March 28th, 2016
Solar energy in Maine is so successful it’s pushing against the limit of what old laws allow for generation in the state. As solar approaches 1% of total energy generation in the state, lawmakers there must either increase the limit or establish new rules for how solar energy is bought and sold in the state. That’s why utility companies and solar advocates in Maine are coming together to create a path forward.
Lawmakers in the Pine Tree state have come up with a very interesting plan that might be instructive to other states gearing up for similar battles over net metering, the gold standard solar billing arrangement. We say “gold standard” because net metering has long been the best way to ensure that solar is economically viable. Under a net metering agreement, solar energy is credited on a 1-to-1 basis with usage. If your panels produce 100 kilowatt-hours (kWh) of electricity during a month, you get charged for 100 fewer kWh on your next bill. It’s simple, straightforward, and makes sense.
But many utility companies argue that solar owners are shirking their responsibility to pay for upkeep of the grid, because the retail charge for each kWh actually represents many smaller charges. Most of it is for the power, but a few fractions of a cent are added for upkeep of transmission lines and other grid maintenance needs. Anti-net metering advocates usually say these charges are disproportionately paid by non-solar customers because, under net metering, solar owners don’t pay them. So the move to change the law has arisen both from the need to establish a path forward and a recognition that these arguments aren’t going away.
Solar lovers point out that the anti-net metering argument ignores the fact that distributed (small, customer-sited) solar has a value above other kinds of electricity, because it’s consumed locally, produced when electricity demand is highest, and results in less pollution. That’s why the state is trying a new way: studying the value of solar and using the findings to establish a baseline for how much solar owners should be paid for the power their panels produce.
The Value of Solar in Maine
In 2015, the Maine Public Utilities Commission (MPUC) commissioned a study to determine and quantify the benefits of solar electricity. It gets a little complicated, but the benefits can basically be described in two categories:
- Avoided costs – That is, the costs of producing, procuring, transmitting and distributing energy from traditional sources—including the uncertainty of future prices for those sources—as well as the cost of building future power plants, pipelines, and more.
- Social costs – Meaning the costs associated with pollution and effects to the environment.
Long story (very) short, the study concluded that the actual value of solar energy over the next 20 years can be averaged to $.33/kWh, despite current electricity prices in Maine of around $.16/kWh. That means solar owners are actually getting the short end of the stick under Maine’s current net metering arrangement, and if a suitable alternative can be found, it could more accurately reflect the real benefits of solar to the state.
But of course, no one would do anything unless they could figure out how to make money doing it. And Maine’s new solar metering proposal will make sure money can be made and solar owners can be compensated fairly.
Maine’s proposed net metering replacement law
Based on the $.33/kWh finding of the Value-of-Solar study, a new system of solar payments has been proposed in Legislative Document 1649. The proposed law would establish a marketplace for solar and its benefits, in which electricity produced by solar panels would be sold to a “standard buyer” (in this case, your utility company) for a set price over a 20-year contract. The contract price per kWh would be based on the value of solar price, but probably not $.33/kWh, because how would the utility make a profit then?
Basically, what this would do in Maine is provide every homeowner interested in going solar with a solid knowledge of exactly how much money they can expect to make over the 20-year life of their contract. It would give utility companies the right to monetize all the benefits of the solar power they buy, selling all the various pieces (e.g., the energy, the additional transmission capacity opened up, and other arcane utility company stuff. It’s important to note that the customer-generator, i.e. YOU if you’re a Maine solar owner, gets to keep any Renewable Energy Credits your system generates for you.
Who’s for it? Who’s against it?
The advantage this proposal has, compared to less-popular net metering changes in states like Nevada, is that it’s backed by a diverse coalition of environmental groups including the Sierra Club and Natural Resources Council of Maine, the state’s big utilities, and many of Maine’s solar companies, including ReVision Energy, the state’s largest solar installer.
As far as who’s against it, that list includes national solar installer SunRun, which doesn’t operate in Maine but wants to see net metering continue nationwide, and Governor Paul LePage, whose energy office opposes the proposal because they don’t think it does enough to protect non-solar customer from the cost shifts mentioned above.
One additional voice of dissent that should be taken seriously is MPUC Chair Mark Vannoy, who argued the proposed bill would end up costing Maine’s taxpayers $22 million per year, and would be cumbersome for his office to implement. These assertions run counter to earlier estimates from Maine’s Office of the Public Advocate, which found a long-term net benefit to ratepayers of $55 million from the proposed law.
