PSC Issues Order Changing the Way Solar Owners/Customers Are Compensated for Their Power

On March 9, the Public Service Commission (PSC) adopted an Order changing the method utilities will use to compensate solar customers for the power they produce. The new policy will replace net-metering, which has been in place in New York since 1997 and which has contributed enormously to the growth of customer-sited solar projects in the Mid-Hudson region.  Under the old rules, customers with solar arrays that feed electricity into the grid receive credit for the electricity they produce at the same rate they would pay the utility. These rules will still apply for existing renewable installations and for new residential and small commercial installations until 2020. But new community solar projects, remote net-metered projects (such as solar at a municipal landfill), and large customer-sited projects (like a roof-top project at a hospital, university, or large grocery store) will be subject to new rules. For these projects, utilities will use a “Value Stack” tariff, compensating customers based on the benefits and costs of their power to the grid and, to a more limited extent, the environment. 

The impact of the new policy on customers’ compensation will differ depending upon the type of project and where it is located.  Much is unknown about the precise bill impacts and will remain unknown until new utility tariffs are in place this summer.  What we do know is that customers participating in community solar projects, which previously received retail net-metering credits, would receive less under the new regime. To smooth out the relative drop in value, the Order provides for “market transition credits” (or MTCs) for community solar projects, with the goal of initially maintaining a value similar to what they would have received under net-metering, and then gradually stepping down that value as more megawatts (MWs) of community solar come on line. MTCs, good for 20 years of the life of a project, will be available in limited quantities, based on the costs to utilities of providing these credits (capped at 2% of utilities’ revenues). In Central Hudson territory, 77 MWs of community solar projects will be eligible for the credits on a first-come, first-serve basis. The value of energy generated by the first 39 MWs of projects will be similar to the value under retail net-metering; the value for the next 19 MWs of projects will step down by 5%, and the value for the remaining 19 MWs of projects will step down by another 5%. After the MTCs are used up, community projects will rely entirely on the Value Stack tariff for compensation. (What, you may ask, is this "stack" comprised of?  Details further below….)

In comments during this PSC proceeding, the Energy Democracy Alliance (of which CLP is a member) called for retaining net-metering for a period of two years and allowing customers to opt-in to the tariff to test out how it will work in the real world and give the market time to adjust to the new regime.  In particular, CLP and other EDA members worry that the new policy may create uncertainty and harm the nascent community solar market, which holds the promise of extending the benefits of renewable energy ownership widely, including to low-income customers.  While the Commission did not support the EDA proposal, our response did have some positive impact. The Order modified DPS Staff's recommendations and effectively increased the value of the market transition credits for community solar. The PSC also acknowledged EDA’s concerns about the impact on low-income customers, issuing new directives intended to increase their participation in community renewable projects. Thus, it commits the PSC to “consideration of” beefing up funding to support low-income participation (NYSERDA is tasked with this), addressing financing and credit issues faced by these customers, and exploring a new “inter-zonal credit program” that would enable low-income customers to participate in community solar projects outside their service territory. Department of Public Service (DPS) Staff have been directed to file a proposal on low-income participation, based on stakeholder input, by Sept. 1. CLP and other EDA members will do our best to ensure that the proposal provides specific and meaningful solutions that offer more equitable access to the benefits of renewable energy.

So what is the Value Stack?

Think of it as a stack of Legos, with each block representing some benefit (or cost) to the grid, utility, or environment, and expressed as monetary value per kwh of electricity generated. The combined value of each of these blocks equals the amount that a solar customer will be credited on the utility bill for each kwh produced.

