By: Francis Koster, Ed.D.
A straightforward contracting mechanism has proven to be a major enabler of solar electrical energy installation. We spell out the details below. But first - let’s create some context: Did you know that a lot of electrical energy sold to you costs more to make than you are billed for? That is because of two different phenomenons which hide the real cost of your electricity. These two phenomenon are called “peak” power generation costs, and new vs. old capacity generation costs.
Peak Power Costs: Your electrical meter can only describe how much energy you use, not when you use it. Electric utilities have a large number of generation stations on their grid – some generating all the time making cheap power, and some used only at times of peak usage, making very expensive power. Since your electric meter cannot tell the utility which generator your home caused be turned on, the utility adds all the generators (high cost and low cost) up, determines an “average” cost, and bills you for that. In other words, they lose money on a lot of the power they sell, because it cost more to make than the “average” cost. Believe it or not, if they eliminated having to make expensive “peak” power, and sold less electricity, they would make more money!
Because the average homeowner contemplating solar energy compares their potential cost of solar power per KWH to their meter cost (average price) per KWH, solar almost always looks like a bad financial investment. But it is not.
Since solar electric power is a “Peak” source in most parts of the country, it is replacing the electricity that the utility sells for a loss. And a sound business case can be made that the utility should pay more for that power than the “average” cost they sell power for, because in fact solar electricity is replacing the need for expensive peak power. The problem is the customer does not know what that peak power costs, nor can they be compensated for it – until now. The solution we lay out below fixes that!
New vs. old generation stations: The same problem exists on a large scale when new generation stations are compared with existing generation stations. The “Average” cost of power adds in old plants with their mortgage long paid off, and newly constructed plants with very expensive pollution control costs, the need for high costs financing and bond market insurance, and so forth. When the electricity comes to your home and lights the lights, it is priced at a blend of the costs of new (high priced) generation costs and old (low costs) generation costs. This “average cost” sends a price signal to the homeowner that new solar power is not competitive pricewise, when in fact it may be cheaper than the next new central generation being planned.
These two factors (peak power cost and new vs. old capacity power cost) combine to create price signals to individuals that have historically discouraged the market from working to create new disbursed, non-utility owned renewable energy sources
There is a way around this dilemma, however. The utility can agree to buy power for what it would cost them to make it on peak, and/or from a new generation station.
Called a “Feed-in tariff”, this arrangement is emerging as a partial solution to our nation’s electrical generation problem.
Under the “feed-in tariff” plan, a utility calculates how much it will cost it to obtain electrical energy from a new non-polluting generating source, and agrees to pay that much to the provider of electricity from a solar plant. In setting the rate they will pay, the utility must consider the cost of building a plant, its fuel and operating costs, and the cost it may be assessed for pollution. For example, a new nuclear plant may have high capital costs and lower operating costs than a new coal fired plant, which may have lower capital costs, but higher fuel costs, and increasing costs for pollution both at the mine and at the generation station. As the local public health costs of pollution and the yet to be determined costs of some form of carbon control tax (to reduce climate change) loom larger in the utility managements eye, they assign a larger avoided cost to the pollution reduction, thus raising the price it is willing to pay for a non-polluting generator. It is important to remember that these planning calculations extend 30 years into the future, and must take into account possible wars, supply interruption, increases in local supply (off shore drilling or newly obtainable natural gas, for example), and changes in political climate.
The city of Gainesville Florida operates a municipal electric authority – Gainesville Regional Utility (GRU) which serves 84,000 residential customers and 10,700 commercial customers. [i] It owns generation capacity, either its own plants or by using fractional shares of jointly owned plants, a total of 620 megawatts generation capacity [ii]. Due to aging of its generation plants, and increasing population and demand for peak power in its service area, GRU needed to plan to add new generation capacity. As part of its strategic planning for new capacity the utility set goals to try to cause an increase in the amount of renewable energy it fed to its customers so that it would not need to build new coal fired plants. The utility asked its customers how much they would be willing to pay extra for the use of renewable energy generated electric power. Customers indicated 1% additional per monthly bill (about a dollar a month) was an acceptable amount. Using this percentage, a program costing $2 million annually was designed. [iii] Note that this was in effect a subsidy by the customer to the utility to permit creation of what was generation ability more expensive than traditional fuels. This in turn led to a program which is a national model, although criticized for paying too much for its renewable energy.
Under this contractual “feed in tariff” arrangement, the non-utility provider of the electricity is guaranteed two things: 1) a long term contract, and 2) a known, fixed price for the energy produced. The combination of these two business incentives allows entrepreneurs to obtain needed private financing, land purchase, and other ingredients necessary to create large projects.
The program started with a purchase price of $.32 per kWh, (which is above market rates for new marginal capacity) and is designed to pay less each succeeding year for new added capacity. This design was adopted to jump start the program and draw the attention of entrepreneurs. The launch was so successful that in the first 9 months the project reached the 2016 program goal!
In the United States, other incentives have been tried since the 1960’s, including state and federal tax credits, some loan guarantees, and so forth. While laudable in their intent, they were less impactful because they were for short windows of time (for example, the original renewable tax credits were authorized by congress for just a few years – not enough time for a major project to obtain financing, secure land, go through engineering, permitting, and so forth).
Other nations are far ahead of the United States in using the “Feed-in tariff” contracting technique. In fact, France is in the odd position of having its own solar industry advocates argue that the rates are to HIGH! The fear is that this will cause such a boom in construction that competitors from other countries will flood in, disadvantaging local providers, and creating resentment among the rate payers who are offering a greater subsidy than is required to create this new industry. [iv] Germany has caused an explosion of new generating capacity with the tariff.
For a good resource to consult regarding feed in tariffs, you can go to: http://www.renewableenergyworld.com/rea/search?keywords=feed+in+tariffs
More information about the program and the Gainesville utility can be found at: http://www.gru.com/AboutGRU/PublicDiscussion/FuturePower/default.jsp
The original Gainesville project proposal can be found at :
[iii] Comment 19, ibid