Virginia’s solar industry has seen rapid growth in customer demand over the past two years, and a bill that recently passed through the state legislature appears to be a huge victory for solar customers and the electric cooperative industry.
However, the full projected outcomes of this bill for residential solar will become clearer in 10 years, once demand charges fully kick in for solar customers, and the electric cooperatives begin to amend their solar tariffs without State Corporation Commission review, per the legislation.
Today, absent demand charges and with a 30 percent federal tax credit, a solar array could see a payback in 10 years, assuming a 12 cents per kilowatt hour co-op electric tariff rate escalating on average at 2.5 percent per year. (Demand charges are fees charged over and above the cost of energy usage that are assessed according to a customer’s peak power requirements)
Without the tax credit, which ends in 2022, the payback would be 14 years. The proposed new demand charges could extend the economic payback for residential solar systems by another three years, from 14 to 17 years, just as the federal investment tax credit drops from 30 percent this year to 0 in 2022. Those paybacks may become less of an issue as electricity prices increase, or more, if demand charges increase.
Senate bill 1769, patroned by Sen. Glen Sturtevant, R-Richmond, and House bill 2547, patroned by Del. Tim Hugo, R-Fairfax, includes several provisions that will open up the distributed “rooftop” solar market in the state’s electric cooperative service territories, which is a good thing.
These identical bills, which are on their way to be signed into law by the governor, widen the net metering program for customers of electric cooperatives, legalize third-party power purchase agreements for tax-exempt entities in electric cooperative service territories and allow all cooperative customers to install enough renewable energy to meet up to 125 percent of their previous year’s demand (up from 100 percent).
For an industry that remains largely untapped in the commonwealth due to stifling policy barriers, this represents a momentous breakthrough.
The only downside is that these bills establish a post-net metering model in the electric cooperative service territories that implements demand charges on all solar net metered customers, phased in over a five-year transition period following an initial five years, and enables the co-ops to enact new solar tariffs without SCC review or approval.
The five-year phased-in demand charges start at a maximum of 50 cents per kilowatt (combined distribution and supply charge) in year six and increases to a maximum of $2 per kilowatt by year 10.
And while solar customers who built their installations prior to July 1, 2019, will be grandfathered until 2039, new solar customers will see demand charges on their bill starting six years from now.
When you do the math, residential customers would now see their payback pushed back three years to 17 years, whereas today with the investment tax credit and no demand charges, they would see a 10-year payback. But as electricity prices increase, those paybacks could shorten again, assuming demand charges are not increased in the meantime.
This could make solar more costly. And if demand charges are increased without SCC review in the future, it could dampen customer demand and crimp Virginia’s fastest growing job-creating industry.
The two technologies that would help to compensate for the resulting diminished economic incentive — battery storage and advanced meter infrastructure (smart technology) — are far from being widely accessible across all customer segments.
So, this raises a social equity issue as lower- and middle-income customers would be less likely to be able to purchase battery storage or a solar system itself.
To summarize, these bills offer a great relief for customers for the next 10 years, but if co-ops increase demand charges in the future without SCC review, it could create unintended consequences in curtailing our growing industry.
This law of unintended consequences could be blamed on the process in which these policies were born.
The content of these bills was negotiated behind closed doors in the utility-centric Rubin Group, a “consensus-building” stakeholder group that includes our investor-owned utilities (Dominion Energy and Appalachian Power Company), the electric cooperatives, a couple of environmental and solar advocates but, unfortunately, no consumer group advocates.
All members of that group must sign non-disclosure agreements, thus further circumventing public discussion.
Utilities will argue that the implementation of demand charges applied solely to solar customers is necessary and fair to avoid what they call “cross-subsidization.” To date the utilities have not provided data that this “cross-subsidization” is actually occurring at current or projected solar penetration rates.
And like many before it, these bills were rushed through the Rubin Group process and the legislature, without enough time for invested stakeholders to consider their unintended consequences.
On top of that, solar advocates at the table were told they had to agree to a deal or be left with whatever the utilities would negotiate directly with legislators. Solar advocates were thus forced to choose between the lesser of the two evils: concede to a few years of market growth in exchange for demand charges that could dampen future demand for distributed solar.
Given the unintended consequences this bill will have on Virginia’s solar industry and future solar customers, we must resolve to develop more transparent and inclusive ways to develop our energy policies, whereby we imagine a truly modernized grid where individuals and organizations who are willing to invest their own money to install grid-tied generating capability are regarded as investors in building grid resiliency and creating economic opportunities in our communities.