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Tom Murphy

Tom Murphy

Tom is an associate professor of physics at the University of California, San Diego. This post originally appeared on Tom's blog Do the Math.

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Plans to Put PV to Pasture?

A colleague pointed me toward an article in the LA Times last week, which lays out a plan to remove financial incentives legally bestowed on solar photovoltaics (PV) to the detriment of utility power companies. The plan is spearheaded by the Koch brothers and their political action group, Americans for Prosperity.

In summary, they target two laws that give a big boost to solar: net metering, and renewable mandates. Both impart crucial advantages to solar installations that can change the economics by a large factor.

Net Metering

Net metering is the practice in which a solar PV array may run the utility meter backwards in the daytime, during times of over-production, then spin the meter forward at night when the house is a net consumer. The customer only pays for net power imported over some defined period of time. Different states and municipalities have different timescales for assessing net balance. The most generous (e.g., California and many others) use an annual timescale, so that under-production in winter may be compensated by summer sunshine. Others use a monthly balance sheet. Very few states require utilities to cut a check to PV owners for net over-production. Those that do often compensate at a cost-avoided rate of a few cents per kilowatt-hour (kWh).

When net metering started, most utility meters were analog affairs with a spinning disk and dials. This crude device cannot record separately the import and export of electrical energy, so net metering is the only real option for tallying PV production with these meters: assessing the cumulative effect. This implicitly means that PV generation is being compensated at the retail electricity rate (national average around $0.12/kWh).

“Smart” meters are now sweeping the scene, although I have a serious beef with that name. In any case, these meters can keep track of production and consumption separately. The door is open for differential pricing, as well as time-of-day fluctuations in the cost of power. At present, price (demand) is highest in the daytime, and cheapest at night. Time-of-use pricing would presently advantage solar producers. Longer term, if solar were to establish a substantial share of electricity production, the price differential could flip.

A well-sized system in an annual net-metering state will balance the books and leave the consumer spending no money on kilowatt-hours from the utility. This is a large factor in figuring out finances and payback time. For instance, a household using 20 kWh/day and paying $0.15/kWh pays about $1,100 per year in electricity costs. A 4 kW PV array (at an average of five full-sun-equivalent hours per day) will offset the utility and cost about $16k or less to install at today’s rates. The payback is 15 years with no additional incentives and at constant utility price. Eliminate net metering altogether and assume that 50% of a household’s electricity use is in the dark (often will be more), and the consumer still pays $550/year to the utility—doubling the payback time to 30 years. That, my friends, makes it a no-go for most people. Even if being compensated for over-production during the day at a cost-avoided rate of $0.04/kWh, the payback looks like 25 years. The buy-in shrinks precipitously.

But it gets worse. The Koch proposal also points out that PV producers are using an electricity grid for free, even though it is costly to maintain this system. They propose that solar producers pay $50 to $100 per month for the grid service. That pretty much destroys any financial advantage to putting solar panels on your roof—however slim it already was.

Renewable Portfolio Standards

The mandate for a state to acquire some fraction (or absolute amount) of its electricity generation via renewable sources (solar, wind, hydro, geothermal, etc.) goes by the name: Renewable Portfolio Standards (RPS). According the Wikipedia page, 36 states in the U.S. have some form of RPS in place. Usually, this takes the form of a target percentage at a certain date: commonly something like 20% by 2020.

The RPS puts pressure on utilities to build and embrace renewable installations, which tend to be costlier than fossil-powered plants. Few people want to pay more for their electricity than they already do, so the utilities are squeezed between a mandate and a grumpy place.

The whole point of these incentives is to give an economy-of-scale kick-start to an underdog technology that is deemed likely to be important for our future. The advantages seem to be working: PV panel cost has dropped precipitously in the last five years. Given more incubation time, the hope is that solar will reach cost parity and be able to outcompete fossil interests on its own. In a similar vein, we don’t throw children (seen by some as important to our future) into adult roles at age 5: we protect and nurture (advantage) them until they are ready to face the world without help. Do the mega-rich advocate throwing auspicious children to the wolves?

Siding with the Kochs?

The solar-killing initiative is being tested in a few of the more conservative states having net metering and RPS mandates. The utility companies are giddy. Stepping into a business mindset, what the Koch brothers are trying to do makes sense. No free rides; no artificial distortions to the market (government meddling); no penalty to hard-working, legitimate, successful, and important service companies.

They have a point. Utility companies perform a valiant service for our country: stable electrical power is critical to productivity, and therefore to the health of our economic engine. Folding in intermittent power supplies outside their direct control can threaten their ability to maintain grid stability—especially if renewables grow to a substantial fraction of the input. Some would say that the RPS targets are already too high for grid stability. Without costly storage systems, organic growth of renewable resources constitutes a giant headache that the utilities would rather not have. So this friction between solar upstarts and business-as-usual is not surprising.

