Community Solar Cost Allocation Strategies: Lessons from Six Utilities

December 10, 2020| By Pabitra Belel, Domjur, Howrah

Considering the array of benefits provided by community solar programs, why should a utility worry about gaining regulatory or board approval for a new program? Two hints: ratepayers and cross-subsidies.

Community solar programs are a compelling option for electric utilities to fulfill growing customer demand for clean energy. However, program designers must devise utility ratemaking that ensures customers pay only for the portion of the system that is needed to deliver electricity to their facility. Unsurprisingly, exclusively allocating program costs to participating customers can be complex. In response, utilities have developed a variety of creative solutions, including limiting the program size initially (even if temporarily) and matching program growth with new generation needs.

3Degrees recently partnered with the Smart Electric Power Alliance (SEPA) to analyze community solar cost allocation challenges, and explore various utility approaches to managing cross-subsidization concerns.

The full report, Striking the Balance: Allocating Community Solar Costs and Benefits, explores cross-subsidization solutions incorporated into community solar programs offered by six utilities: DTE Energy, Xcel Energy, PG&E, Rocky Mountain Power, Poudre Valley Rural Electric Association and Trico Electric Cooperative. These utilities included a variety of complementary program design measures and solutions to address pre-program expenses, the risks of unsubscribed load, stranded assets, and more. The authors highlight how utilities have delivered the broad-based benefits of community solar programs, while protecting non-participating customers from direct and indirect costs.

Understanding the Cost Community solar programs provide utility customers with access to the benefits of solar energy resources without having to purchase and maintain (or lease) solar panels for their home or business.

Basic Community Solar Program Structure (Source: NREL)

Customers seek out community solar programs for a variety of reasons, including environmental benefits and, in some cases, cost savings. While customer demand for community solar is strong and growing, with cumulative U.S. capacity rising by around 120% on average annually from 2010 to 2018, utilities are obligated to hold non-participating customers indifferent from the costs of these voluntary programs.

Utilities which offer voluntary renewable energy products must propose mechanisms to capture upfront costs. They also need to consider indirect impacts on their customer base associated with program growth. Community solar programs often support a new renewable energy project dedicated to the program. This requires additional utility considerations to secure adequate customer enrollment and assess overall resource adequacy to ensure these programs do not affect non-participants.

Cost Allocation Challenges and Utility Solutions Every community solar program incurs a mix of direct and indirect operational costs. Direct costs, such as the cost of generation and program administration, are fairly straightforward for the utility to calculate and pass along to participants.

However, the indirect costs are harder to identify and quantify. According to interviews with utilities as part of the SEPA study, common indirect costs in community solar program design include:

• Cost from impacts on the grid (integration, transmission, etc.)

• Costs involved with pre-program marketing and administration (IT, infrastructure, updated billing, etc.)

• Cost incurred due to unsubscribed generation from a solar project built or contract for the program

• Cost of stranded assets stemming from participation in the voluntary program

Utilities have deployed many approaches to successfully mitigate these cross-subsidization risks. The report highlights five categories of solutions, and provides specific implementation details from successful utility programs. Highlights from three of these solutions are detailed below.

Limit program size (to start) Starting with a smaller program, or even a pilot, can help minimize direct impacts to the grid. Small programs lower risks of unsubscribed load, generation-load mismatches, and stranded assets. Utilities can scale small programs by including cross-subsidization prevention provisions.

• In practice: The six utilities profiled demonstrated that a small program size relative to overall utility load minimized or eliminated the risk of unsubscribed load and stranded assets. One utility, faced with intervenor concerns of cross-subsidization, used a pilot program to test a rate-making provision to calculate and assign indirect program costs to customers. While this approach raised questions, it was ultimately approved on the basis that the small size of the program minimized risk of impact and allowed stakeholders to test and improve the new approach.

Address start-up costs with creative approaches Pre-launch expenses can include updating billing systems and preparing marketing campaigns. While these necessary costs must be calculated and covered within the program through thoughtful planning, utilities have many options.

• In practice: Many utilities must ensure community solar subscribers cover all costs associated with the program, and several have successfully employed amortization. By diligently tracking all costs, utilities can amortize start-up costs via program rates. This approach provides an added benefit of proving program viability and scalability to regulators. Alternatively, some utilities cover some or all costs through a general or public purpose fund, while others have successfully incorporated some billing system upgrades into broader IT upgrades, spread across all ratepayers.

Design program charges to include indirect impacts For larger programs, or those that lead to new demand for renewable energy resources outside of existing generation needs, the utility needs to account for other system costs, such as risk of stranded assets or integration costs. It’s especially important for larger utilities to demonstrate that these indirect program costs will also be covered by the program participants.

• In practice: Two utilities included a specific quantification of these impacts that was built into program charges. Both programs introduced an adjustment in rate design that predicted costs from a variety of impacts, including stranded assets, and incorporated them into program charges.

Lessons Learned In interviews with utilities, two key themes connect their variety of different approaches.

The first theme is good planning: predicting start-up and downstream costs of a program requires careful consideration of the variety of costs and impacts that could result from launching and running the program. The greatest potential for scalable programs involves anticipating the potential impacts of a more expansive program and introducing solutions early that can be tested and proven while the program is small.

The second theme is resourcefulness: many utilities uncovered unique solutions that allowed program development within the confines of their regulatory environment. As utilities embark on new community solar program development processes, they will need to employ robust, thoughtful planning and creative approaches.

The full report, Striking the Balance: Allocating Community Solar Costs and Benefits is public and available for download here. It provides more details on the utility programs mentioned above, including program summaries and comparison tables, plus key program details, including program percentage subscribed, key terms and conditions, program targets, and more.