The political pricing of rooftop solar

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Take it from a retired accounting professor that utility pricing is ALWAYS much more about politics than it is about accounting. It has long been that way for home versus business customers, and the addition of rooftop solar, which Florida legislators are literally trying to kneecap right now, adds a messy third axis to the politics.

Let’s try to explain this with as little math as possible.

The current rooftop solar fight in Florida is déjà vu for me. When I was still a snowbird splitting my time between a small Iowa town and Gulf Coast Florida, I served on a “green committee” in that community-oriented rural village, exploring multiple ways to be more environmentally aware even as industrial agriculture squeezed us from all sides. Our electrical and gas utility was a municipality-owned venture, and generally well-run considering that it probably had fewer than 1000 billable addresses. The utility manager was active on our committee, and usually a positive force for change.

You literally cannot separate community interests from the interests of this utility. But we already had a couple of “bleeding edge” environmentalists in town who had invested a lot of money, relative to the worth of their homes, in rooftop solar systems. The standing utility policy was that these innovators could sell excess electricity back to the grid via net pricing, which basically means that you sell electricity generated by your rooftop solar panels in excess of your current needs back to the municipal utility at the same dollar rate per kilowatt-hour at which you normally consume it.

Net pricing sounds simple and rational. But the utility manager believed that net pricing hurts the utility and its other customers. He wanted that buy-back rate reduced considerably, which would strangle the economic viability of rooftop solar, and it would directly harm financially the “early adopters” who were relying on net pricing to recover part of their substantial investment. Florida is in this fight in a big way right now, just as rooftop solar is becomig much more economically viable for more homeowners.

The fixed-cost dilemma of utilities

Now for the accounting lesson, which I first presented four years ago in a discussion of how pharmaceutical prices are set. Utilities basically have “elephant costs” and “mouse costs.” The “elephant costs” are the large fixed-cost expenditures required to get capacity up and running. In our small town it was some new diesel generators, backed up by the larger regional electric grid if these sources were not sufficient. Interest on the bonds used to finance that new capacity is another important, long-term fixed cost. Big bucks for a small town.

You can also think of the cost of poles and wires required to get electricity to every address, regardless of level of consumption, as an “elephant cost” as well. Staff to administer the billing and maintain the grid and is also a big fixed cost. I personally never saw these folks unless a nasty storm hit. And for the big guys, like Florida Power and Light, my current provider, the huge executive salaries and bonuses are also fixed “elephant costs.”

Once you get the generators up and running, and if bad weather doesn’t pull down wires, then the incremental cost to deliver electrical power to my home’s toaster is a “mouse cost.” In relative terms, and often in absolute terms, that cost is very small, even if we add in all of my ceiling light bulbs (which I had changed out to low-consumption LEDs). This at-the-moment “variable cost” is basically the incremental cost of fuel in traditional generating systems. In Iowa’s growing windmill-powered grid (with its own large fixed costs of construction), the incremental cost per kilowatt, at least at time of generation, approaches zero.

Yes, the actual utility cost structure is more complex with that, but the math works out the same.

Multiply that little Iowa municipal utility by millions of customers and you now have Florida Power and Light, my current utility. So, how much should that municipal utility or FPL bill me, personally, for my usage? Obviously, I should pay my incremental cost of power, my “mouse costs,” but I also need to bear some of the fixed “elephant costs,” many of them “sunk,” or past costs that have already been incurred. But how much? Ay, there’s the rub!

Big guys versus little guys

The normal battle on utility pricing is between large business consumers of electricity versus individual residential consumers. I won’t do the math here, but it comes down to this. If you were to throw ALL of the “elephant costs” and ALL of the “mouse costs” together into one pot, and then divide that pot by the total number of kilowatt-hours generated by that utility, then that is arguably the best accounting solution to the rate-fixing dilemma. But that answer is usually not viable from a political point of view.

My own snowbird status was a great example of this. My empty house was using very little electricity in the high-usage winter months in Iowa, while I was in Florida, and likewise my Florida place used very little during the high-usage summer months, when I traveled north. And yet, both my little municipal utility and Florida Power and Light needed to support my low-consuming addresses the entire year with billing services, line maintenance, and repair if a storm hit the area.

For instance, FPL is just getting around to a major strengthening of the power poles and other infrastructure in my neighborhood over four years after Hurricane Irma messed up aging wires in 2017 (and it wasn’t even a direct hit). My little bill in this proposed accounting system does not go very far in financing the “elephant costs” if my share were simply pro-rated based on usage alone.

A large manufacturing business, on the other hand, may just need to be set up with a sufficiently-sized power transformer and then it can suck up a lot of power every day with very little incremental support from that utility. If you do my original math, the large business winds up paying an exorbitant total price for its power consumed. That business will demand a “quantity discount,” and based on the relatively-low support demands from the utility, they can make a good case. If it can’t get a lower rate, the business may even leave the town for a community that gives favored rates to large users. You have entered the world of local government financial subsidies for its businesses, which often extends to favorable tax and regulation treatment for existing and prospective employers.

And so, the utility rate-setting board must make a dicey decision that is really based less on accounting and more on the relative political power of the big versus the small users. Who gets to eat what share of the fixed “elephant costs”? There are other options, such as a fixed per-address monthly charge, but the political choices remain unavoidable, and somebody will not be happy with their utility bill, proclaiming that “It’s not fair!”