  • At the base of this Lego stack is the wholesale electricity rate, set in the NYISO day-ahead electricity supply market. Hourly meters will now be required to be installed so that solar installations capture the variation in the value of the power at different times of day—when demand for electricity is high, the power has more value; when lower, less value. The value will also vary by location, or zone, within the larger transmission system. (For the geekier among us, the technical term for this pricing is “locational-based marginal price,” or LBMP.) Finally, this Lego block will take into account the value of avoiding line loss (electricity wasted through transmission) by generating power closer to where it is used.
  • The next Lego block is the “capacity” value—that is, if the solar array produces power during peak times of the day (or year), it substitutes local generating capacity for electricity transmitted long-distance from dirty, inefficient, and very costly “peaker” plants in order to meet the increased demand.  Solar installations would receive compensation associated with this Lego block when their production coincides with peak demand – mainly during summer months.
  • The next Lego block is the climate benefits of reduced carbon emissions. The monetary value is calculated using either the US EPA’s social cost of carbon or the Renewable Energy Certificate (REC) price under Tier 1 of New York's Renewable Energy Standard, whichever is greater.
  • The next Lego blocks are the avoided costs to the electricity distribution system, depending in part on the location of the installation (e.g., if tied into a substation that would otherwise need investment to meet growing peak demand) and also by other values to the system.  These Lego blocks are still under construction at the Department of Public Service--proxy values are being used until more is known about how to value them. For community solar projects, the market transition credits will substitute for these blocks.  Figuring out how to accurately capture all the distribution system benefits is the subject of Phase II, and the Commission has set a deadline of the end of 2018 to finish developing the Value Stack methodology.

Taken together, the combined monetary value of the Legos in the stack may be more or less than the value of a kwh of electricity charged by the utility for the energy consumed from the grid, and that value will vary by location and time of day and season. Under the former net-metering regime, a kwh produced was valued exactly the same as a kwh imported on the grid. This will no longer be the case. 

The big picture

CLP sees real benefit, conceptually, in a pricing system that rewards clean-energy investments and helps lead to a more efficient grid. At the same time, it is important to keep in mind that local renewable investments produce major social benefits that are not monetized (or readily monetizable) by this new methodology. These include benefits to residents and businesses (in the form of lower and more stable energy costs over the long-term), and to the community (in the form of local job and wealth creation, resilience, environmental protection, and energy independence). If the new policy facilitates increased local investments in renewable resources, we will judge it a success. If it discourages these resources, then the policy must be changed. Time will tell. Thankfully, the Commission Order builds in a review process, and CLP and other organizations will closely monitor how the Value Stack impacts local renewable development going forward to make sure that it does not adversely affect our transition to a more locally-based clean energy economy.

If we take a step back and look at the big picture, it is far better for our communities and for society as a whole to maximize the build-out of local renewable energy and minimize the total electricity load that we need to import via long-distance transmission from fossil fuel and nuclear resources.  Local “distributed” energy will be more economically efficient; and when combined with storage technology, will make us more resilient and less vulnerable to the effects of climate change than the long transmission lines on which we currently rely. Plus, residents and businesses—and the local economy as a whole--are better off when we generate our own power, either individually or collectively. 

Another concern we have has to do with the power that the Value Stack tariff confers to utilities to determine "value."  Net-metering is a very simple compensation method whose value is determined completely independently of the utilities—a kwh of solar is worth the same as a kwh of electricity purchased on the retail supply market. Now, the value will depend to an important extent on information from the utilities about distribution system costs—information over which they have monopoly control.  The Commission Order recognizes that there are issues with this information dependence:

“The utilities, in the first instance, have the most in-depth knowledge of their systems and have access to the planning and operational data necessary to perform such analysis.  With unilateral access to the primary data and knowledge of the portions of their systems where load relief would be more or less beneficial, they are gatekeepers of the information” (p.112).

In our experience, utility cost assumptions are often overly conservative and the utilities have no incentive to be less so—especially when the costs are born by solar customers and not by the rate base as a whole.  We don’t want to see our citizens and businesses short-changed for the value of their energy.

CLP will keep a close watch on utility tariff development and the impact of the new methodology on distributed renewable development, and intends to play an active role in development of the Phase 2 methodology. We’ll keep you posted.