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Valuing Solar Energy: Two Models to Use

solar energy valuation models

For every state beginning to wrestle with the value of solar and how it should be reflected in net metering, standby charges and future cost-of-carbon deliberations, just about every one is conflicted by politics, especially where there is a dominant investor-owned utility in the mix with a monopoly over its service territory.

ImageFour energy analysts at ICF International, a consultancy in Fairfax, Virginia, have taken a stab at how to establish “the true value of solar” (aka distributed photovoltaics, or DPV). It is certainly one of, if not the most credible and holistic, methodologies developed to date. For both solar advocates and utilities wary of having to compete with, or serving, their customers, their approach merits a close look.

The Rocky Mountain Institute created these categories (table) for estimating the benefits and costs of solar energy. Table courtesy of ICF International.

The analysts are: Vice President Steven Fine, who has performed studies for the Edison Electric Institute, American Wind Energy Association and the Regional Greenhouse Gas Initiative, and three colleagues: Ankit Saraf, Kiran Kumaraswamy and Alex Anich.  

At first blush, the ICF analysis won’t please most solar advocates in part because some of solar’s

benefits currently are difficult to monetize.  That is largely because solar is just now getting traction beyond the early-adopter states such as California, Colorado and New Jersey. ICF’s work is a realistic approach that tries to value solar from multiple perspectives: ratepayers, utilities and regulators.

As solar costs continue to decline and the Obama Administration’s Clean Power Plan takes hold after June 2016, another approach – this one released in September by Synapse Energy Economics for the Advanced Energy Economy Institute (report cover, below) – outlines several techniques for estimating solar’s value including those that are currently hard to monetize.

Either of these efforts might have helped guide utilities and other solar stakeholders in Minnesota early this year, in Virginia this past summer. Perhaps stakeholders will draw on them in Georgia and other states going forward.

Here is how ICF recommends treating key components of any solar valuation, which were derived from The Rocky Mountain Institute’s 2013 meta-study, A Review of Solar PV Benefit and Cost Studies.”


Energy: avoided energy at the margin represents the most straightforward calculation.

Avoided / Deferred Generation Capacity: any valuation must analyze the profile of distributed photovoltaics in each regulated jurisdiction to assign a system capacity credit. Also needed: a correlation between customer and system peak demands.

Avoided Transmission and Distribution (T&D) Losses and Capacity: Distributed photovolatics potentially represents both a benefit and a cost and should be assessed separately.

Grid Support Services:  Don’t bother with this – yet, say the analysts. At some future point, solar may need to pay for services that the grid effectively provides.

Environmental: Solar deserves to be evaluated the same way any other new resources regarding the environmental costs and benefits it confers upon the system. Values for carbon dioxide (CO2) emissions should be assigned on a $/ton basis and should be similar to those used to evaluate other power generation resources.

Financial: Here is where solar advocates may take issue with ICF; benefits such as a fuel-price hedge, reservation of natural gas pipeline capacity and/or a market price response are not typically accounted for in utility integrated resource planning and therefore, ICF contends, should not be included for now.

Social: ICF asserts ”social” values also should not be valued because they are not currently included in the construction of utility-scale conventional or renewable energy projects.

Security: Any security value that solar may provide does not accrue to society in any agreed-upon manner, therefore the analysts contend it should not be included at least until a “set and agreed upon methodology for climate resiliency is developed.

Frequency to Update a Valuation of Solar Formula: Utilities should update annually any Value of Solar Tariff “on a locational basis for new installation to address the change amount of solar or energy use in different regions.”

Naturally, these solar calculations for individual utilities require an analysis tailored to the circumstances of its geography, the energy market(s) they participate in (e.g. PJM) and current state of efforts to modernize the grid.  The components could be inputs in calculating the retail utility credit for net energy metering while also guiding larger investments and market decisions by utilities, regulators and the broader solar industry.

Lisa Frantzis, Senior Vice President, Strategy and Corporate Development at the Advanced Energy Economy, said, “While the ICF white paper attempts to present a balanced approach to valuing solar it appears to dismiss a few important factors like environmental benefits apart from CO2, such as other pollutants associated with fossil fuel power generation  and grid support services, which may be limited today but are certainly part of solar’s potential value.

“Certainly all value of solar assessments are ‘works in progress’, added Frantzis. “The ICF recommendation to review annually is a good idea – especially as utilities and industry develop new ways to integrate distributed solar and get more value from it. For instance, as more energy storage (both consumer and utility-owned) comes online, VOS (value of solar) methodologies will change dramatically.”

“A strong VOS approach,” ICF’s Fine and colleagues concluded, “in which the real costs and benefits to the system are accurately portrayed and valued, is not only a useful tool for integrating increasing amounts of SPV onto the grid, but will be critical for utilities, regulators and other stakeholders to make rational planning and risk management decisions.”


Nathan Wilson's picture
Nathan Wilson on Dec 17, 2014

Missing from essentially all of the analyses is the notion that distributed solar must be compared not only with the exising grid, but with utility scale solar.  The reality is that by moving hypothetical solar generation from residential rooftops to large centralized facilities, the energy costs drop by at least a factor of two (around 10 ¢/kWh, and the other costs: loss and transmission only go up by 1-3 ¢/kWh).

Another noteworthy feature of the RMI meta study was that unsurprisingly, all of the studies which found large values for solar electricity selected the most favorable parameters:  very low solar penetration (either explicitly, or implicitly, via a large capacity credit), expensive fossil fuel costs (even though natural gas is cheap now), the assumption that gas peaking turbines run all year (rather than only for peaking), high cost of carbon emissions or high REC cost, etc.

Jim Stack's picture
Jim Stack on Dec 19, 2014

Distributed Solar compared to other fuels also saves a lot of water. Most power plants boil water and in a desert like Arizona and even California we know how valuable water is. Another high value is that it makes the Solar home owner aware of their use . They find ways to reduce their loads by using LED lights , more efficient appliances and even runs their plugin cars. They saves OIL and all the security and pollution that goes with it.

The valuse are priceless. We all become part of the GRID and energy system.

Lewis Perelman's picture
Lewis Perelman on Dec 22, 2014

Advocates of renewable energy often invoke “internalizing externalities” to justify high costs and the unreliable nature of intermittent sources. This report demonstrates what I have often pointed out: Internalizing externalities is a subjective exercise that is easier in theory than it is in practice.

What is notable about both methods for valuing solar described here is that neither is provably correct. Rather they reflect independent, idiosyncratic value judgments. In that sense, they are arbitrary, as are any methods that attempt to incorporate values external to the market.

Jim Pierobon's picture

Thank Jim for the Post!

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