Berkeley Lab Predicts Distributed Solar Will Have Minimal Effect on Retail Prices

The effects of distributed solar on retail electricity prices are, and will continue to be, relatively insignificant compared to many other electricity-price drivers – such as utility capital investments – according to study results  released on January 19 by the U.S. Department of Energy’s Lawrence Berkeley National Laboratory.

The investigation by the lab’s Electricity Markets & Policy Group, led by Research Scientist Galen Barbose, aimed to address concerns by some utilities and stakeholders about cost-shifting between solar and non-solar customers.

These concerns have, in turn, led to a proliferation of proposals to reform retail rate structures and net metering rules for distributed solar customers, often extending to states that have yet to witness significant solar growth,” Barbose said in describing the current regulatory environment in his paper, Putting the Potential Rate Impacts of Distributed Solar into Context.

How much of the current effort is worthwhile or even useful? Barbose and his team said that the effect of distributed solar on average retail electricity prices is a function of three basic drivers:

  • Market penetration level (total distributed solar generation as a percentage of total retail electricity sales);
  • Net avoided costs (the net value of solar to the utility, relative to the utility’s average cost  of service); and
  • Solar compensation rate (the payment or bill savings per unit of solar generation, relative to the cost of service).

Using these drivers, the researchers offered the following summary points:

For the vast majority of states and utilities, the effects of distributed solar on retail electricity prices will likely remain negligible for the foreseeable future. At current penetration levels (0.4% of total U.S. retail electricity sales), distributed solar likely entails no more than a 0.03 cent/kWh long-run increase in U.S. average retail electricity prices, and far smaller than that for most utilities. Even at projected penetration levels in 2030, distributed solar would likely yield no more than roughly a 0.2 cent/kWh (in 2015 dollars) increase in U.S. average retail electricity prices – and less than a 0.1 cent/kWh increase in most states, where distributed solar penetration is projected to remain below 1 percent of electricity sales.

For states or utilities with particularly high distributed solar penetration levels, retail electricity price effects may be more significant, but depend critically on the value of solar and underlying rate structure. Four utilities, all in Hawaii, currently have solar penetration rates on the order of 10 percent of electricity sales; and three other states are projected to reach this mark by 2030. For a utility with electricity prices otherwise equal to the national average, this would equate to a ±0.5 cent/kWh effect. Under rate structures with fixed charges or demand charges—as are already common, particularly for commercial customers—this range would be shifted downward.

Energy efficiency has had, and is likely to continue to have, a far greater impact on electricity sales than distributed solar. Distributed solar and energy efficiency can both impact retail electricity prices by virtue of reducing electricity sales. Indeed, utility energy efficiency programs and federal appliance efficiency standards together reduced U.S. retail electricity sales in 2015 by an amount 35 times larger than that of distributed solar, the Berkeley Lab found. Projected growth in energy efficiency savings from those policies through 2030 is almost five times greater than projected growth in distributed solar generation.

Natural gas prices impose substantial uncertainty on future electricity prices. Electricity prices have become increasingly linked with gas prices, and are likely to become more so with continued growth in the share of electricity generated from gas. Although current gas prices are near historical lows, future prices remain highly uncertain, and that uncertainty is skewed upward.

Alhough their historical effects on retail electricity prices appear small, state Renewable Portfolio Standards (RPS) programs could lead to greater impacts, if supply does not keep pace with demand. RPS compliance cost data suggest that the policies have thus far increased retail electricity prices by just 0.1 cents/kWh, on average, in RPS states. Rising targets over the coming years may put upward pressure on costs, which could be amplified if supplies of eligible renewable energy don’t keep pace.

The effects of state and federal carbon policies on future retail electricity prices are highly dependent on program design and implementation details. Existing cap-and-trade programs in California and the Northeast have had limited impacts on retail electricity prices to date. In large part, this is because complementary policies have accomplished much of the targeted emission reductions, and because auction proceeds are used for ratepayer bill credits. Studies of the Clean Power Plan—currently under stay and facing an uncertain future—have estimated that it could result in anywhere from 0.0 cent-1.5 cent/kWh increase in U.S. average retail electricity prices. Much of that range reflects differences in assumptions about how states implement the federal standard.

Future capital expenditures in the electricity industry will put upward pressure on retail electricity prices. Capital expenditures in the electric industry have been on the rise, increasing by roughly 6 percent annually in real terms since 2000, despite relatively flat load growth. Going forward, the impacts of continued utility capital expenditures on retail electricity prices will depend on both the pace of future investments as well as utilities’ cost of capital. Considering a plausible range of assumptions for those two factors, the researchers estimated a 1.6 cent -3.6 cent/kWh impact on U.S. average retail electricity prices in 2030. For some utilities—for example, those making investments in new nuclear generation capacity or undertaking major grid modernization initiatives—the potential impacts on retail prices may be greater than the range estimated above or may occur over a more accelerated timeframe.

The conclusion of the Berkeley Lab research into retail electricity prices is that, in most cases, the effects of distributed solar will continue to be quite small compared to many other issues.

“Among the issues explored in this paper, future electric-utility capital expenditures are expected to have, by far, the greatest impact on the trajectory of retail electricity prices,” the study noted in its Executive Summary. “That is not to say anything about the potential benefits or prudence of such investments, but clearly this is an area where regulatory oversight can play a crucial role in managing retail electricity price escalation.”

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