utility rates are designed and how they affect the economics of distributed solar.

Mari Hernandez is a Research Associate in Energy Policy at the Center for American Progress.

5 Responses to Why We Should Pay Attention to Utility Rate Design and How It Affects Distributed Solar

  1. Why does GTM think it takes a 10% discount for commercial solar to become competitive? Businesses are also getting (a) a green image bonus (Walmart, Ikea), (b) a costless hedge against future utility price increases. In many cases, price parity should therefore be enough.

  2. PS: the study also does not consider the impact of net metering rules and tariffs on commercial sites. This matters because few business premises work on Sundays, many do not on Saturdays, and nobody works on public holidays. At least 15% of the electricity produced on commercial rooftops therefore has to be sold to the grid or thrown away. A favourable or unfavourable feed-in régime is therefore a significant factor in project analysis.
    An additional issue for the future is the price the grid pays for storage, once it becomes cheap enough. Businesses will generally calculate storage to optimise their own PV consumption, but again they will have saleable storage capacity at weekends and possibly at other times.

  3. Paul Klinkman says:

    Electic rates are already pre-rigged so that there’s no price parity at all. When you buy monopoly utility power, you’re buying the risk that your entire state (I live in a small state) could be wiped out by a Fukushima-style explosion. When you buy oil power, you’re buying the army that seized the oil field and the traumatic brain injuries and Gulf War Syndrome of the veterans.

    Should mass extinction be priced into your personal electric bill? Aaugh! It’s five dollars more!

  4. Paul Klinkman says:

    I forecast that we’re moving into an era where thousands of businesses will have a mix of on-demand solar electricity generation capacity (limited solar thermal storage), PV generation, hydrogen fuel cell storage units not too far from individual communities, negawatt contracts and peak load needs. Is your Public Utilities Commission set up for this mix? Would your PUC prefer size 34 EEEE or size 56 EEEEEE clown shoes?

  5. Chad says:

    In California, while tiered rate-structures obviously encourage solar, we can’t ignore the reality that many big and middle-class families can’t afford the investment and are getting stuck with cost of electricity that is way above people in the bottom tiers.