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For What It’s Worth: Former Utility Exec Talks Value of Solar

Closer look at utility economics finds common-sense sun-power rates

Clean Energy, Solar | March 10, 2014 | By Jim Dulzo

About the Author

Jim Dulzo is the Michigan Land Use Institute’s senior energy policy specialist. Reach him at jimdulzo@mlui.org. This is Part 3 of our ongoing coverage of the MPSC solar work group. Read Part 1 here and Part 2 here.

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This is Part 3 of our ongoing coverage of the MPSC solar work group. See the entire series here.

We have put VOS on the table in a number of places. It’s a better way to look at your operation. The idea is under consideration at the TVA, some munis; the two Michigan utilities, Iowa, Louisiana.  That’s what happened in Austin, in Minnesota. it’s a huge leap of faith; right now they don’t see s with customers as a two-way flow.
As a vice president at Austin Energy, Karl Rabago established rates for rooftop solar panels that pleased the utility and sparked more private investment in distributed solar power.

Karl Rábago, who recently spoke in Lansing about pricing solar energy, gets respect from all sorts of folks who don’t always get along with each other—utility regulators, renewable energy activists, clean energy companies and researchers, and utility executives. You can blame that on his remarkable resume

Rábago used to set rates at the Public Utility Commission of Texas and other utility regulators. He pushed for renewable energy at the Environmental Defense Fund. He managed renewables at private companies and public agencies, including the U.S. Department of Energy.

But his crowning achievement, so far, is his success at Austin Energy, where, as a vice president, he parlayed an obscure phrase—Value of Solar—into a guiding principal that helped the public electric utility’s customers “go solar,” big-time.

Value of Solar is an unconventional concept in the very conventional world of utility monopolies. It shows in exacting detail why encouraging customers to go solar—and paying them fairly for their power—is good for the company and all of its customers.

Rábago uses real-world numbers to value the advantages customers’ panels provide their utilities. Those include using no fuel, which reduces the risk of volatile coal and natural gas costs; shifting maintenance, insurance, and repair costs to customers; and feeding power to the grid at locations that avoid the need for new power lines and substations.

Solar is valuable also because it works best when needed most, on hot days, cutting down on extraordinarily expensive “peak” power purchases. It reduces a utility’s costly pollution-control challenges, too. 

Rábago presented his Value of Solar concept—just adopted by Minnesota to guide payments to utilities’ solar power-producing customers—to the Michigan Public Service Commission’s solar work group on Feb. 25.

The group is searching for ways to expand DTE Energy’s and Consumers Energy’s tiny solar programs beyond their four-year-old “pilot” status.

Rábago’s bottom line is simple: Given where energy technology is going, utilities and ratepayers must work together; treat each other fairly, as partners; and strike a new balance that is less about selling power from big, central plants and more about managing different power sources spread across their grids.

VOS, he said, shows how the money actually flows in decentralized solar generation, and points to a radically different future for profitable power-making.

Coincidentally, a few days after Rábago’s talk, Peter Terium, CEO of RWE, Germany’s largest electric utility, echoed his stark warning that utilities must change to survive. Terium admitted that his company lost money for the first time in 60 years last year—$3.8 billion—because it fought, instead of embraced, Germany’s march to renewables.

Rábago spoke by telephone last Thursday from Denver, Colo., where he leads Rábago Energy LLC, a clean-energy consulting firm.

Michigan Land Use Institute: By establishing Value of Solar at Austin Energy, you opened the door to lots of solar power development by your customers. How did that happen?

Karl Rábago: We had an ordinary base rate case, the first in 18 years, in 2009, so it was a big undertaking and a great opportunity to look at all the rates at the same time. Some people were putting up solar and we thought this was a good chance to set solar rates for the ages.

The phrase ‘Value of Solar’ was actually used in a study AE commissioned in 2006, when I wasn’t there: What is the value of solar to the company? They knew how to get the lowest price for solar, but had no idea if the price they were paying and its value to the utility were related.

When I came into office I was doing rebates. I used the study to set a good rebate number for people who installed panels. When the rate case came up, I said let’s take a fresh look at solar, [and] do it in context of other rates. So I’m first person to apply Value of Solar to rates.

MLUI: Do you get strong pushback over your numbers, or do utilities agree with your calculations?

Rábago: There’s nothing in the analysis that’s profoundly controversial. It’s the kind of thing that utilities do all the time when they do resource planning: What is this going to cost me year in and year out? How much fuel? How much transmission?

There’s a pretty long list of stuff solar doesn’t require. It’s actually an avoided cost calculation. Utilities work hard to make payment [rewarding avoided costs] as small as possible, because utilities make money when they invest in infrastructure, and they don’t when somebody else invests.

The real “aha moment” comes when a utility starts considering solar on a customer’s roof as a resource, even though the company doesn’t own it. That is the giant mental leap they must make. It doesn’t all have to be ‘Go buy a rock and burn it.’

So VOS is nothing fundamentally new, but you have to rearrange your mental furniture a bit. And then just do the numbers. Before I got there, the Austin Energy guys found that VOS fits with common sense. As natural gas prices [to run power plants] go up, the value of solar goes up, because it’s saving gas. As gas goes down, so does solar. That’s fair. It tracks common sense.

