The laws of supply and demand are straightforward. Prices reflect the interplay between what people want and how realizable what they want is. But in the world of utilities, nothing is simple – certainly not the prices consumers pay for electricity.
That’s because utilities charge customers not only for the power that they use, but also for the grid that they maintain and the power that they generate. Because of this, the infrastructure choices made by a utility have a massive impact on what consumers see on their monthly statement.
In Colorado, the Intermountain Rural Electric Association, a midsized cooperative supplier of energy, is an ideal example of a utility struggling to grapple with poor infrastructure choices. In an effort to become less reliant on natural-gas-based energy, IREA bet heavily on coal. In fact, it built an entire new coal-fired power plant in 2009.
Since that time, the cost of natural gas has stabilized while the cost of operating a coal power plant appears set to spike, the result of various state and federal efforts to curb the use of coal. To compensate for its bad bet on coal, IREA is now seeking to adopt a new rate scheme designed to reduce the value of residential solar power.
The nexus between a bad bet on coal and the need to undercut solar is not immediately apparent, but makes sense in light of what solar means to IREA’s business model. The value proposition of residential solar power – in the form of cells placed on roofs – is predicated not only on reduced consumption from the grid, but also on the surplus power those systems are able to push back onto the grid. Thus, the IREA loses twice when one of its customers installs solar panels. It sells less electricity from its coal plant and must credit customers for the power their solar systems generate. As solar becomes more popular, the cost of the IREA’s coal investment is spread among fewer customers.
This is where supply and demand go out the window. To offset its bad investment in the coal plant, IREA is now seeking to foist a new rate regime on those customers with rooftop solar – charges that bear no relationship to the of the energy those customers use.
The rate regime is based on what the IREA is calling a “load factor adjustment.” The plan is to calculate the load factor by looking at kilowatt hours, divided by the product of the customer’s peak demand and the number of billing days in a cycle. Using that formula, if a customer’s load factor falls below a certain threshold, that customer will be assessed a “demand charge.”
Confused? You should be. In a sense, the IREA is seeking a rate plan that charges customers for what they don’t use. Yet the purpose of the rate formula becomes clear in light of the fact that the customers to be assessed a demand charge will largely be those with solar systems at their homes.
Punishing early adopters of solar energy is bad policy, not only from the perspective of environmental concerns, but also in terms of future grid sustainability.
Should the rate regime be adopted, the losers in the deal will count among their number more than IREA’s solar customers. The chilling effect on innovation will be felt throughout the state.