Thanksgiving Table Politics

This week, I’ve had an argument with a conservation biologist whose position is desert tortoises are invaluable and the power utility is evil therefore we should not have large scale solar and do the rooftop solar instead.

My position was that before deciding what we consider should include but not be limited to the tortoises. However, attaching a value to tortoises wouldn’t necessarily be so straightforward.

She was too polite to say it but she probably thought I was lost cause who is clueless about how amazing the nature really is…

Therefore, it’s official.

I’m a grown up economist now!!

What are you thankful for?

 

Let’s back up a bit.

It is about the net metering drama in Nevada.

Perhaps you’ve heard it. You can read about it in the most recent working paper written by Jeanne Wendel, Tom Harris, and yours truly.

 

It’s the one where actor Mark Ruffalo was screaming at the PUCN commissioners at the hearing room.

By the way here is my open letter to him:

______

Dear Mr. Ruffalo,

You are a great actor.

However, you don’t know any economics.

Sincerely,

______

 

Net metering (NEM) is an arrangement between a power utility and its customers where the customer generates electricity onsite for own use [think: mostly rooftop solar panels] and exports the unused portion into the local grid and gets credited for it.

In Nevada, and in many other states NEM started out and stayed at minuscule levels for many years.

Then the climate change happened and the governments started giving out rebates and subsidies for renewables.

Also, technology and learning by doing brought down the costs tremendously.

Then, all of a sudden, rooftop solar became a possibility for many middle or upper middle class Americans.

As the take up started to soar, two main economic concerns started matter.

First is regarding how much compensation should be given to NEM exports.

In Nevada, the credit the NEM customers got per kWh was the same as retail electricity price.

 

What this means is that the utility was effectively buying electricity from the NEM customers at the retail rate (~12 cents/kWh) while they could be buying the same electricity from the wholesale markets for MUCH cheaper (as low as ~2 cents/kWh).

This of course increases the costs, which the utility has the right to pass on to the customers. [think: rate hikes for ALL]

 

The second one is about basic service charge.

Being a power utility requires investing a ton of money into generation, transmission, and distribution infrastructure to be recovered through the rates overtime.

 

On your bill, you’ll see a “basic service charge” and a “consumption charge”.

 

Not just the basic service charge but also a good portion of the consumption charge goes towards covering the capital investments.

 

These rates are designed back in the day so that large customers would be covering more of the capacity investments

[think: proportionate to their consumption]

 

So if a NEM customer starts to consume less energy from the grid, she would be paying less in consumption charges and therefore would be contributing less to the overall capital recovery.

 

**This is true even though the basic service charge is still intact.**

 

Therefore, some of the capital costs will remain uncovered [again read: rate hikes for ALL].

 

An important detail is that NEM customers [**on average**] are richer than the non-NEM customers [source] which makes such a cost shifting extra annoying.

 

With all these concerns in mind, PUCN ruled to divide the customers into classes.

 

The NEM class will now pay higher basic service charges and be credited less for their grid exports.

 

This is what led Mr. Ruffalo and a bunch of pissed off rooftop solar folks to protest and brought the Silver State to the national news.

 

I want to assert here that, contrary to what seems to be the popular opinion, this decision was not at all about making the utility rich but about fairness.

Think about this: the total amount the utility can collect is strictly regulated.

There is a certain “revenue requirement” -the amount that was foreseen that the utility should make to cover the cost of service plus some rate of return.

That quantity is pretty much fixed, so it is about who pays a larger share of this revenue requirement.

 

There has been [of course] a major push back from the rooftop solar companies and some advocacy groups.

Their main argument was that NEM saves money to the utility for a couple of reasons.

First is the avoided transmission losses.

You’ll lose some energy when you transmit it over the lines. NEM generation occurs where it’s consumed so it avoids the losses.

Good point, but this benefit will be limited if a large portion of the NEM generation is exported to the grid. [think: some energy will still be lost if the electrons travel in the grid]

 

Second, avoided capacity investments.

Again good point, but again limited because the majority of the NEM generation occurs [noon] outside the peak human consumption hours [6pm].

It is hard to store electricity, so the total installed capacity cannot be less than the peak load.

Hence not a lot of capital investments will be avoided because of NEM capacity.

 

HOWEVER, there are other benefits of distributed solar generation that,

to the best of my knowledge, have not been factored into the decision.

 

These include:

 

Diversifying the spatial portfolio [don’t put all you panels to one location because if one circuit next to a large plant breaks you are doomed.]

 

Better utilization of space [rooftop spaces are useless otherwise plus large scale solar threatens the super cute plants and animals in the desert including the tortoises!]

 

Solar panels provide insulation to buildings [so they won’t be blasting the AC as much during the summer peak load hours.]

 

If we want fair policies we have to factor in not just one but ALL of these dimensions.

For this to happen we need to measure them well.

We need good data, statistics, computerized grid models, and computational power for running simulations of different scenarios.

Luckily, it’s 2016 and we have all of them.

 

We need this because with better batteries, smart grids, and downward trend in the cost of solar panel on the horizon, rooftop solar will become popular again, even in Nevada.

So we should make sure that everything is fair for everyone.

 

FYI: The existing NEM folks are grandfathered in back to the favorable old rates.

 

Last thought: I hate having to defend myself like this, but I am a proud tree hugger myself. That’s why I spent many years of my life studying environmental economics. It breaks my heart that poor desert tortoises and many other species have to pay the price of our insanity.

But we are in tough times now.

We are literally at a point where we are about to drive the entire planet to distinction and we have to act fast.

Don’t think about just the US or Germany.

Think about China, India, and other growing economies where people are not as wealthy.

How should they plan to fuel their growing economies in a way that doesn’t destroy us all?

The solution will have to be the least cost one.

And that, for now, seems to definitely include large scale solar.

 

 

Happy Thanksgiving.



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