Thursday, October 9, 2014

The Grid and Solar Power:

Getting the Incentives Right

One of the biggest problems in the energy industry today seems to be setting the incentives to achieve what we'd like to the maximum extent possible without introducing other problems.  I just found an interesting article on some incentives for solar power that are having unintended consequences, so will focus on that.  The problem is really broader than just solar energy, but the article provides a good case study for how good intentions can produce suboptimal results. 

The New York Times just published an article called, appropriately, "How Grid Efficiency Went South."  The article covers some of the same ground we've been hearing a lot about recently, namely, the negative pricing that nuclear plants have suffered in some markets when demand is low and renewable energy sources are producing too much electricity.

More interestingly, though, the article points to another problem I had not seem discussed before--namely, that the rules for buying solar power that is input to the grid by private solar collectors create an incentive that results in less total energy production than could be generated.  Namely, the incentives create a discrepancy between what is best for the owners of the solar panels and what is best for the overall energy supply.  Most solar panels, the article explains, are oriented to the south so they catch the maximum amount of solar energy as the sun transits from the southeast to the southwest during the course of the day.  That generates the most energy, and therefore, earns the owners the most money.

Sounds good, right?  Well, maybe not so much.  The article points out that the greatest demand is often in the afternoon, when the sun has heated the world up and more air conditioning is needed.  By then, the sun is hitting solar panels at an oblique angle, and they are generating less electricity.  To maximize production, the panels should be oriented in a more westerly direction, so they have more output when the demand is higher.  However, that would result in a somewhat lower total generation, and under current pricing rules, a somewhat smaller income for the owner.

(The article did not address seasonal variations.  In winter, the demand for heating would be less in the afternoon when the atmosphere has heated up.  However, most home heating is supplied by natural gas or oil.  Therefore, the heating season is probably not really relevant in this case.)

One can't blame the owner of the solar panel for wanting to maximize his or her return.  The problem is that the incentive plan that was set up was too simplistic.  More is usually better.  It is also simpler.  But it doesn't produce the maximum value overall.  There are, of course, solutions to this problem.  Just as electricity use can be priced according to the demand levels, so too, can electricity supply.  Of course, the transition will not please those who have already installed their solar panels. 

While this is a solar issue, it demonstrates some of the complexities we seem to keep missing when we put new rules in place.  In a broader sense, it relates to the issues we discuss for nuclear power because the same kinds of short-sighted policies apply in other areas that do affect nuclear power.  The negative pricing that I mentioned above is one such policy, but there are others as well that we have addressed in past blogs and will continue to address in the future.



  1. To make the incentive even greater for California home owners, a few years ago the solar tax credit application was changed to include a calculation of actual output based on shading and panel orientation. Apparently, some homeowners had used the solar incentive as primarily a tax dodge, installing systems that had a reduced output because of the way their house was constructed.

  2. The issue of matching supply to demand is a big one for unreliables ("renewables" other than hydro, geothermal and biomass).  PV especially needs market discipline.  If customers want to be paid for putting energy on the grid, they should first be billed as a commercial customer (peak monthly demand plus energy consumption).  Then they should be compensated for energy according to its value at the local market rate, which varies by time of day.

    That's a huge difference from net metering practice.  One nearby utility bills residential customers 13.4¢/kWh for electricity consumed, with no peak limit (other than their fuses).  But large commercial customers pay for peak electric consumption at $12.55/kW(peak) per month, plus 4.3¢/kWh.

    Dropping the grid-infeed tariff from 13.4¢ to 4.3¢ eliminates the economic case for residential PV, even with all the federal and state subsidies.  But the actual market rates vary quite a bit from the average.  If grid-tied users got the market rate (perhaps with a couple of cents per kWh added, to incorporate maybe $20/ton of CO2 abatement) they would re-orient their panels to match generation to peak demand rather than peak sun.

    This would help a great deal, but turning PV generators into market participants also changes the market for new entrants.  If PV generators drove down the price of mid-afternoon juice into the 2¢ region, people would stop installing new PV because they couldn't make money with it.  And that is exactly what ought to happen.

    There are a few other tweaks that really need to be added, such as limits on downward ramp rates for non-dispatchable generators before they have to pay for spinning reserve.  This would create a market in batteries and flywheel storage, helping to smooth out the "duck belly" curve that looms as the next blackout-threatening issue in sun-heavy areas.  It would also make the "renewable" sector absorb some of its externalities, finally enforcing some discipline and making them a reliability asset.