MLUI: Is VOS getting a good reception?

Karl Rábago: Right now it’s in place in Minnesota and Austin. In Austin, it was part of the new rate package. They complained about a lot of stuff, but nobody complained about VOS.

We have put VOS on the table in a number of places. It’s a better way to look at your operation. The idea is under consideration at the TVA, some munis, the two Michigan utilities, Iowa, Louisiana.

There are a whole lot of people inviting us to come into their town and talk about it, and then say, ‘Oh wow!’ But I often make the point that it took over a year to get this rate done with our staff. There were months socializing the concept with the solar community; I got all sorts of positive and negative reactions. We walked through every element of it, with robust debates on every point.

I’ve done it with utilities in other jurisdictions. That is one good part of it: It forces you to go through all of numbers.

Even the guys who say VOS is zero right now agree with how you got to your numbers. They say, ‘I understand your process, it’s numerically correct, but our model doesn’t consider values in such small amounts, so we set it at zero.’

MLUI: You figured out a rate reflecting Value of Solar at a publicly owned utility. How about investor-owned utilities, which must turn a profit?

Rábago: With or without a VOS rate, you may or may not have those profit issues.

For example, when a customer takes steps to reduce energy consumption, it affects a utility’s bottom line. Should a utility have to help make customers more efficient users of their product? Many utilities think they shouldn’t have to do it, that they should not be ‘forced’ to help customers to use less.

Those are the folks who define their service only as selling kilowatt-hours. But a growing fraction is seeing their role as electric service. They have a big menu of tools they can charge for, instead of just dropping off kilowatts at a meter and saying, “See ya later, buddy!’

So a lot depends on a utility’s mindset. Are they just selling kilowatt-hours, or providing services?

MLUI: Is it possible to influence that mindset?

Rábago: If your shareholders are guys in New York City, it’s easier to look at what a utility sells as a commodity. It is harder for them to connect with the service satisfaction of local customers.

But most of the utility guys went to the same schools, so publicly owned utilities don’t think they’re in the service biz, either. VOS shines a little light on how utilities are doing business. You can do this same approach to all sorts of aspects: the value of energy storage, the value of savings and energy management, the value of smart technology.

Solar is just the tip of the spear; it’s the most charismatic power technology ever. It’s a perfect storm, compelling a fundamental re-look at how utilities make customers happy.

MLUI: Is interest spreading?

Rábago: I’ve been to a dozen forums in the last 18 months, and I don’t do this as charity. There are a whole bunch of places where people want to explore this.

But this is not just about Karl; look at all the studies listed in the Rocky Mountain Institute report. Folks who have nothing to do with me are spending lots of serious dollars on understanding this. They are trying to reconcile this in Arizona, in Colorado.

There is a real issue facing the industry: How do we value this new suite of resources that are at our distribution system’s edge? All I am is someone who has done a few hundred rate cases, mostly involving Texas utilities. I’m part of a small group of people lucky enough to have a pretty unique perspective on this.

I venture there are staff in utilities around the world who encounter other staff grousing about losing money on energy efficiency, and come up with good ideas about turning that into a win-win. I just happened to in a good position at a utility when the lightning bolt went off in my brain.

MLUI: So, you’re in an elevator with a utility executive. What do you say to get him thinking positively about VOS?

Rábago: The core principal you have to work on is symmetry. If you are fair to customers, you can ask them to pay their fair share. If you not symmetric, they will resist paying for the full cost of your work. You can use this dialogue, this discussion about Value of Solar, with an analytical basis, to get to the point where both sides treat each other fairly, saving the company’s time, money, and reputation.

That is when the light goes on, when the executive realizes: We just need to be treated fairly; and they, the customers, want to be paid fairly for solar.

I would tell them, “Trust me, I took a leap of faith that, if I treat solar customers fairly, I can convince them this makes sense.”

That’s what happened in Austin, in Minnesota. it’s a huge leap of faith; right now they don’t see service with customers as a two-way flow.

Regulators really hear that: ‘This is what we are supposed to do—make it fair for everyone, so we can make good decisions.’

Treat your customers fairly, they will be glad to treat you fairly as well.

MLUI: You left Austin Energy about 18 months ago and started your own business. How is Value of Solar faring back there?

Rábago: They are still paying a solar rate that is a little higher than their retail rate—it’s maybe gone from about 12 cents per kWhr to about 10.7, and retail is at 10 cents. They changed how they calculate natural gas prices [that fuel conventional generators], which also went down. And they knocked a half-cent off solar rates by reducing the panels’ projected useful life.

I’m glad the methodology is still in place, and I agree that solar rates they pay should go down when gas prices go down. That’s because VOS should be referent to everything else.

And, if Austin Energy stays true to the VOS system, we’ll see the value and the rate to solar customers go back up and track reality when gas prices rise again.

Jim Dulzo is the Michigan Land Use Institute’s senior energy policy specialist. Reach him at jimdulzo@mlui.org. This is Part 3 of our ongoing coverage of the MPSC solar work group. Read Part 1 here and Part 2 here.

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