Net Metering in South Dakota – A Primer, Part 3

This is the final post in a three-part series. Miss the first two? Check them out here and here.

by Bill Powers

In order to determine what the price of electricity would have to be to encourage local electricity generation, we need to have some idea what the cost of such a system would be. Present estimates for solar photovoltaic (PV) systems are something like $5000 – $8000 per kw installed. It is predicted that these prices will be dropping, but let’s go with these prices for demonstration purposes. Each installed kw can produce about 4.5-5 kwh per day, on an annual basis. This equates to something like a 600 kwh per month annual average, although the amount generated can vary considerably from location to location and with time of the year. Ignoring maintenance or replacement costs, it would take such a system about 17 years to provide electricity at $0.20/kwh, a cost well above what we currently pay the utility companies in South Dakota. Some costs can be reduced. There is presently a Residential Efficient Energy Tax Credit of up to 30% for PV costs, not including installation. This credit can generally not be taken in a single year, but it can be carried forward to subsequent years. With this credit the 17 year payback for $0.20/kwh electricity is reduced to about 12 years.

The lifetime of a PV system is on the order of 30 to 40 years. With falling initial costs, these systems will become increasingly practical, especially as fossil fuel costs increase. Moreover, the inflationary costs of electricity will decrease the payback time for providing electricity at a price below the price charged by utility companies. In making these assessments it is assumed that all the electricity generated is used. We have essentially assumed that no electricity would be stored in battery systems, which can be very expensive to both purchase and maintain. If the PV system installed is sufficiently small (say half of the current usage), then most of the electricity generated would likely be used by the home. In this case, net metering is virtually irrelevant. It is only when the PV system is producing surplus electricity that net metering become relevant. When the fraction of generated electricity that cannot be used immediately by the home becomes significant, net metering and the utility purchase price becomes important. The purchase price could in this case significantly affect the payback period. On the other hand, if the PV system is sufficiently small so that net metering is not an issue, then the homeowner reduces his electric bill by the amount that is generated by the owner. In this case, it would take about 24 years payback if the utility rate was $0.10/kwh. If we incorporate an electric rate inflation rate of 2% (the inflation rate over the past 20 years), then the 24 years is reduced to 20 years.

Higher inflation rates (a likelihood) would decrease the years to payback. Since the incentive for home generation does not necessarily rely upon any net metering arrangement, it is possible that home generation could eventually grow to a significant fraction of power usage in the state. Were this to happen, utilities would be stuck with more generation facilities than they presently require. It is uncertain what a significant reduction in electricity sales would engender. Would the utility companies have to greatly increase rates to pay off aging facilities and debts? Would they suffer the possibility of insolvency? For this reason, it seems that it behooves the utility companies to embrace this trend and begin to prepare for its consequences. Perhaps they need to begin considering more creative partnerships with their customers, net metering being but one of them.

The last perspective on net metering rates is to employ an ecological approach. Under this approach, total costs need to be considered, Minnesota’s recent attempt at determining the “value of solar” being one early example. Many environmental costs are external to market forces. For example, the environmental costs associated with increased carbon dioxide production do not (for the most part) affect market prices. One could, however, imagine attempts to include such costs in the utility company costs. When this is done, the utility company costs might be expected to decrease when they compare it to the purchase of renewable energy sources of electricity. For example, many recommend applying the “social cost of carbon” (SCC) developed by the federal government.

The SCC estimates the social cost per metric ton of carbon dioxide. At the present estimate of $37/metric ton solar generation has about a $0.03/kwh advantage over natural gas powered generation. While such sophisticated considerations are important, it seems that they are more useful in considering state policy, although Minnesota is expected to adopt a policy employing such calculations. Were South Dakota to investigate raising its present renewal energy goal from 10%, such considerations would play an important role. But when it comes to negotiations with the PUC and the utility companies, it is not likely to have much influence.

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