Valuing the Climate Benefits of Rooftop Solar

An earlier version of this post appeared as a guest post on NRDC’s Switchboard Blog.

Rooftop solar electricity generation may seem like something that everyone can agree on. It helps homeowners save money on their electricity bills. It can help support the rest of the electrical grid during times of high usage or outages. It can help utilities meet their renewable energy mandates. And, if it replaces dirty fossil fuel power, it will reduce harmful air pollution, including carbon pollution that threatens to warm our climate and destroy our planet. However, utilities are concerned that increased development of rooftop solar generation will threaten their ability to maintain vital infrastructure, equitable rates for all ratepayers, and their own financial viability. Heated debates have raged in states ranging from Arizona to California to Colorado about the appropriate rate that utility companies should pay customers for the energy that they generate on their rooftops. Forty-three states require utilities to run a rooftop solar owner’s meter backwards for any extra electricity they provide to the grid, an approach known as net metering. Utilities have long complained that these rates are an unfair subsidy to rooftop solar owners, but with increased installation of solar systems, utilities’ resistance has reached a crescendo.

Minnesota recently took an important step forward in this debate by becoming the first state to establish a method to assess the value that rooftop solar brings to the electrical grid and to society. Last year, the Minnesota legislature passed a law requiring the state Public Utilities Commission to create a way to “compensate . . . customers through a bill credit mechanism for the value” of rooftop solar generation “to the utility, its customers, and society.” The law requires the commission to account for “the value of energy and its delivery, generation capacity, transmission capacity, transmission and distribution line losses, and environmental value,” and allows it to consider other values as appropriate. This approach is an important step because it attempts to find the true value of rooftop solar, accounting for all of its costs and benefits—both direct effects on utilities and consumers, as well as externalities that impact society more broadly. Net metering, while possibly helpful as a tool to spur rooftop solar development, does not account for the full costs and benefits of rooftop solar. For example, net metering might pay rooftop solar owners too much—by not including the utility’s investments in infrastructure—or too little—by not considering the environmental benefits of renewable energy.

Last week, after a months-long study process, the Commission issued an order approving its new Value of Solar Tariff. One of the most significant questions that arose was how to value the benefits of the carbon emissions avoided by using solar power instead of dirty fossil fuels. Minnesota regulators considered three potential approaches to valuing the benefits of reduced carbon emissions. One approach was a two-decade-old value used in state resource planning that regulators decided was outdated. Another approach was a value that Minnesota regulators had recently developed to estimate the cost of complying with future carbon regulations. The third approach, which the Commission wisely selected, was the federal Social Cost of Carbon—the highest value out of all three options, at $37/ton.

The Social Cost of Carbon is an estimate of the damage caused by emitting a ton of carbon dioxide into the atmosphere. It was developed by a federal interagency working group and has been used in a number of federal rules to assess the value of carbon reductions. Because it was designed to account for the full benefit to society of reducing a ton of carbon emissions, the Social Cost of Carbon is the appropriate value for Minnesota and other states to use in a comprehensive analysis of costs and benefits of rooftop solar. When the federal government updates the Social Cost of Carbon, Minnesota should follow suit with the value it uses. In particular, recent studies by the Institute for Policy Integrity, NRDC, and the Environmental Defense Fund have shown that the current Social Cost of Carbon is likely too low, because it fails to include a number of types of damage from climate change, including wildfires, storm surges, and droughts.

Under Minnesota’s law, utilities are given a choice between using the new Value of Solar Tariff and the traditional net metering approach, which they have criticized as an inappropriate subsidy. For at least the first few years, the Value of Solar Tariff is expected to be higher than the net metering rate, so utilities may decide to stick with net metering. However, as the Value of Solar Tariff methodology develops further, Minnesota and other states should consider requiring all utilities to value rooftop solar using a comprehensive Value of Solar approach. Only by fully accounting for all of the costs and benefits of rooftop solar—including all of its climate benefits—will rooftop solar owners be compensated properly for the value they provide to the grid and society.