Will Virginia's feed-in tariff work?

Friday, May 31, 2013

Virginia’s largest electric utility is launching a feed-in tariff for solar energy – but will it work?

Feed-in tariffs are a policy tool used to facilitate the production of renewable electricity.  While six states and a handful of utilities have each designed their own programs, in general feed-in tariffs guarantee that customers who own solar panels or eligible renewable electricity generation projects a fixed price to sell the power to their local utility.  Building solar photovoltaic and other renewable generation technologies can have a relatively high capital cost, but the lack of a fuel cost can lead to low operational costs in the long run.  Customers, particularly businesses, say they need certainty about the internal economics of their project – whether revenue streams or savings off existing power bills – prior to committing the capital to actually build it.  Feed-in tariffs are one tool to address this uncertainty. Dominion Virginia Power serves ratepayers in the Commonwealth as Virginia Electric and Power Co.  It is a subsidiary of Dominion Resources Inc.  After securing an approval from the Virginia State Corporation Commission last March, the utility recently proposed a pilot feed-in tariff program for solar resources.  Under the Solar Purchase Program, Dominion will provide five-year contracts to purchase the energy produced by eligible rooftop solar projects and other distributed solar photovoltaic resources.

The program guarantees a price of 15 cents per kilowatt-hour over the contracts’ term. This price paid to solar energy producers is above Dominion’s recent retail average electricity price.  In 2012, Virginia's average retail electricity price was 10.5 cents per kWh for residential customers.  Commercial customers paid an average price of just 7.8 cents per kWh; the increased spread between the feed-in tariff rate for sales to the utility and commercial customers’ average price for purchases from it creates a strong incentive for commercial customers to develop solar projects.

Despite significant interest in Virginia and elsewhere in the development of the feed-in tariff, Dominion’s program is only a pilot project.  It applies only to residential systems up to 20 kilowatts and commercial systems up to 50 kW in size.  Moreover, the feed-in tariff is capped at 3 MW in total participating capacity.  Coupled with solar projects’ capacity factors, this limits the total volume of electricity to be purchased under the program.

Will Dominion’s feed-in tariff work?  The answer depends on what “working” means.  If the price spread between the feed-in tariff rates and retail rates, combined with other incentives such as federal tax credits, the feed-in tariff may be enough to encourage the development of some commercial and residential systems.  The utility and ratepayers may learn more about the costs and benefits of distributed generation.  To some degree, it may incentivize activity and competition in the solar installation business.

But where the program is capped at 3 MW, the current feed-in tariff program alone may neither spur much new investment nor cost ratepayers much.  Dominion’s recent peak loads were about 19,636 MW – so solar purchases would represent just hundredths of a percent by capacity, and an even smaller number by volume of electricity sold.  The entire program cap could be taken up by 60 commercial-scale projects, or even by 750 homes using Dominion’s estimated average of 4 kW per residential project.  It is unclear if this level of volume is enough to lead to a more robust installation services sector, or to lower costs for installed solar projects.

Implementation of Dominion’s solar feed-in tariff program will follow State Corporation Commission review and approval.

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