Levelized cost of energy (LCOE) has been criticized in the literature as an inadequate metric for comparing renewables to non-renewables as sources of electricity generation. It is necessary to include both levelized cost and revenue to the utility in order to compare non-dispatchable intermittent renewables with low capacity factors, as well as to compare them to dispatchable fossil fuels with much higher capacity factors. There are other shortcomings to conventional LCOE. Previous research of Goudarzi showed the necessity of addressing over-/under-production penalties/incentives when calculating the LCOE. Similar attempts resulted in developing renewable portfolio standards (RPSs) under power purchase agreements (PPAs) and renewable energy credits (RECs).

In this paper, we explore the pricing of solar energy from the customer point of view; i.e. the price paid to residential solar photovoltaic (PV) generators. The dominant form of compensation in the U.S. is net metering (NM), where customers pay the retail rate for grid purchases, as well as receive a credit at the retail rate for solar exported to the utility. While 39 U.S. states currently use NM, electric utilities strongly oppose it, maintaining that solar customers do not contribute their fair share to existing grid capacity costs, with their reduction in electricity purchased from the grid. In turn, where utilities are subject to rate-of-return (ROI) regulation, they will increase their rates to cover these costs, increasing the rates for non-solar customers. In essence, non-solar customers end up subsidizing solar customers.

 

In 2012, Austin Energy was the first U.S. utility to replace NM with gross metering (GM), or Buy-All Sell-All in the company terminology. GM requires the solar customer to sell *all* of its solar production to the utility, and buy *all* of its electricity from the grid. As a result, unlike net-metered customers, they do not reduce their grid purchases. Furthermore, compensation is based on the value of solar energy from the perspective of the electric utility, rather than the retail rate. Austin Energy justified its new rate by stating that Buy-All Sell-All would eliminate cross subsidies.

 

There is a second unintended factor that may contribute to cross subsidies. Increasing block rates (IBRs), with higher prices as consumers consume more, also encourage the purchase of solar systems for customers subject to NM. By adopting solar energy systems, customers reduce their grid purchases, and so avoid the highest priced tiers. In contrast, customers subject to GM still purchase all their electricity from the grid, and so cannot avoid a higher priced tier.

 

Using individual customer data from Austin Energy for each of the years 2014 through 2017 made available by the Pecan Street Dataport, we examine individual customer grid consumption and solar generation for customers with solar systems subject to IBRs. The data include total electricity consumption, solar energy generation, temperature, and house square footage, among other variables. We simulate flat rates that are constant at all levels of electricity use, as well as simulated net-metered rates. We also simulate a third rate known as net purchasing (NP). Similar to NM, the customer can consume solar production or export it to the grid, and so grid purchases are reduced and cross subsidies still exist. But as with GM, compensation is based on the value of solar from the utility’s perspective, not the retail rate. Again, we consider an IBR as well as a flat retail rate. For each of these rate structures—NM, NP, and GM—and for flat rates as well as IBRs—we compare the value of solar to the utility by adjusting the LCOE as well as the value of solar from the utility’s perspective.


Adjusting the Levelized Cost of Energy for Different Rates of Compensation for Solar Generation: A Case Study

Division / Sponsors: 
Power Division & Nuclear Engineering Division (NED)

Power Conference
Paper Proceedings: https://asmedigitalcollection.asme.org/POWER/POWER2020/volume/83747

International Conference on Nuclear Engineering
Paper Proceedings: https://asmedigitalcollection.asme.org/ICONE/ICONE2020/volume/83761

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