Does your energy project have rate risk?

Image courtesy of Flickr user Kevin Dooley

Rate changes inject hidden risk into renewable energy projects.

Solar panels in parking lots have become increasingly popular in California. The panels provide shade, electricity, and a proudly visible statement of support for clean energy. Dropping prices for solar panels and generous subsidies help these projects pay back in less than five years. What’s not to like?

Maybe this: your current payback may not be the payback in the future because of rate risk. For any on-site generation project, make sure your payback calculation is built on a solid understanding of energy costs, not rates.

California utilities offer heavily tiered time-of-use rates for solar projects. For example, summer energy charges under PG&E’s A6 tariff range from $0.14 per kWh during off-peak times to $0.49 per kWh during peak periods. Under net metering, customers receive the full retail credit for all kilowatt-hours exported, meaning that you can effectively sell power for $0.49 per kWh during the summer. Suddenly that parking lot looks like a very profitable power plant.

Typical energy costs in California are closer to $0.13 per kWh, so the big financial rewards from solar come not from offsetting your own energy but from selling back into the grid. This has some interesting implications. First, it makes more sense to attach solar panels to a meter with low load to ensure that you’ll have surplus to sell. Second, the structure of the rates heavily determine the project payback.

A6 is not a feed in tariff, but energy managers relying on it for 20 year projects are treating it as such.

At first blush, this might not seem like such a big deal. Choose the right rate, size the system appropriately, and calculate your 20-year IRR.

The problem arises when this calculation might be built on a foundation of sand. If load on the meter increases, your net metering surplus can shrink or vanish. Worse, rates can and do change dramatically over time. A6 is not a feed-in tariff, but energy managers relying on it for 20-year projects are treating it as such.

Case in point, the A6 tariff was already subject to fierce debate in the last rate case, with most parties acknowledging it as an implicit solar subsidy. Secondly, as solar continues to grow, a fight is brewing over whether net metering customers should compensated with the retail rate ($0.49 per kWh) or the wholesale rate, which is about one tenth of that number. Finally, rates change all the time, and do not always go up. We’ve already seen dramatic reduction in the tiering of residential rates, and the A6 rate structure could easily change.

Our advice? Make sure you are explicit about the rate assumptions in your business case and acknowledge they could change. If a special rate is key to your project return, prepare your analysis with a more standard rate and make sure you’ll still be happy with the outcome.

Remember, energy is a zero sum game. These subsidies are paid by your competitors, so you should be agressive and grab them. But in this case, you may want to examine how you fare if they suddenly disappear before you have reached your payback horizon.

About Tom Arnold

Tom Arnold is co-founder and CEO of Gridium. Prior to Gridium, Tom Arnold was the Vice President of Energy Efficiency at EnerNOC, and cofounder at TerraPass. Tom has an MBA from the Wharton School of Business at the University of Pennsylvania and a BA in Economics from Dartmouth College. When he isn't thinking about the future of buildings, he enjoys riding his bike and chasing after his two daughters.

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