Let’s make rooftop solar panels paired with storage affordable for all

For the past year and a half, a debate has been raging in California about the future direction of net energy metering (NEM) in the state. The debate is being watched carefully not only in the rest of the US but also in Canada and Mexico, and, in fact, in much of the world.

At the heart of the debate is an alleged cost shift from low-income customers, who cannot afford to install solar panels and pair them with storage, to high-income customers. Given the largely volumetric nature of electric rates, it is argued by certain parties that when customers install solar panels, they reduce their energy bills by such a large amount that they fail to pay their fair share of the capacity costs associated with the grid, especially the costs of being connected to the distribution system.

Some parties go so far as to allege that solar customers pay nothing at all, i.e., have zero bills, when that is not the case for the vast majority of solar customers.  

These parties convinced the CPUC to include a grid access charge of $8/kW-month in the Proposed Decision of December 13, 2021. If this were to come to pass, it would kill the incentive for investing in solar panels. While there is a basis for reducing the compensation that customers get when they export power to the grid, there is no rational basis for instituting a grid access charge other than to stifle competition.

When solar customers reduce their usage, they are no different from customers living in very energy efficient homes, or customers who have downsized their homes, or customers who have relocated elsewhere. No charge is imposed on any of these customers.

A grid access charge is discriminatory and reminiscent of the policies that industries that were once natural monopolies sought to impose on nascent competition. Examples include the US Postal Service, AT&T and taxis. It was criticized in a letter that ten energy experts submitted to the CPUC as ex parte communication.

One would be hard pressed to find parallels to a grid access charge in other industries. Safeway does not charge a higher price for customers who grow their own produce, Chevron does not charge a higher gasoline price for customers whose other car is an EV. Nor does United Airline charge a higher price for customers who sometimes drive from San Francisco to Los Angeles.

A grid access charge (or a demand charge) has been rejected just about everywhere it was proposed or instituted, including states such as Arizona, Kansas, Montana and Nevada. Most recently, the premier of Nova Scotia intervened in the provincial utility’s filing which included a grid access charge and asked the regulatory board to not spend time evaluating the charge.

I testified in favor of the charge in the states listed above but stopped doing it once I rethought the rationale. I changed my views to make them congruent with the bigger goals of climate policy.

A grid access charge would make solar panels unaffordable to everyone and move California backwards, not forwards, on the road to Net Zero. California is leading the nation in its pursuit of clean energy. That’s why it has instituted a mandate which requires all new homes to install solar panels. Under Governor Arnold Schwarzenegger, it was the first state that made the installation of solar panels on one million homes a state priority.

While experts may continue to debate the merits of solar and storage, the fact is that California’s customers are installing solar panels to reduce their electricity bills, which are spiraling out of control, and which are projected to rise by billions of dollars over the next decade as utilities modernize their grids to enhance resilience and to proof them against damage from wildfires, which are becoming more frequent and more devastating, again due to climate change.

The way to resolve the conundrum is to make solar plus storage affordable to everyone, not to make it unaffordable to anyone. In other words, we need to replace the grid access charge, which is nothing but a tax on the sun with a rebate, to harness the power of the sun by incentivizing solar and pairing it with storage. That will enhance affordability while also mitigating climate change directly as well as indirectly, by encouraging the installation of heat pumps and the purchase of EVs.

The time has come to rethink the NEM regulations regarding solar+storage. The CPUC and the investor-owned utilities that it regulates should dispense with using the Rate Impact Measure (RIM) test for evaluating solar+storage investments. It should switch to the Societal Cost Test for the reasons discussed below.

When energy efficiency (EE) was first introduced as a utility program in the 1980’s in the US, expert opinion was divided on what should be the appropriate test for evaluating EE programs.

Around the country, almost universally, utilities and some notable economists, wanted to use the RIM test for evaluating EE programs. It was called the No Losers Test. Since marginal costs were generally lower than average or embedded costs for most utilities, just about all EE programs failed the RIM test. The only customer-focused programs which passed the RIM test were load management programs involving direct load control of air conditioners and water heaters which ran for only a few hours a year.

Unsurprisingly, some utilities only implemented load management programs. They did their best to not pursue EE programs.

Sometime In the nineties, the consensus began to move away from the RIM test. It became known as the No Winners Test. Commissions came to the conclusion that what mattered was not the impact of EE on rates but the impact on aggregate spending on electricity, i.e., on customer bills. As long as energy efficiency lowered bills in the aggregate, it was worth pursuing. The preferred test became the Total Resource Cost (TRC).

Nationally, utilities are spending around $8 billion annually on EE programs. Of that total, California alone is spending $1.5 billion annually.

However, the TRC test is not without its limitations. It does not value the carbon mitigation benefits of either energy efficiency or solar paired with storage. Climate change is causing global devastation, as seen in the droughts that are afflicting California and the floods that have deluged a third of Pakistan this summer.

A new age has begun, in which climate mitigation should be the Number One priority for energy policy. This behooves us to expand our horizons beyond the metrics in the TRC test and to adopt the expanded metrics of the Societal Cost Test. This should now become the primary test for evaluating customer-side programs, such as EE and solar and storage. Why? Because it’s the test that is best suited to evaluating the carbon emissions that are avoided by such programs.

This will require using a societal discount rate, which would be considerably lower than the weighted cost of capital that is often used in the TRC test, and including a value for the social cost of carbon which is excluded in the TRC test.

Nationally, the penetration of rooftop solar panels is very low – around 4%. In California, the state with the most aggressive climate mitigation goals, it’s just over 10%. The percentage of homes that have paired solar panels with storage is even lower. The need for pairing solar with storage was highlighted during the recent heatwave in California when homes with solar and storage, acting as virtual power plants (VPP), helped prevent rolling blackouts from being instituted by the California ISO.

Even those houses that were not participating explicitly in the VPP programs, they were helping reduce the strain on the grid during the 4-9 pm peak period window.

To accelerate the adoption of rooftop solar panels with storage, utilities should begin providing rebates to customers that install solar panels and pair them with storage. The amount of the rebate should be designed to reach a target adoption rate. This will require estimating a relationship between adoption rates and the payback period. Analogies from energy efficiency rebates can help guide this computation.

The rebates should be based on the size of the panels and expressed as $/kW-month. In order to earn the rebate, customers could be placed on time-of-use rates, supplemented with a dynamic pricing overlay. Such a suggestion was included in the settlement that was arrived at in South Carolina by various parties.

To address the equity issue, the rebates should be graduated inversely with income, with the highest rebates being given to the low-and-moderate income customers. But even the non-LMI customers should be provided rebates to make sure that solar and storage are as widely deployed as possible.