A fair system, the Kochs would say, does not allow solar producers to use the grid for free. It does not allow PV generators to get full retail compensation for energy production (erratic, unscheduled production, at that). It does not impose artificial targets for inferior and costly energy resources in a heinous market manipulation—conferring enormous advantages to these renewable blights. Governments should not pick winners or establish grossly tilted playing fields. It’s not fair. I get it.

But let me share a quote hanging on the wall of the undergraduate advisor in the physics department at UCSD:

Fairness does not always appear to be in your favor.

Tough love, but wise words. [Clarification: I don't want to give the wrong impression of our fabulous undergraduate advisor, who will bend over backwards to help students—within a fair framework.] So when you hear someone—whether a kid or a billionaire—say “it’s not fair!” you are usually safe to substitute the words: “it’s not in my favor!” Sometimes both are true, but the latter phrase is nearly always on target.

A Broader View

It is clear enough that net metering and RPS targets are not favorable to electric utility companies. Are they fair? That depends entirely on your world view and what you think should be the governing principles behind the rules of the game.

If you think our lives should be governed by free market ideals, and that government’s role is primarily one of defense, enforcement, and currency protection, then NO: the RPS and net metering rules are absolutely not fair. I can see the logic of this argument, and in this light do not view its adherents as necessarily having purely self-serving intent. I could imagine that the battle is more for the principles and ideology of free-market capitalism. If they do not stand up and fight for fairness under their world view, then who will protect those who have played by the rules and succeeded?

The theme, as I see it, is: rules, order, consistency. It’s like a big board game, and winners should not be penalized just because some players who didn’t fare well advocated for rules changes that would give them a leg up. A more cynical view is that this is all profit-driven, and less about ideology. Possibly, but I will operate in generous mode here.

Okay, so while I believe I can understand the mindset and motivations of the solar-disincentive effort—and acknowledge a certain legitimacy—I do not, alas, share this view. Yes, renewables bring new challenges, are more expensive, and are inferior in a multitude of ways. But that is our road. Nature does not care about our rule-set. As finite fossil resources give way (and contribute to climate change), nature forces us onto a different path if we are to remain somewhat in control of our destiny. As fisheries collapse, agricultural land is lost to salt and desertification, freshwater resources are consumed, forests are lost, and species disappear under the grinding heel of climate change, why should we respect the rules of the game that got us here? Why pursue business as usual?

At its core, we have nature vs. free-market capitalism. They were not designed to co-exist indefinitely. We can’t change the rules of nature, but we have control over the rules of humankind. The challenges of the 21st century are not easily addressed by short term concerns characteristic of market forces. Quarterly reports and earnings are paramount, followed by annual performance. Companies do think into the future, but with an ever-decreasing weighting factor for future decisions (manifested as a discount rate). By the time one reaches the decade timescale, market influence has waned. Governments, on the other hand, can and do exert influence on longer scales. If it is thought that renewable resources will be crucial to our future, but that short term interests will prevent the renewable industry from growing fast enough to matter, then governments can give these industries a fighting chance to establish full-scale adoption by the time it’s needed—hopefully averting a crisis in so doing. Climate change is another domain in which governments can exert control over markets, for the betterment of mankind. Just because the current rules do not include a stiff carbon tax, for instance, doesn’t mean that such a rule is an abomination and should not be considered. if we bind ourselves to the present rules just because some have succeeded at the game under the current set, then we cannot hope to adapt to nature’s curve balls.

I have pointed before to this excellent article in The Nation about the genuine conflict between capitalism and climate change (can substitute “resource limits” and have identical arguments). The more we cling to the rules that got us here, the less likely we will be to deal with real challenges in our future. Governments have responded in the right direction, in my opinion, by giving advantage to nascent renewable technologies. It may not be enough: we may not find the prosperity to afford a renewable lifestyle, and the Energy Trap awaits an ambush. Nonetheless, we should do all that we can within the constraints of what politics and voters will allow. Let’s at least try not to go backwards.

By Tom Murphy of Do The Math

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  • David Wilson on June 05 2014 said:
    If net metering's benefits are reduced or removed, people will add batteries, and operate some part of the house off the grid. This gets them the full retail value for their power. Why sell it to the utility for less? This is the worst scenario for utilities, but they're sure pushing for it hard. Net metering with batteries would provide a constellation of benefits to utilities, like peak load reduction, less loading on transmission systems, load shaving, voltage and frequency support through reactive power, and low voltage ride through. All that potential benefit is on the line with the utilities pure lack of understanding of the issues. They only see the down side, refute the benefits, and are rejecting the most promising, long term, stable, clean and low cost technology. Get with the program, or go out of business. It's the utilities choice.
  • Anon on June 05 2014 said:
    When utility companies built nuclear plants and they ran over budget, they went to the Public Utility Commissions and got the customers to pay for their mistakes. Of course, it's human nature to want to have it both ways.

    PV does not 'free-ride' on the grid, it actually produces peak power close to the load, reducing the need for construction of more HiVoltage lines.

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