How Electricity Pricing Can Boost Distributed Solar – Part 1

Editor’s Note: EarthTechling, always looking to bring you interesting cleantech articles, is proud to repost this article from partner Institute for Local Self Reliance. Author credit goes to John Farrell.

What if electricity cost more when the sun was shining?

Many utilities are using new electronic “smart meters” to adjust the price of electricity as often as every 15 minutes, to reflect supply and demand.  And charging more when electricity is in short supply can be good news, making investments in distributed solar power pay off faster.

image via Solar

Note: I’ve also done some analysis for San Francisco and PG&E’s time-of-use plan which has a better payoff for solar.  Look for it in the next few days.

Time-of-use (TOU) pricing is a different billing method for electricity, where the customer pays based on the time of day of using electricity rather than a flat rate per kilowatt-hour consumed.  The premise is that electricity is more expensive when in high demand (e.g. by air conditioners in the afternoon on hot, sunny days) and that pricing accordingly will help reduce demand.

For example, customers in Los Angeles on a TOU pricing plan have a flat rate for electricity in the fall, winter and spring.  But in the summer, they pay significantly more for electricity used during “peak hours,” when the power system is at its maximum use.  In June to September, electricity used from midnight to 10 AM (and from 8 PM to midnight) costs 4.7 cents per kilowatt-hour.  But each kWh used from 1 to 5 PM costs 16 cents. (there are other charges on the typical bill that amount to ~6.1 cents per kWh)

This pricing scheme can act as an incentive to go solar, because solar panels tend to operate at their highest capacity during summer months.  The following chart shows the solar radiation falling on Los Angeles during the various seasons.  The average insolation during June to September is 6.37 kWh per sq. meter per day, compared to 5.33 in the non-peak season.

Solar panels also tend to have higher output during the peak hours of the day.  In fact, the California Public Utilities Commission found that solar tends to have a 60% capacity factor (produce 60% of its maximum) during peak electricity periods.  The following chart from SolarStik illustrates:

The Economics of Time-of-Use Pricing for Solar

So what will a time-of-use pricing plan mean for the economics of solar in Los Angeles? It means solar customers save more money.

About 37% of annual solar production in Los Angeles comes during the peak season, and almost 90% of that during peak and near-peak (shoulder) periods.

On average, year-round, the cost of grid electricity on a TOU plan is 7.3 cents during the daylight hours a rooftop solar array is producing (13.4 cents including the required other charges), modestly higher than the 7 cents (13.1 cents) customers pay on a flat rate plan. It’s not an enormous difference, but some perspective helps.  The cost of solar has fallen by about 7% per year over the past 30 years.  The time-of-use pricing difference in Los Angeles is about 5%, nearly as good as an additional year of solar panel price decreases.

If the peak price were about 50% higher (24 cents instead of 16 cents), the average value of electricity produced by solar would be 8.6 cents (14.7 cents with fixed charges), compared to 7.3 cents (13.4 cents), good for nearly three years of price declines.

For now, time-of-use electricity pricing may not be a panacea, but it’s a good policy for helping finance distributed solar.

Note: For the levelized cost of solar in Los Angeles, we used an installed cost of $4.40 per Watt, 80% financed over 10 years, with a 25-year project life.

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    • impact of “smart” meters needs to be factored in