1
Many in the solar industry have come to recognize that retail net metering (RNM) is, 2
in the age of smart grid and more sophisticated pricing, no longer a defensible 3
method for pricing solar PV DG. Having recognized the inevitable demise of a 4
pricing system that bestows excessive dividends on their resource, many solar 5
advocates have shifted to an argument that pricing should be based on consideration 6
of the “value of solar,” arguing that when this is properly considered, a significant 7
premium is justified for solar PV DG, which should be provided through an 8
administrative, highly subjective assessment of value, both internal and external.
9
The next section of this report will contain an analysis of the specific elements most 10
commonly proposed as the elements to be considered in assessing the value of solar.
11
To fully assess the value of solar, one would need to look at the resource in all of its 12
dimensions, not simply the costs and environmental effects derived from the energy-13
producing process itself. It is also critical to think of pricing in the context of 14
establishing incentives for technological improvements that would increase its 15
efficiency.
16
In considering using the “value of solar” approach, one needs to proceeds cautiously.
17
From an economic perspective, the optimal pricing would be by the competitive 18
market. Failing that, the next best option, and the one that is most deeply rooted in 19
American regulatory tradition, would be to derive prices from cost-based regulation.
20
Both market and cost based pricing are subjected to external discipline that should 21
lead to reasonably efficient resource decisions devoid of arbitrary or “official”
22
preferences. Subjective consideration of the “value” of particular technologies and 1
where they may rank in the merit order of “social desirability,” as proposed by 2
certain “value of solar” advocates, effectively removes the discipline (i.e. that of the 3
market or of cost based regulatory oversight) that is more likely to produce efficient 4
results. Whereas both the marketplace and transparent cost-based regulation are 5
likely to produce coherent pricing that allows us to enjoy a degree of comfort 6
knowing that efficient performance will likely lead to productivity, administrative, 7
highly subjective consideration of soft criteria, like “value of solar,” is far less likely 8
to produce coherent and reasonable predictable price signals and incentives.
9
This does not mean that short-term efficiency is the only factor that should have a 10
role in resource selection. Economics is critical, and efficiency is of vital 11
importance. However, there are other economic values besides efficiency, 12
especially those that go beyond short-term considerations. It is also obvious that 13
many people believe that other, non-economic factors need to be considered.
14
Certainly the fairness of the impact on customers also needs to be factored into any 15
decisions. There has, for many years, been a running debate in electricity regulation 16
as to whether externalities, in the absence of a legislative grant of authority, ought 17
to be factored into regulatory decisions. This report does not join in that debate over 18
the proper scope of regulation, nor does it attempt to assess what is permissible or 19
not permissible under applicable law. The report, however, to be comprehensive 20
and thorough, needs to recognize the nature of the arguments being made and to 21
analyze them. As a result, consideration of the elements to be considered in 22
assessing the “value of solar” seems in order.
23
To the extent that a value of solar approach is considered, efforts should be made to 1
do rigorous analysis and avoid subjectivity. Any values provided by solar PV DG 2
that are to be compensated in price should be tangible and enumerated. If 3
externalities are to be considered, then all relevant ones deserve attention, as 4
opposed to “cherry picking” the issues to best protect a particular interest.
5
Additionally, if non-economic objectives are factored into its decision, then it is 6
wise to prescribe the ways of attaining them that are the most efficient from an 7
economic point of view.
8
There are a number of criteria that advocates of a value of solar approach to pricing 9
take into consideration. They deserve careful scrutiny. One would begin by looking 10
at the energy produced, and the cost of this production (as we did in the first part of 11
this paper)., Beyond that, the criteria would include an evaluation of environmental 12
benefits, availability/capacity, reliability, impact on system operations and dispatch, 13
transmission costs and effects, distribution costs and effects, hedge value, and any 14
value associated with job creation, price reductions, and enhanced competition.
15
Solar proponents often phrase these issues in terms of avoided costs. In addition to 16
those dimensions, for any plan to provide “value of solar” price advantages, there 17
are also all of the considerations discussed above in the specific context of net 18
metering: degree of subsidization and cross-subsidization, efficiency 19
considerations, impact on alternative technologies, market price impact, reliability, 20
and social effects, including environmental and customer class impacts.
21
In what follows, this report will examine some of the claims about avoided costs 1
and argue that many of the costs identified are not actually avoided. In other cases 2
(in particular, the environmental case), there are true avoided costs—however, 3
singling out solar PV DG for disproportionately high payments (either through 4
RNM or through some other subsidy) causes market distortions that far outweigh 5
the benefits offered.
6