How do we pay our solar and wind energy providers? What’s fair?
If you’re new to the electric business, you may wonder what Distributed Energy Resources (DER) are and how they fit with the mix of energy options. DER are renewable energy power sources (mainly solar and wind) and continue to grow as power supply options. Due to the way they operate, there are different methods for determining how to provide compensation to DER providers. This article is an introductory primer to some of those reimbursement methods.
Solar energy farm
Main methods for setting DER reimbursement rates
There are four main methods for DER reimbursement. They vary based on the technology, region, and regulatory environment. Main methods include:
Feed-in tariffs (FIT)
Power purchase agreements (PPA)
Net metering
Value of solar (VOS) or Value of distributed energy resources (VDER)
Feed-in tariffs
Feed-in tariffs are fixed rates or premiums paid to producers of renewable energy for every unit of electricity they generate and feed into the grid. These rates are often set by regulatory authorities and can provide long-term contracts with guaranteed rates. FiTs are designed to incentivize the development of distributed energy generation and vary depending on factors such as technology type, system size, and the prevailing market conditions.
Power purchase agreements (PPAs)
Power Purchase Agreements involve negotiations between energy producers and energy consumers or utilities. Under a PPA, the producer agrees to sell the generated electricity to the buyer at an agreed-upon rate over a specified period. The rates can be fixed, escalate over time, or be linked to a specific pricing index. PPAs are commonly used for larger-scale distributed energy generation projects such as solar or wind farms.
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Net metering and feed-in billing
Net metering allows distributed energy generation system owners to offset their electricity consumption by exporting excess energy back to the grid. The utility credits the producer for the excess energy, which can then be used to offset future consumption. The credited rate is often based on the retail electricity rate, meaning the producer receives the same rate they would pay for purchasing electricity from the grid.
Value of Solar or value of Distributed Energy Resources
These methodologies attempt to capture the full value of distributed energy generation beyond just the electricity price. They consider factors such as avoided transmission and distribution costs, environmental benefits, grid resilience, and other system-level impacts.
Examples of these arrangements are rates paid to DER providers based on the avoided cost of energy purchases in a market. Average daily market rates are published, making the calculation transparent.
What about charges to DER providers?
DER providers sometimes give the impression that they should not be charged by the local utility, since they (the DER) are a power provider. In the case of residential or business DERs, the power produced generally does not meet all of the DERs power needs. Due to lack of battery storage or excess capacity, the DER is still reliant on the local utility for part of its power needs. The connection to the utility provides an “available for use” aspect, that requires investment on the utility’s part to provide electricity to the DER in time of need. There is a fixed cost to that to be paid by the DER.
DERs and utilities - a 2-way street
FERC Order 2222 requires power providers to incorporate DERs in their supply portfolio planning. As this process evolves in greater depth, the recognition that providers and DERs must work together is important to building out DER effectively and efficiently.
About Russ Hissom - Article Author
Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.
Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.
The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.