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Curing the Death Spiral

Seeking a rate design that recovers costs fairly from customers with rooftop solar.

Fortnightly Magazine - August 2014
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In the U.S., most residential customers of electric utilities are on a consolidated tariff that collects revenue based on a fixed monthly fee (often called a customer charge) and a commodities charge (an energy or kWh charge). The fixed monthly fee is generally designed to recover metering and billing expenses. The commodities charge is designed to recover expenses associated with the supply of both energy (kWh) and demand (peak kW).

For electricity, fuel costs are a large component of the energy expense. Fixed costs related to the infrastructure investment to provide central station service to the customer are a large component of the demand expense. However, there is often disagreement about whether some of the traditionally classified energy costs should be reclassified as demand and vice versa.

The growth of rooftop solar is dramatically reducing the amount of energy that goes through residential utility meters from the utility to the customer. Indeed rooftop solar often reverses the flow, such that many rooftop solar residential customers deliver energy to the local wires company during some periods of the day. In Washington, D.C., the mayor has a vision to reduce energy consumption by 50% and to have 50% of the remaining energy produced by rooftop solar.

Figure 1 - One Revenue Target – Three Alternative Rate Designs

Under conventional ratemaking, PEPCo, the D.C. utility, would need to increase its commodity charge by a factor of four (4.0) to overcome such a reduction in energy sales. The rationale for this assertion is that PEPCo's revenue needs would be unchanged to pay for the wires it will still own, wires that will still provide service to the customer, while the commodity through the wires would be reduced to 25% of the level which was used to set the current commodity rate level. The result would be non-generating residential customers paying high rates (and higher bills) in order to subsidize the lower bills paid by residential customers who decide to install rooftop solar.

A Demand Charge as Remedy

A remedy to this "death spiral" rate outcome is the introduction of a demand charge for all residential consumers. Even customers who wish to reduce their carbon footprint with rooftop solar still will need to receive some electricity from the utility grid from central station generating units. Some of that electricity will be for periods when the sun is not shining ( i.e., at night) or is low in the sky in the early morning or evening. Some of that central station electricity will also be needed to meet customer load in excess of the capacity for the solar rooftop unit's capacity to meet that load. Of course, if the rooftop solar unit is damaged or out for maintenance, power will be needed from the grid as a standby resource to

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