What would the change mean for a home solar investment in Maine?
This is where we break down the financial implications of the change, and show whether keeping things the same or changing them would benefit solar owners. It’s important to point out that under the plan, current solar owners can keep net metering for their systems for 12 years after implementation, switching over to the Value of Solar (VoS) plan at that point.
As it stands, a solar investment for a 5-kW system in Maine with net metering intact means a $20,000 up front cost (before incentives), which is reduced to $13,064 after the first year by the federal 30% tax credit and energy bill savings. After 25 years of net metering, you can expect to net $22,457 in profits from such a solar installation.
If the proposed bill were to pass, it gets a little more complicated. Remember how the VoS study found that the benefits of solar are worth about $.33/kWh? Well, we doubt that number is what the utility company will actually pay, because if they did, they wouldn’t make a profit. We don’t really know what the initial price for solar energy will be under the VoS, so we’ll look at two scenarios: $.20/kWh and $.25/kWh.
Take a look at this chart that shows how electricity prices will likely change over time at 3.5% growth or 2% growth:
See the question marks there? That’s because after 20 years, when your contract ends, there’s no telling what the new price for solar energy will be, because it will change depending on how well solar grows in the state. It could go up or down, depending on how many new solar installations there have been.
Either way you can see how 3.5% growth quickly exceeds a $.20/kWh VoS price, and even beats the $.25/kWh price around 2029. If prices continue to rise as they have in the past two decades, net metering will be better financially. But if price increases slow to around 2%, as they are likely to do with increased renewable generation, it’s actually better to go with VoS.
The key concept here is that electric price increases are uncertain, and part of the advantage of VoS is a contractual guarantee that you’ll keep getting paid for your solar energy.
The next complication involves how you hook up your system. The traditional solar installation is hooked to your home “behind the meter,” that is, you get the electricity first, and any excess is sent to the grid. Under the proposed scheme, you’d be paid the VoS price only for that electricity that is sent to the grid. The solar energy you use would reduce your usage, effectively offsetting the retail price of the power you would have used.
That means you’ll likely be leaving money on the table, at least for now. The VoS payments are levelized over 20 years, so they’ll initially be higher than retail electricity costs. The solution is to hook your panels to a separate meter that feeds directly to the grid. That way all the electricity you generate will be sold at the VoS price.
Now we have to compare the financial returns of solar in Maine under net metering and with a VoS price of $.20/kWh and $.25/kWh. Let’s assume you haven;t installed solar yet, and if the VoS system comes to pass, you’ll hook your panels to a separate meter. Here’s a chart showing the comparison:
Several interesting things are happening here. First, let’s explain the chart: each net metering estimate begins in 2016 with the same initial cost of -$13,064 ($20,000 minus incentives and $6,936 year 1 bill savings), but each VoS estimate represents a lower first-year cost, because the bill savings are higher.
Overall net income is about the same—around $22,000—under net metering with 3.5% annual electricity price growth as it is with a $.25/kWh VoS price. Similarly, overall net income is about the same for net metering with 2% growth and a $.20/kWh VoS price. But the interesting thing is, under VoS, the initial system cost is paid back faster, which makes internal rate of return (IRR) higher.
The benefits of VoS are front-loaded, making it a better investment overall, because you get more money, sooner, then enjoy steady income over the life of the system. VoS does what it’s supposed to do, making solar great for homeowners now, and leveling the playing field for utility companies in the long term. It’s the rare example of a true win-win.
A final benefit of VoS is that it’s a defined income stream for a 20-year contract meaning it would be much easier to get a low-interest loan to pay for the initial purchase of the investment, with the promise of income that will make it easy to pay the loan back over time.
The Final Word on Maine’s VoS proposal
As we said in the headline, this kind of Value of Solar-based system is a sensible alternative to net metering, which recognizes the benefits of solar while giving every stakeholder a fair shot. It encourages solar growth and will adjust with time as solar becomes more widespread, allowing incentives to decrease as costs do, which again, is good for everyone.
It remains to be whether the Maine State Legislature will pass the law and if Governor LePage will sign it into law. Rest assured that if it does, we’ll be there to report on it, and we’ll keep tabs on Maine to see whether the law is being administered in a way that benefits all interested parties—solar owners, non-solar owners, the solar companies and the utility companies.
If all goes well, Maine might just point the way to a bright future for solar energy in the U.S.A.
Last modified: April 19, 2016