Last week, six New York utilities and three leading solar companies announced a landmark joint proposal on the future of net metering in the state.
The “Solar Progress Partnership” filed its proposal in front of the New York Public Service Commission, which is considering options for a transition from today’s net energy metering to a Reforming the Energy Vision (REV)-driven distributed energy market. This is certainly the highest-profile collaboration between major utilities and solar companies on a NEM transition to date.
The proposal alone is important for New York, but its framework could also serve as a model for other states. I see four characteristics in particular that could form the basis for compromise in the many regulatory battles to come over the future of distributed energy and rates.
Solar export compensation will ultimately be aligned with value
NEM is, at best, a blunt instrument. Through its REV initiative, New York has already been heading toward a transition to compensation for exported generation from a distributed solar project that approximates the value of that generation to the grid. New York’s version of this value calculation is “LMP+D+E”. “LMP” is the locational marginal price of electricity, or what any wholesale generator in that location would earn for an equivalent kilowatt-hour. “D” is the value of the resource to the distribution system -- basically, the additional value of the asset being distributed. And “E” is the external societal value. LMP+D+E is a New York-specific acronym, but the general concept of value-based compensation is being assessed in California and explored in many other states.
At its core, the intent is to allow a distributed energy owner to sell power into the grid according to the value of that power. Notably, the proposal implicitly acknowledges that LMP+D+E will often be lower than the retail electricity rate. In other words, most rooftop solar projects will likely receive lower compensation under this regime than they would with full retail NEM. This is a concession for the solar advocates, but well worth it in the context of the broader proposal.
Existing customers will be grandfathered in
The proposal suggests that customers who qualify for NEM, prior to the implementation of LMP+D+E, should continue to receive their designated NEM compensation for anywhere from 15 to 25 years. This is vital in order to protect the investments of current customers and send a signal to financial markets that the rug won’t be pulled out from under these assets while they are operating.
Importantly, it also gives these customers the option to switch to LMP+D+E at any time. This may become valuable for some customers in particularly congested portions of the grid, where their distributed energy resources have high value.
The new regime is phased in, not implemented overnight
In order to minimize disruption to the market, the proposal suggests a phase-in period between NEM and LMP+D+E. Here the solar parties and utilities have slightly different proposals. The solar companies would like the transition to be based on “blocks” of capacity. Beginning in 2020, new projects would receive LMP+D+E plus 80 percent of the difference between that and full retail NEM. And that 80 percent would step down with each block until the final group ends up at LMP+D+E. Meanwhile, the utilities prefer a three-year ramp-down to LMP+D+E based on timing rather than capacity.
Both transitions have their merits, but the important point is that they both include transitions. Most major NEM reforms to date have taken place overnight, but this one allows for a transition. Most good solar policies have included periodic step-downs to enable a smooth transition; why should NEM be any different?
Community solar customers will still see a simple bill reduction
When switching from a simple mechanism like NEM to a more complex one like LMP+D+E, there is some danger of overcomplicating the customer value proposition and thus reducing the adoption rate. This is particularly true for community solar/virtual net metering customers, whose entire value proposition is based upon a kilowatt-hour bill credit, as opposed to simply a lower bill.
Here, the proposal offers an interesting solution. Community solar and virtual NEM customers would still receive a full NEM credit on their bills, but the project owner would pay the utility directly to make up for the difference between LMP+D+E and the retail rate. This payment would start low and then, as with the on-site NEM transition, gradually increase to the full differential.
So the developer pays the difference and passes it on to customers in the form of a higher community solar cost -- but the customer still sees a simple bill credit each month.
Of course, the devil is still in the details. The actual calculation of LMP+D+E, plus many of the associated decisions, will certainly be contended as New York continues its REV design process. But I strongly suspect that utilities and solar advocates in other states will closely examine this partnership. After all, who doesn’t want compromise?
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Shayle Kann leads GTM Research, the market analysis and advisory arm of Greentech Media.