The document’s goal was to revive Nevada’s rooftop solar incentives.
Like most filings with the Public Utilities Commission of Nevada, NV Energy’s document, released in July, was peppered with ratemaking acronyms and arcane jargon. Then about halfway through, the technical brief broke into a more theoretical discussion about the future — about disruption, rates and the grid.
“While the electric industry and the power grid have come a long way since Edison’s Pearl Street Station was commissioned, the pricing of electricity and electric services for the mass market [residential and small business customers] has not,” NV Energy said in its July filing.
For the past century, utilities have served as the sole gatekeepers, the companies responsible for making sure that a reliable flow of power was always around to meet unpredictable demand, to be there the moment you turned on your A/C or turned on a light in the middle of the night.
Customers rarely played a role in controlling supply. But that dynamic is changing with more data for customers and technologies, like rooftop solar, which let customers sell energy back to the grid, or smart thermostats, which help customers reduce their overall consumption.
At the same time, a utility like NV Energy is still required to serve 1.3 million customers, to make long-term investments in power plants and a reliable grid that can, without any warning, instantaneously deliver power to your iPhone or TV. That comes at a cost. The utility must purchase expensive transmission lines, solar, natural gas plants, transformers and meters.
Utilities traditionally recoup these expenses in the retail rate, or the price they charge customers per unit of electricity. The more power you buy, the greater your share to generate, transmit and distribute it. That system worked fine when the relationship was one-sided. As customers bring value to the grid that old paradigm is starting to break down. A static retail rate does a poor job communicating a consumer resource’s value, which is often based on time and location.
“The way we charge customers is not cost-reflective,” said Jesse Jenkins, a researcher at the MIT Energy Initiative and a contributor to MIT’s Utility of the Future report. “That means that the choices we are making based on price signals can be severely distorted. What looks like a good deal for the customer may not be a good deal for the power system as a whole.”
This fact is the source of much tension between regulators, utilities, consumer advocates and newcomers like rooftop solar companies. In many ways, the impetus for the high-profile fight over rooftop solar, was this very technical issue about how the rate structure pays for the grid, makes the utility whole and compensates the end user for the value that they offer the utility.
“Solar is really the tip of the iceberg,” Jenkins said.
After two years in which the rooftop solar battle was punted from the Legislature to regulators to the courts and then back to the legislature, this fundamental issue remains open for debate.
The old model
For most customers, the current rate structure includes two pieces:
1) The Fixed Fee — Technical Term: “Basic Service Charge”
- It covers the cost of NV Energy’s meters, billing and customer service.
2) The Retail Rate — Technical Term: “Volumetric Charge”
- It covers the cost of electricity, generation, transmission and distribution.
Like other utilities, NV Energy wants to move past this model.
“The existing traditional two-part rate structures at [Nevada Energy] do not properly and distinctly show consumers the costs and value of the electricity (a commodity) and electric services (infrastructure),” the company wrote in its document about setting rooftop solar rates.
And it has other critics. The Environmental Defense Fund, for instance, is pushing to make the retail rate better reflect the value of electricity at a given time of day. For example, energy usually costs more for the utility in the late afternoon. Demand shoots up as people return home and crank up the A/C. Utilities have to match this demand with more supply, causing them to turn on carbon-emitting power plants or purchase expensive power from the wholesale market.
If prices are more expensive at these “peak” times, some environmentalists argue, consumers will have the incentive to shift their usage to non-peak times when prices are cheaper. Instead of doing the laundry at 4 p.m., the price signal would tell them to do it at 9 p.m. In turn, utilities would no longer need to dispatch extra natural gas and could reduce their carbon footprints.
Some economists also take issue with the current rate structure.
Severin Borenstein, who studies energy markets at UC Berkeley’s Haas School of Business, said that the retail rate should better reflect the marginal cost of electricity and externalities like pollution. He said historically regulators didn’t need to think about economic efficiency because customers had no choice but to buy the utility’s power, regardless of the price. Now they can generate their own electricity and adjust their usage with LEDs or smart home technology.
From an economic perspective, the current structure undervalues and overvalues certain behaviors. Jenkins, the MIT researcher, offers this example. A consumer is faced with two options: invest in an energy-efficient fridge or an energy-efficient A/C unit. The fridge saves more energy. The consumer goes with the fridge because the savings will be greater. But in reality, the A/C unit that runs during peak times — when energy is expensive for the utility — would bring more value to the grid. The system would benefit from the consumer choosing the A/C unit. Yet a retail rate, untethered from the cost of electricity, doesn’t provide that incentive.
With more choices, “we start to see the cost of getting these prices wrong,” Borenstein said.
