4.3 Rate Structures that Appropriately Value Solar

Electricity rates include fixed and variable charges, and vary by location and customer class (residential, commercial, and industrial). Rates always include a charge per kilowatt-hour of electricity consumed and sometimes include demand charges for the maximum amount of electric capacity (usually based on 15-minute peak power demand for each month) a facility needs at a given point in time. Electricity rate structures determine the value of the power produced by a photovoltaic (PV) system and the cost of additional electricity purchased from the utility. Rate structures affect the overall economics of a PV system—sometimes significantly. By generating electricity from a PV system instead of purchasing electricity from the grid, the economic value of the system is comparable to the cost of avoided utility electricity over time. In addition to determining fixed and variable rates, rate structures can assign different values to variable electricity use based on how the customer uses the electricity. Some rate structures, for example, are tiered depending on the amount of energy used. Rate tiers can be beneficial for solar if they're set up so that consumers pay higher electricity rates when they use more electricity, because solar is offsetting those higher rates. Rate tiers don't work in solar's favor if consumers pay lower electricity rates during high usage, because solar is offsetting those lower rates and therefore increasing payback time. Another rate-structure model is dynamic pricing, in which utility customers are charged different amounts for electricity based on when the electricity is used; time-of-use (TOU) and real-time pricing are two examples of dynamic pricing structures. Dynamic pricing often provides the most value for PV systems, depending on the site load profile and coincidence with PV output. With dynamic pricing, electricity rates typically peak in the afternoon with increased demand, so PV installations (which generate electricity during the day) can offset those higher rates, thereby increasing the value of the PV system's energy production.

Many proponents of solar energy note that conventional utility rate structures fail to compensate PV system owners for the full value of the electricity they generate. Conventional rate structures don't account for the benefits to the electricity grid realized by generating electricity from solar energy technologies. For example, in many regions of the United States solar electricity production is highest during sunny afternoons when the electricity grid strains to meet peak electricity demand. Most rate structures fail to recognize the value of PV in lessening the strain on the electricity grid during peak demand times. Most rate structures also don't take into consideration the value of avoided transmission and distribution losses that distributed PV systems provide by producing electricity at the point of consumption.

BENEFITS Working with the utility to create rate structures that appropriately value PV will improve the economics of solar energy in a community.

Implementation Tips and Options

□ Identify the rate structures offered by the local utility.

□ Understand the net-metering rules in place in the community and how they interact with the available rates. See 4.2, Improve Net-Metering Rules.

□ Gather electricity load data from a facility of interest and analyze the electricity bill based on the rates available to the facility. This will help reveal how electricity rates affect the economics of energy use at a given facility, whether a home, a business, or a government building.

□ Research dynamic rate structures and encourage the utility to consider rates optimized for solar energy technologies.

□ Collaborate with regional or state authorities to improve rate structures.


Minneapolis–Saint Paul, Minnesota: Developing a Photovoltaic Valuation Tool

The Minneapolis–Saint Paul Solar America Cities team partnered with the National Renewable Energy Laboratory (NREL) to develop a tool that quantifies the value of PV-generated electric power for both the PV owner (retail level) and the utility (wholesale level). This tool evaluates the energy, demand, and revenue values of PV systems ranging in size from small-scale residential and medium-scale commercial systems to large-scale utility systems. It can incorporate a variety of energy and demand rate structures, including TOU tariffs and wholesale market prices (with coincident wholesale market prices and solar radiation data). The tool's ability to run multiple scenarios gives users the ability to estimate revenue for alternative configurations, contract provisions, market conditions, and local solar resources.

San Diego, California: Studying Rate-Design Impacts on the Value of Solar Electricity

San Diego has extensive, real-time electrical metering on most of its municipal buildings and PV systems, which has resulted in a comprehensive set of overall consumption and PV electrical production data collected in 15-minute increments over years. An analysis of PV system data from two city facilities illustrates the effects of rate designs. The analysis estimated the energy and demand savings that the PV systems are achieving relative to a base case of no PV systems. The data revealed that actual demand and energy use benefits of binomial tariffs (those that include both fixed demand and variable energy charges) increased in summer months when solar resources allow for maximized electricity production. Further, a comparison of different electricity rate options for these facilities revealed savings that differed significantly; that is, the benefits of PV vary substantially depending on the choice of the utility electric rate schedule applied. Therefore it is critical for larger facilities—those subject to binomial rates—to perform a structured analysis, using interval consumption data if at all possible, to forecast the economic benefits of each PV installation. Such an analysis will inform not only the choice of rates where there are multiple options from the utility, but also the sizing of the PV system itself to maximize the annual benefit and/or return on investment (ROI), in alignment with the specific goals and available resources of the facility owner. Local governments considering various bond or third-party financing instruments will decrease risk significantly by implementing such a measured analytical approach. Finally, in the facilities examined in San Diego, the study determined that the PV systems save the city about 50% in electricity costs for the buildings the systems serve.

Additional References and Resources




The Open Energy Information initiative (OpenEI) is a linked data platform on which the world's energy data can be collected and connected. It brings energy information together, allowing for improved analyses, unique visualizations, and real-time data access. OpenEI strives to open access to this energy information, with the ultimate goal of spurring creativity and driving innovation in the energy sector. OpenEI users can browse, edit, and add new electric utility rates to OpenEI's repository.

The Solar Alliance: Utility Rates and Revenue Policies


The Solar Alliance is a state-based advocacy group of companies involved in the design, manufacture, construction, and financing of PV systems. The Solar Alliance Web site gives the industry perspective on areas critical for building a local solar market, including utility rates and revenue policies.


The Impacts of Commercial Electric Utility Rate Structure Elements on the Economics of Photovoltaic Systems

National Renewable Energy Laboratory, June 2010

This analysis uses simulated building data, simulated PV data, and actual electric utility tariff data from 25 cities to better understand the impacts of different commercial rate structures on the value of PV systems. By analyzing and comparing 55 unique rate structures across the United States, this study seeks to identify the rate components that have the greatest effect on the value of PV systems.

Report: hwww.nrel.gov/docs/fy10osti/46782.pdf

Solar Real-Time Pricing: Is Real-Time Pricing Beneficial to Solar PV in New York City?

Bright Power, Inc., July 2009

The goal of this study is to evaluate the validity of this concept: The coincidence of high electric energy prices and peak PV output can improve the economics of PV installations and facilitate the wider use of hourly pricing. The study focuses on Con Edison's electric service territory in New York City.

Report: www.nycedc.com/NewsPublications/Studies/Documents/SolarRealTimePricing.pdf

Solar San Diego: The Impact of Binomial Rate Structures on Real PV Systems

National Renewable Energy Laboratory, May 2008

This paper uses 2007 PV system data collected from two city facilities in San Diego to illustrate the effect of binomial rate designs. It includes a financial analysis of PV-system output under various utility rate structures.

Paper: www.nrel.gov/docs/fy08osti/42923.pdf

The Impact of Retail Rate Structures on the Economics of Commercial Photovoltaic Systems in California

Lawrence Berkeley National Laboratory, July 2007

This report uses electricity load data and PV production data from 24 commercial PV installations to compare the value of the electric bill savings across 20 commercial-customer retail rates available in California. The report findings suggest that choices made by utility regulators when determining or revising retail rates can significantly affect the future viability of customer-sited commercial PV markets.

Report: http://eetd.lbl.gov/ea/EMS/reports/63019.pdf

Mercury Solar Systems installed this 6 kW installation in the Lower Kensington neighborhood of Philadelphia. (Mercury Solar Systems/PIX18065)