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Clear Price Needed for Solar Juice

November 29, 2012 By Will Nissen, Fellow

When starting and running a business, you continually want to determine and adjust to the size of the market you’re in and the price people are willing to pay for your product or service. Mismanage either one and you're probably out of business.

Policies designed to increase the implementation of renewable energy sources attempt to provide more certainty surrounding these two factors. For example, states’ Renewable Energy Standards carve out a section of the electricity generation portfolio dedicated to renewable sources, creating a market for renewable industries like wind and solar to grow into.

Wind and solar, however, are very different in their pricing. A large-scale wind farms' power generation is more predictable over the long-term and, therefore, Power Purchase Agreements (PPA) with a utility are negotiated in the financing phase of construction.

Solar is a much more distributed generation source: it is best utilized on the rooftop of or on the ground near the building where the electricity is used, and thus at much smaller levels of generation compared to wind farms or coal and nuclear-fired power plants. In addition, because most of the electricity generated is used on-site and because solar is a variable generation source, the amount of excess electricity that can feed into the grid fluctuates over time. These factors make it difficult for a homeowner or business to negotiate a financially viable PPA with a utility to purchase excess electricity, not to mention the time and resources needed to do so.

The result is a wide range of possible prices that solar project owners can get for the excess electricity they feed back into the grid. These prices vary across states and depend on the characteristics and preferences of individual utilities. Some utilities pay a premium for solar-generated electricity from customers, capturing the full value of solar to the grid and making solar projects beneficial to both the customer and the utility. Some utilities pay the equivalent of the average retail rate through policies like net metering, or the “avoided cost” to the utility that amounts to only a few cents per kilowatt-hour, and some don’t compensate at all for excess electricity generated by the customer.

This lack of certainty surrounding the price paid for solar-generated electricity on the grid can represent a significant barrier to interested solar project investors. Imagine a home or business owner asking a bank for a loan to finance a solar project on their property. Payback for the loan can come from lower electricity bills and revenue from selling excess generation back to the utility. But an uncertain price for that electricity, or too low of a price, can wreak havoc on the financing, risk level and viability of a solar project.

One policy tool that has been successfully implemented around the world to resolve this issue at national, state and local government levels is the Clean Local Energy Accessible Now (CLEAN) Contract, a concept that has been used extensively to promote growth in solar-generated electricity specifically. The contract guarantees grid connection for the producer, and sets a concrete and explicit rate for the purchase of excess electricity from the producer that holds over the entire length of the contract.

A CLEAN Contract's success is based on finding the right purchase price that allows solar project investors to make a reasonable profit to warrant investment, without overpricing the electricity to the detriment of utilities and ratepayers. In a recent article in the journal Environmental Law, professor Felix Mormann recommends setting the price using a cost-based method, essentially covering the difference between current electricity rates and the break-even price for solar projects plus a 5-10% return on investment for project backers.

The determined price could be multi-tiered to reflect financing differences between projects of various sizes and technologies, could gradually decrease over time to reflect lower project costs due to technological advancements, and could be reevaluated every year or two to more effectively incentivize solar projects without burdening ratepayers.

As Mormann notes, the rates ideally would be set by regulatory bodies like the Minnesota Public Utilities Commission, or municipal utilities like the Rochester Public Utilities Commission. These bodies already have institutional knowledge and experience setting rates for conventional energy sources, and are properly equipped to find the appropriate rate described above for a given jurisdiction.

While Renewable Portfolio Standards create a market for renewable energy sources in states, the CLEAN Contract model sets the price for solar-generated electricity that homeowners and businesses can rely on to make smart and accessible investments in solar energy. From national policy in Germany to city-level action in Gainesville, Florida, the CLEAN Contract concept has successfully stimulated and propelled solar growth. If Minnesota is serious about doing the same, this model can be part of the discussion.

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