Establishing Solar Tariffs in the New Reality of Distributed Generation

November 2015

Introduction
Despite the many benefits of expanding distributed solar generation for our economy and environment, the challenge of addressing the role of these resources within the existing infrastructure is something utilities face every day. This is why one of the nation’s largest municipally owned electric utility engaged ScottMadden to assist with its response to an issue on the application of tariffs and rate riders for large-scale solar installations. Internal reviews uncovered a potential gap in its process for solar tariff cost of service allocation, which had resulted in a loss of revenue from a number of commercial entities. The utility determined that a new method was required to address this segment of customers.

The client requested that ScottMadden provide: 1) an evaluation of options, through external benchmarking and internal interviews, for correcting the tariff gap, 2) assistance with segmentation of the customer base, and 3) development of a communication and implementation plan. Given the expected rise in solar installations, as evidenced by the known construction pipeline at the time, developing a prompt resolution was critical to avoid the potential for further losses.

The Challenge
The expansion of rooftop and commercial-scale solar installations in the years leading up to this project created challenges for a number of utilities across the United States. The strategy to incorporate these distributed energy resources, and then modify the rate structure to accommodate them, was evolving and required a careful balance of financial, operational, and market drivers. The drive to integrate low-carbon and renewable energy resources into the energy portfolio put pressure on utilities to “play nice” when it came to dealing with changes to the distribution infrastructure, despite the potential financial and operational impacts to operations and grid reliability.

In this case, the utility fully supported distributed solar, but it needed to correct a pricing issue that was causing financial losses. It needed to correct this without drawing the ire of a public that had embraced solar energy as a fundamental component of the growing renewable energy portfolio or creating a misleading opinion of its pro-solar public policy position. In fact, the utility had been a leader in this space.

How We Helped
An assessment of the current state was performed by the utility to determine the extent and financial impact of the current misapplication of tariffs. The analysis found that a rider intended for larger-scale (>25kW) solar installations was not being applied as intended, but rather customers were being billed under the rider intended for smaller (≤25kW) solar systems along with an established firm rate. In conjunction with the misapplication, it was determined early on that neither the large-scale nor small-scale riders were financially or strategically sound going forward and therefore a new program was required.

ScottMadden established a team of experts with the accountability to develop proposed solutions and evaluate what the impact of those solutions would be on the existing customer base. The first step was benchmarking to examine the policies in place at other peer utilities for handling distributed solar resources. The study reviewed net metering practices and rates used by the peer group and amassed details regarding the levels of segmentation used for categorizing the customer base.

Several common financial strategies for integrating solar resources were identified:

  • Net metering with caps
  • Restructured rates for solar customers (e.g., standby charges)
  • Restructured rates for all customers
  • Net revenue loss adjustment
  • Decoupling
  • Solar value rates/feed-in tariffs

The benchmarking showed variations in the classifications and approaches used by the peer group but concluded that many of the options in use had a negative impact on the solar value proposition for customers. ScottMadden helped determine that the development of solar value rates created the best opportunity for this client to recover costs and limit cross-subsidies, while still promoting the value of the solar installation for customers.

The next step was a thorough cost analysis to understand the financial impact to customers and establish the method to set the solar value rate. Several scenarios were considered, taking both the large-scale and small-scale customers into account. ScottMadden helped the client determine payback periods based on existing rebates and typical out-of-pocket system costs. The final data provided a value for the new solar energy credit, which would allow new customers a reasonable payback period on their investment, while providing the utility a means of recovering standby costs. The data was also used to evaluate and reset the solar equipment rebate provided by the utility for new systems.

The final component was the development of a detailed implementation plan for the rollout of the new program. A timeline was created to establish required milestones for legal approvals, design and testing of the new billing systems, and distribution of communications to customers. Given that the program impacted each customer group differently, a clear and digestible message was crucial for avoiding confusion and potential backlash. A specific method of outreach was created for each group based on their anticipated needs and included large-scale and small-scale system owners, solar equipment installers, environmental organizations, and local political figures.

Results
ScottMadden was able to successfully assist the utility in updating its solar program. The revised pricing approach created a logical and defendable position for the utility to embrace going forward, as the market for distributed solar installation continued expanding.

A focus of the new program was to demonstrate the commitment of the utility to support the growth of solar while addressing concerns related to strains on the distribution system, impacts to system reliability, and the need to maintain a method of cost recovery to ensure the necessary investments can continue to be made in infrastructure.

By taking the time to listen carefully to this client’s unique situation and then working collaboratively with its internal team, ScottMadden was able to help create and deliver an implementable solution in a complex and challenging environment.

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