Setting the price of sunshine
Posted July 8, 2014
Updated July 15, 2014
Raleigh, N.C. — The North Carolina Utilities Commission has started its process of setting solar energy rates for the next two years.
It's a complex process involving weeks of hearings conducted like legal proceedings, with thousands of pages of filings and a football team's worth of lawyers representing utilities, environmental groups, business groups, solar industry members and associations – and even Google, which buys solar power for its facility in the state.
At stake is how much utilities like Duke Energy and Dominion will have to pay for solar power. Sometime this fall, the commission will determine that rate. Solar advocates say it could make or break the state's booming solar industry.
Under a 1978 federal law, regulators can require utilities to buy energy from third-party facilities that generate power. But they can't be compelled to pay more for that energy than it would have cost them to produce it themselves.
That's called "avoided cost," and under North Carolina law, it includes both the cost the utility would pay to produce a unit of energy at its most expensive plant – the fuel required plus a fraction of the power plant's operations and management costs – and the money the utility saves by not having to build additional generating capacity.
Some states, such as California and Minnesota, also factor into "avoided cost" the pollution and health problems caused by fossil-fuel plants, from ozone and smog to increased rates of asthma and pulmonary disease.
North Carolina does not include these factors, but solar advocates say it should.
Nancy LaPlaca, who's representing environmental group NC WARN at this week's hearing, is a former policy adviser to the Arizona Utility Commission. She says regulators in other states have added value to solar by using scientific studies to determine the health and pollution costs solar avoids.
"These are studies that have been done by the National Institutes of Health, the EPA, Harvard, Yale – these are very renowned, peer-reviewed studies," LaPlaca said, although she concedes there could be disagreement on what those costs per kilowatt-hour actually are.
"Let’s agree that there’s a range, and let’s agree that it’s not zero," she said.
The current "avoided cost" rate for solar energy, set in 2012, ranges from $3.69 to $5.95 per kilowatt-hour, based on the contract, connection and time of year.
If the commission decides that solar energy is now saving the utility more than that, it could require Duke and Dominion to pay more for solar. That's good news for the solar industry, but Duke spokesman Randy Wheeless says utility customers would ultimately have to cover any increase.
"What we’re trying to do is bring power to people in the most cost-effective way possible," Wheeless said. "Our rates are 20 percent below the national average here, so you could say that regulation in North Carolina has done a pretty good job when you compare it to the nationwide average."
Amount of energy produced at issue
Another key factor for the commission to decide is the terms and conditions of the "standard contract."
For decades, North Carolina has required utilities to offer a standard contract, usually for five to 15 years, to buy power from solar facilities generating under 5 megawatts a year. Strata Solar Vice President John Morrison says that's been critically important to the young industry.
Strata develops, builds, owns and operates solar farms, with more than 200 megawatts of generation across the state.
"We build and complete a solar farm about every seven to 10 days here in North Carolina," Morrison said. "Each solar farm is about 5 megawatts, about 40 acres in size. We've got on the order of 1,500 people out there building solar farms, cranking them out."
The standard contract, he said, has made that possible.
"A developer like us doesn’t have to go negotiate with the utility for each and every solar farm that we want to build. That gives us a bit more of a level playing field to deal with this behemoth of a utility," he said. "That’s really what has enabled us to do these contracts – to line them up one right after the other – because we can have some predictability.
"Business loves certainty," he continued. "With that in hand, we know we can then go get the investors and bring them on board."
In its filing, Duke is proposing to lower the standard contract threshold from 5-megawatt facilities to no more than 100 kilowatts, a 98 percent decrease.
Morrison said that would exclude most anything larger than a backyard system. All other facilities would have to negotiate with Duke independently.
"There hasn’t been a particularly good track record of those negotiations actually coming to fruition," he added.
Wheeless said Duke needs more flexibility to negotiate, especially in light of the rapid drop in the cost of solar in recent years
"We’re trying to make sure we get the best price for solar for our customers. If we’re overpaying for solar, basically our customers are picking up the tab. Our customers are definitely saying, ‘We want solar, but we don’t want to overpay for it. Get us the best deal possible,’" Wheeless said. "So, if it’s coming down in price, obviously the price we pay may come down as well."
If Duke wants cheaper solar power, Morrison said, it should move the contract threshold upward – perhaps to 10 megawatts – rather than down.
"There are always economies of scale to a larger size. If your objective is to put the least-cost power onto the grid, particularly clean energy, solar, then yes, you would want to go with the larger size," he said. "We’d be happy to do 10-megawatt projects if we could have that same degree of certainty."
Capitol Broadcasting Co., the parent company of WRAL, owns a 4.3-megawatt solar farm in Garner that is currently under contract with Duke.
Solar more cost-competitive
LaPlaca said Duke and other utilities are trying to rein in the growth of solar generation because it's been so successful. She calls it the "solar wars."
"One of the things no one ever expected was that the cost of solar would come down so far so fast," she said. "We’re so close to solar being cost competitive that the utilities fear even 2 or 3 cents a kilowatt-hour for health costs, because it pushes solar into the green."
Traditional utility generation is hobbled by slim profit margins, she said, because the fixed costs of operating and managing a fossil-fuel plant are so high.
"Once you pay for a solar plant, the operations costs, the maintenance costs, are extremely low. All you have to do is hose the panels off once in a while," said LaPlaca. "Solar in terms of operation and maintenance? About $27 per year per kilowatt."
According to the U.S. Energy Information Administration, coal has a fixed operation and management cost of $32 to $80 per kilowatt/year, depending on the type of plant, in addition to $4 to $9 in variable cost per megawatt-hour that rises and falls with the price of fuel, emissions control, carbon and other factors.
"Solar is very cost-effective over time because it displaces fuel," LaPlaca said. "There’s no water use, there’s no waste. You don’t have to worry about carbon costs. You don’t have to worry about the [price] volatility of natural gas."
NC WARN is running broadcast television ads in the state's three largest markets accusing Duke of "hating solar."
Wheeless said that couldn't be farther from the truth. In fact, the utility's two divisions, Duke Energy Progress and Duke Energy Carolinas, are rated in the top 10 utilities nationally for solar use.
"We’ve got $6 billion [in multi-year contracts] committed to solar in the Carolinas going forward. That’s a pretty big stake," Wheeless said.
"We have about 350 megawatts of solar in North Carolina right now. We have another 300 we’re trying to get. So, we’re almost going to double solar in the next two years," he added. "I think Duke has a pretty strong story to tell with solar and renewables in North Carolina."