Item 3- Value of Solar Discussion — original pdf

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Value of Solar Discussion RESOURCE MANAGEMENT COMMISSION - APRIL 29, 2026 RAPHAEL SCHWARTZ Austin Energy Goals Local solar goals: • “Promote Innovative Local Solar Solutions Austin Energy will continue building local solar solutions and expanding local solar access for all customers. Austin Energy will plan to . . . reach 405 MW of installed local solar capacity by 2035 — including 160 MW of existing capacity.” • Need to average ~ 23 MW per year going forward. • FY2026 expected to trail 2025 ---23 ? https://austinenergy.com/about/news/news-releases/2025/Austin-Energy-adds-record-18MW-of-local-solar-to-the-grid Many successful solar programs • Residential solar • Commercial solar • Commercial Standard Offer • Community Solar program • Solar on city owned buildings • New lease program • and more… Oct. 21, 2025 Resource Management Commission Obstacles….. •US solar market is in a “transition year” in 2026 • Loss of 30% federal subsidy - Residential expected to see 33% declines nationally [1] • ‘Foreign Entity of Concern’ another major cost increase from new legislation • Commercial Standard Offer was already struggling to scale in FY2025 (thin margins) • Residential Standard Offer program appears will not move forward? • ‘Solar for All’ appears to be dead • Austin Energy does not have much appetite to increase subsidies… [1] https://pv-magazine-usa.com/2026/03/17/residential-solar-to-decline-33-year-over-year-said-roth-capital-partners/ Value of Solar tariff • AE uses a Value of Solar tariff that is ‘buy all, sell all’. • Originally set up in 2012 to assess the true value of local solar to the utility • Leadership has been clear that the intention is to: Properly value the customer-sited solar as a resource to the utility and fairly compensate the customer without burdening non-solar customers. • Four components make up avoided costs. • Some tariffs don’t include the environmental “societal benefit” Stepping away from ‘subsidies’ • AE has tried to step away from actual incentives in recent years: • • Rolling out new programs (Standard Offer programs) which do not value the carbon emission reduction or any environmental aspect of solar Charging commercial solar customers relatively high permitting fees • AE has made clear that even modest incentives are not sustainable for the utility long term • • Strong desire for programs to be ‘sustainable and scalable’ by tying programs to financial avoided costs Every dollar spent on societal benefits or incentives limits program sustainability in the utility’s view Value of Solar • Value of Solar payout is mainly dependent on energy scarcity on ERCOT (highly fluctuating) https://services.austintexas.gov/edims/document.cfm?id=471826 • Ignoring the societal benefit component: FY24 & FY25 avoided costs plummeted to 5.64 cents/kWh from 12.2 cents over prior 3 years (averages) • Massive battery capacity growth on ERCOT has greatly lowered costs of summer scarcity events. Future data center demand may or may not ‘save us’ • By chance the 2023 EPA report doubled the Social Cost of Carbon value Commercial Standard Offer – VoS strained • Commercial Standard Offer does not have any societal benefit component to boost payout • AE has just announced a price “floor” subsidy of 11 cents/kWh to save the program (up from 9.6 cents under VoS) • This is accounted for as a subsidy in the “Customer Renewable Solutions bucket” - budget amount that needs to be specially approved by Council on an annual basis (cannot be guaranteed in future) • It is term limited (10 years) and will only apply to first 30 MW (out of 70 MW) Value of Solar accounting • • • • Around 2014 Value of Solar began to plummet due to the shale gas boom. The utility responded to concerns by setting up plan to levelize the tariff over a rolling 5-year period to stabilize the rate. Value of Solar is a 5-year average which gets updated every 3 years. So, at any given time the ‘avoided costs’ are nominal dollar values from as far back as 3-8 years ago. This mechanism, put in place after the original tariff design, ignores any sort of inflation adjustment. This is akin to solar customers providing the utility local power today but being paid in 2018-2022 dollars. Other VoS tariffs that include a multi-year levelizing framework include a simple inflation adjustment which ‘escalates’ the nominal avoided costs from many years ago to today’s dollars [1]. This is an extremely simple adjustment that just involves multiplying each year’s VoS by the CPI inflation between that year and today. (Or even just using a fixed inflation factor like 2.5%) [1] NREL, “Value of Solar: Program Design and Implementation Considerations” https://docs.nrel.gov/docs/fy15osti/62361.pdf Value of Solar accounting (continued) • ‘Constant Dollar Accounting’ is likely the proper accounting method here: Inflation-adjusted accounting restates financial statements to reflect changes in purchasing power, addressing the distortion of historical costs given inflation [1]. Shows real, rather than nominal, costs. Current VoS uses ‘Historical Cost Accounting’ which under-compensates the actual avoided cost of local solar production. The impact is surprisingly significant: Adjustment using CPI [2]: Adjusted tariff [3]: Year CPI factor adjustment to FY26 Current Value of Solar ($/kWh) Adjusted VoS FY21 FY22 FY23 FY24 FY25 1.25 0.125 0.157 1.15 0.155 0.179 1.09 0.153 0.166 1.06 0.116 0.123 1.03 0.095 0.098 FY27 FY28 FY29 0.144 0.148 0.152 • Accounting for inflation increases the VoS rate by about 2 cents/kWh on average to 14.8 cents • Affect is still large even without covid-era inflation (~1.6 cents) [1] Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 33, https://www.xavierpaper.com/documents/usgaap/n.Fas33.pdf [2] https://www.bls.gov/data/inflation_calculator.htm [3] Using estimated future CPI of 2.5% for demonstration Missing ‘avoided cost’ components – future study • Current VoS tariff leaves out a number of avoided cost components that are well-known and widely-accepted value components used elsewhere [1][2]. The sharply declining financials of solar make it important we get this right: 1) Distribution capacity - studies of growing load zones often find a significant positive avoided cost 2) Demand Reduction Induced Price Effect (DRIPE) - Reduced demand due to local solar reduces wholesale price itself, producing bill savings for utility and all local customers. (Effect is as much as 1-3 cents and easily estimated) 3) Avoided hedging costs – solar reduces wholesale energy obligations which in turn lowers hedging premium that AE pays to mitigate energy/fuel cost risks 4) Other societal benefits such as avoided local NOx (Non-financial) 5) Reduced Demand Response costs - Other 4CP avoided costs such as demand response load shed requirements (Austin experiences less load shed and AE pays for less DR) 6) Generation capacity costs – AE’s 2022 VoS [3] report reasoned that this was not relevant because utility had committed to never invest in local fossil fuel generation again – now that that reality has changed • A comprehensive study of solar in Texas found VoS as high as 27 cents/kWh on average [2]. Even with much more conservative numbers a true fair value accounting would have a major impact on solar scalability in Austin [1] NREL, “Value of Solar: Program Design and Implementation Considerations” https://docs.nrel.gov/docs/fy15osti/62361.pdf [2] Value of Residential Solar in Texas, Texas Solar Energy Society & Dunsky Energy, https://txses.org/wp-content/uploads/2024/07/Value-of-Residential-Solar-in-Texas.pdf [3] “Review of Austin Energy’s Value of Solar report and Avoided Cost Base Component of the Value of Solar Credit memorandum” https://services.austintexas.gov/edims/document.cfm?id=382682 [4] Designing Austin Energy’s Solar Tariff Using A Distributed Pv Value Calculator, https://www.cleanpower.com/wp-content/uploads/090_DesigningAustinEnergysSolarTariff.pdf Next steps 1) RMC can ask for avoided cost inflation-adjustment in time for FY2027 budget process. 2) Ask for study of missing avoided costs components for future inclusion in updated VoS tariff.