There’s a brewing debate over what’s next
If some people agree on the problem, few groups agree on the solution.
Shawn Elicegui, NV Energy’s vice president of customer operations said the company would like to see the price structure “reflect and look a little bit more like the pricing structure for our larger customers with prices that reflect the distinct components of the services (that it offers).”
NV Energy has floated the idea of making some residential bills mirror the billing structure for industrial customers, where fixed costs for grid services are unbundled in what are known as demand charges. These charges are often based on a customer’s highest individual demand.
In Nevada and across the country, regulators have been skeptical of demand charges, which critics say are difficult for consumers to understand and don’t always send the right price signal.
Ratepayer groups see them as part of a national trend in which utilities are looking for ways to lower the retail rate and recover more grid costs through fixed fees. Utilities proposed raising fixed charges in 26 states last quarter, according to the North Carolina Clean Energy Center.
Some economists believe this is the right approach. These proposals tend to give utilities more certainty that they will recover their grid costs. But for different reasons, several consumer and environmental groups are opposed to efforts to increase fixed fees, even with lower retail rates.
Consumer advocates oppose such efforts because they raise serious equity issues. With higher fixed fees, low-use customers, in some cases low-income customers, could end up paying more for the grid. Rooftop solar companies oppose lowering retail rates because it would lower a rooftop solar customer’s compensation, which is based on the retail rate. Some environmental groups argue that lowering the retail rate tends to discourage energy efficiency.
An even cleaner solution, economists like Borenstein say, is dynamic pricing. Under these proposals, the price of energy fluctuates based on demand during the day. Doing so, they say, would send a price signal that incentivizes customer savings when energy is most expensive. That way, not only would the customer save, but the grid would also benefit. Operators could avoid purchasing expensive energy, and in the long-run, avoid investments in infrastructure.
In Nevada, ratepayer groups have concerns that time-variant rates punish some customers for an essential good. Some customers can’t adjust to rates that rise at high demand and fall during non-peak times. Many Las Vegas customers — seniors and shift workers — need to cool their homes during the hot summer and should not be charged a premium to do so, they argue.
Several states in the southwest have experimented with variable pricing, according to Ahmad Faruqui, an energy economist at the Brattle Group. Nearly half of customers from Arizona’s largest utility, APS, are on time-of-use rates. Faruqui, who has done work for NV Energy in the past, noted that California is preparing to transition its customers to default time-of-use rates.
“It’s happening,” he said. “It’s happening around the globe.”
How these debates will play out
It’s happening, but it’s happening gradually.
Regulators are considering new rates that NV Energy proposed in June. Much of the debate has centered around the utility’s push to raise the base fee for residential customers. But there is likely to be a fight over time-variant rates. NV Energy already offers optional time-variant rates for solar and non-solar customers. And in 2017, legislators passed a law requiring NV Energy to develop a time-variant rate schedule for customers who acquire battery storage.
To comply with the law, the utility has proposed replacing the existing time-variant rate with one that includes a demand charge. The utilities commission is not scheduled to hold hearings until later this year, but several groups are preparing to challenge this rate structure. Demand charges often encourage storage, but many environmentalists and solar advocates worry that their complicated fee structure could make time-variant rates less attractive for most customers.
This debate already played out in the rooftop solar fight. In Nevada, everyone had a study proving that rooftop solar was a net benefit or a net cost to ratepayers. Rooftop solar’s actual value is variable, the MIT Utility of the Future report found. Its value is highly dependent on local factors, such as time and location, even how much solar has already been integrated with the grid. Does it reduce peak demand? Does it reduce congestion on a crowded power line?
In the past, rooftop solar customers were credited at the retail rate for the excess electricity their panels produced. With the industry taking off, states are grappling with how to credit customers so that utilities recover their fixed costs and customers are credited for the value they bring to the grid. The Nevada legislature instructed regulators to implement a tiered solution. People who purchase rooftop solar soon will receive a credit worth 95% of the retail rate. The value of that credit will decrease as more solar is added to the grid until it reaches a floor of 75 percent.
But that credit is still a blunt instrument. It’s only an estimate of rooftop solar’s value. Jenkins, who worked on the MIT study, said more cost-reflective rates would make it more precise.
“As (rooftop) solar becomes a mainstream force, which we want to see and where it’s going, then it becomes very important,” Jenkins said. “We can’t fudge it anymore.”
Disclosure: NV Energy ($50,000) is a major donor to The Nevada Independent. See all of our donors here.
Daniel Rothberg is a freelance journalist. He can be reached at firstname.lastname@example.org or on Twitter at @danielrothberg.
From the Editor