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…and the Effect of Solar (SDG&E)
By Adam Hammill
Usage and Demand
Residential utility customers have historically been billed based only on the kilowatt hour (kWh) usage each month, according to a tiered system, in which customers who use more energy pay more for higher tiered use. Alternatively, typical commercial utility customers have historically been billed according to monthly usage (in kilowatt hours – kWh), as well as the instantaneous electrical demand (in kilowatts – kW) according to a rate structure SDG&E calls “ALTOU.” Unlike a tiered system, commercial customers under this rate plan are billed according to time-of-use rates, in which both kilowatt hour pricing and demand charges vary based on different time periods throughout the day (on-peak, off-peak, semi-peak, etc.), and different seasons throughout the year (summer and winter rates). While usage charges are based on the total kilowatt hours used during the various time periods each month, demand charges are based on the single highest fifteen minute period of demand during each time period in a given month. For many utility customers, the usage portion typically accounts for about 30% of their monthly bill, while demand charges account for around 70%.
The Effect of Solar on Usage
Solar can offset the entire bill of a residential customer (aside from a negligible monthly connection charge), because of solar’s ability to completely offset usage. Solar can also offset the entire usage portion of a commercial utility bill, but since the usage portion typically accounts for such a small proportion of a commercial customer’s bill (often around 30%), this cost offset may not be very significant. Even so, a competitively priced solar installation with typical financing will often have the net effect of locking a customer in for the life of the solar installation (25 to 30 years), at roughly the same kilowatt hour rate paid currently. In this worst case scenario, solar will likely save the customer significantly over time, as the customer would be insulated from increases in kilowatt hour charges.
The Effect of Solar on Demand
Based on current rate structures, it is beneficial that solar installations produce their energy mostly during what are now classified as on-peak periods. However, should the solar installation experience as little as a few minutes of down time during or a month, or should clouds roll in while the customer is experiencing high demand, a single fifteen minute period of high demand could result in a demand charge similar to if no solar had been installed. Customers whose highest demand is outside of daylight hours may see little effect from solar on their demand profile. Additionally, with approval of the California Public Utilities Commission, rate structures and time-of-use demand periods could change, which might result in a net change for a commercial utility customer’s demand charges.
Alternative Rates for Solar Customers
Fortunately, for those in SDG&E territory, an alternative rate plan is offered for commercial customers with solar. If a commercial customer covers at least 10% of monthly kilowatt hour usage with solar energy, the customer may, at the customer’s option, elect to change to the DG-R tariff. DG-R stands for “Distributed Generation – Renewables.” This plan offers demand charges that amount to roughly half that of the standard ALTOU rate, although it also carries a higher kilowatt hour usage charge. This would result in substantial savings for a customer who was able to cover 100% of their usage with solar energy, as this customer would be insulated from the increased usage charge, while gaining the benefit of significantly reduced demand charges.
Lower demand commercial customers (those with demand less than 20kW during all 15 minute periods for at least one month a year), are eligible for SDDG&E’s Commercial “A” Rate. Customers on this tariff pay only a low kilowatt hour charge, and no demand charge at all. In some cases, installed solar may cause a customer’s instantanous demand to drop below this level, and if this is the case, that customer could switch to the Commercial “A” Rate, which would result in substantial savings.
While demand can physically be reduced by measures such as staggering the use of high-demand equipment, battery storage can also be used for demand shaving. The reduction of demand charges can make battery storage not only financially feasible, but often attractive. Battery storage can offer the additional benefit of providing backup power in case of a power outage. A battery storage system may also be eligible for California’s Self-Generation Incentive Program, which can provide additional cash incentives up to 60% of the value of the energy storage system.
ALIVE’s Approach to Commercial Projects
ALIVE Industries, Inc. has invested significant resources in creating analysis tools which conservatively model the net financial effect of solar on commercial customers’ total monthly electric expenses. As mentioned above, since momentary solar outages or atypical conditions can negate solar’s effect on demand charges, we do not assume demand will be affected by solar, but we are able to model these worst-case savings by modeling the effect of solar on all customers’ monthly total electric costs, with both the customer’s current tariff and the DG-R tariff, which will be available once solar is installed.
If historical or projected 15-minute increment demand data are available, ALIVE can also model the feasibility of adding battery storage to a project.
Long-Term Risk Associated with Renewable Energy
While warranties up to 25 years may seem to offer substantial security for renewables investment, these warranties are only as good as the companies standing behind them. In this fast-moving and quickly-changing industry, many companies will not survive. Of the top 10 solar companies just 5 years ago, only 4 remain in business, and experience has shown that larger companies are not insulated from the volatility of this industry. ALIVE’s experience in utility-scale solar development has led us to spend significant time and resource vetting the manufacturers we work with. We partner only with companies whose backing and equipment meet the highest standard available. We strongly believe that the companies we partner with will stand the test of time, and weather the coming storms of this industry, as tax credits end, and the industry consolidates. ALIVE itself is structured specifically with the future in mind. Our business model with low overhead expenses and streamlined cost structure was crafted with the specific goal of thriving over long term. All our systems are designed to be virtually maintenance free, as future-proof as possible, and very easily and inexpensively serviceable by any solar services company. If ALIVE were to fail, our customers would be left with the highest-quality systems available. With solar market penetration expanding at such a rapid rate, solar service companies will likely become very prevalent, ensuring continued system operation and reliability, regardless of what the future holds.
The only other significant risk associated with renewables investment regards potential changes in utility billing. The current net metering agreement with SDG&E ensures customers will receive full kilowatt hour for kilowatt hour credit for power produced for twenty years, with only a small, one-time charge for setting up net metering, and a very small $0.02 charge for net metered power usage, when that charge exceeds the monthly minimum bill. While this does not preclude changes in connection charges, time-of-use periods, or changes to the rates charged for usage over and above production, California customers will likely continue to benefit from a Utilities Commission and state government that are extremely friendly toward the renewable energy industry.
†The opinions stated in this document reflect the research and conclusions of ALIVE Industries, Inc. No warranty is expressed or implied. Any forecasting herein is the opinion of ALIVE Industries, Inc., who shall not be held liable for any unforeseen industry trends, utility rate changes, or California Public Utilities Commission rulings.