Now add in the solar customers

My Iowa friends who installed rooftop solar were even worse utility customers than I was as a snowbird, from the utility’s point of view. On most days they consumed very little utility-supplied energy and may even have pushed some excess capacity back onto the grid, which requires more sophisticated metering and creates a fixed administrative cost for perhaps “small potatoes” of electricity going back and forth, from the utility’s viewpoint. But on a bad cold day with no sun, the utility still has to supply power to that rooftop solar customer

And, the utility manager would project, what if 50% of the town went to rooftop solar? In that case, the delicate political balance of big versus small consumers in town would fall apart as you add politically-aware “green customers” into the rate setting debate.

Let’s be clear. From an environmental point of view, rooftop solar is a very good thing for the environment, especially if homeowners are willing to finance for themselves the fixed cost of panels and special metering. Humanity, as a whole, will be saved by the environmentalists with vision and smarts (or not, he says as the water in Florida continues to rise). When you start adding tax incentives and favored “green rates,” however, the financial burden for rooftop solar inescapably starts to shift, at least partially to taxpayers in general and to other utility rate-payers in particular, because those “elephant costs” from the local utility for conventional power delivery are likely not going down in the near future. And thus, the political arm-wrestling gets more fierce.

My personal vote is to put solar everywhere it is feasible. This is a net positive, I would argue, both for the local communities as well as for the Earth. I see this as a collective societal cost required for our long-term survival. Rooftop solar is not a personal option for me currently because, as I have learned since moving south, HOAs are the major form of municipal government in much of Florida today, and they are mini-fiefdoms with their own internal politics. I am, however, still willing to absorb a share of some of those “elephant costs” required to soak up some of this Florida sunshine and use it for more productive uses than causing skin cancer.

By some (controversial, though compelling) calculations, even Iowa would be better off if stopped planting the millions of acres of corn currently grown for ethanol and instead used just a small fraction of the land to produce solar energy. But industrial agriculture is totally dependent on government subsidies and no viable candidate of either party in Iowa’s first-in-the-nation caucuses has yet been willing to utter this truth.

“Here comes the sun, and I say it’s alright.” — George Harrison

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4 thoughts on “The political pricing of rooftop solar

  1. Lisa

    “A large manufacturing business, on the other hand, may just need to be set up with a sufficiently-sized power transformer and then it can suck up a lot of power every day with very little incremental support from that utility. If you do my original math, the large business winds up paying an exorbitant total price for its power consumed.” Not challenging this, but do have a question – couldn’t that “exorbitant total price” be viewed as then future, and now current payments for building/providing the original capacity needed in the first place by the large manufacturing business? Maybe economies of scale play into this; way beyond my field of knowledge here.

    I’m guessing that “we’re providing jobs” in exchange for you (state/city) meeting our power grid demands is going to have less utility (pun intended) as a quid pro quo, except in the context of political bragging, when so many jobs have been lost to factory automation? (Another example – server farms – likely big users of electricity, with very little staff.)

    #Offtopic, but the local utility company offers a rewards program to provide a monetary incentive to users for lowering their residential energy usage. Every month I get a report, separate from the bill, telling me how my residence compares to the most efficient neighbors and to the average residence in terms of energy usage. My residence almost always scores below the “most efficient” usage threshold. Each month I have to remind myself that this is good for the environment, because there is no way I’ll ever get any benefit from the rewards program, without installing solar, which doesn’t make sense for other reasons. So am in effect subsidizing (yes, it’s a small amount) excessive energy users who have lots of room to reduce their consumption and benefit from this program, with or without solar.

    1. @rklindgren Post author

      Your math is correct, but businesses, just like consumers, will demand a “quantity discount.” At some point all the past and future fixed costs of adding capacity MUST be accounted for, but because cities are often competing with other cities for employers, the big guys will demand special favors, and this is one of the easiest to grant. It appears to cost little money in the short run as much of the cost has already been spent.

      A lot of “efficiency incentives” are put in place because you (and I) tend to use the most electricity when everybody else does, in the hot afternoons when we have the air conditioning running full blast in the summertime. That “surge capacity” costs a lot. My small town utility could buy it from the grid, but at a high unit cost. If the utility can get the consumers to dial back a bit, it delays needing that surge.

      Note this is what killed Texas. They are not attached to the national grid, so when a surge hit, the system crashed.

  2. Peter Robinson

    Long ago I read about reverse metering from home owner solar. As I recall the utility paid half the normal per kilobyte rate. This seemed fair to me at the time because a home owner with a solar rig is not a great supplier form the point of view of the utility.

    Compare to a hydroelectric dam. Gobs of power with incredible reliability. No utility would pay the retail (oer kilowatt) rate to the dam despite the fact that it was a supreme producer of electricity. It would quickly go bankrupt if it did so.

    So why should a utility pay an inconvenient penny-ante unreliable producer more than it would pay the dam?

    I thought paying the home owner half the retail rate seemed quite fair.

    1. Lisa

      As an aside, the times they are a changin’ with regard to hydroelectric dams and capacity, especially in the western half of the US. Not only drought, which is a serious problem, but environmental concerns with regard to the survival of some aquatic species. and other dependent species in the food chain.


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