Does VOST=FiT, What is a Value of Solar Tariff (VOST)?
By Yann Brandt, Managing Editor of SolarWakeup.com
Value of solar tariffs, also known as VOSTs, have hit some level of critical mass; At least with public perception and media. The question to ask yourself, as I did; do you know what a value of solar tariff is? Why does it exist? And should you like it?
After the City of Austin presented their VOST, it created a bit of buzz but how many people went into the details and looked at the market effects it created? Now that Minnesota is on its way to potentially creating the first statewide VOST, I decided to do a bit of research about the MN VOST and decide for myself if I thought they were beneficial to the long term development of solar markets.
To begin, we have to figure out why the VOST formula report had to be written (read the full MN VOST report) and for that we review the language from MN Laws 2013, Chapter 85 HF 729, Article 9, Section 10. The report cites the reason in part:
Minnesota passed legislation in 2013 that allows Investor-Owned Utilities (IOUs) to apply to the Public Utility Commission (PUC) for a Value of Solar (VOS) tariff as an alternative to net metering, and as a rate identified for community solar gardens. The Department of Commerce (Commerce) was assigned the responsibility of developing and submitting a methodology for calculating the VOS tariff to the PUC by January 31, 2014. Utilities adopting the VOS will be required to follow this methodology when calculating the VOS tariff
The key part of the reasoning is in the first sentence, “alternative to net metering.” So let’s take a closer look at what the VOST formulation does right, what it really means to solar and if it is beneficial to solar market development. Above all, any policy needs to maintain the right and opportunity for consumers to self-generate using solar and make clear any hidden tax effects a new policy would have.
What does the VOST formulation get correct?
The VOST takes a long term look at the value of solar energy generated by distributed PV. In Minnesota’s draft report, the view is 25 years, though some docket comments have already begun to push for 20 year calculations.
VOSTs create a formula for assessing the per kWh benefit of distributed solar energy as it is placed on the grid and takes into account technical, environmental and societal benefits to the utility infrastructure.
Solar has more benefit that the pure energy value offset and at some point we should value this and it generates benefits far longer than the initial return on capital calculation so many customers focus on. A VOST approach to full benefit of distributed solar should be a great way for regulators to counter the argument utilities use in net metering debates.
VOSTs = FiT?
Minnesota’s VOS legislation mandates that, if a VOS tariff is approved, solar customers will be billed for all usage under their existing applicable tariff, and will receive a VOS credit for their gross solar energy production. Separating usage (charges) from production (credits) simplifies the rate process for several reasons:
- Customers will be billed for all usage. Energy derived from the PV systems will not be used to offset (“net”) usage prior to calculating charges. This will ensure that utility infrastructure costs will be recovered by the utilities as designed in the applicable retail tariff.
- The utility will provide all energy consumed by the customer. Standby charges for customers with on-site PV systems are not permitted under a VOS rate.
- The rates for usage can be adjusted in future ratemaking.
The emphasis is mine, but anytime 100% of the energy output from a solar installation is sold to the grid, that is a feed in tariff. You can call it something else (VOST) but the financial model effects are the same. The revenue is not savings and most likely will be considered taxable ordinary income. Some legal opinions also make the case that a customer using a VOST would not be eligible for the ITC.
I understand why the term feed in tariff is nowhere near this report, and why the proponents of this policy are using VOST as the acronym; but between us solar advocates, VOSTs = FiTs.
Are VOSTs good for the long term solar market?
Feed in tariffs had their purpose to generate interest and comfort in the solar energy markets. What worked in Germany over the past decade has not been what created the solar market in the US today. The top solar markets in the US now exceed the German capacity being deployed and many German solar customers are now using their solar production as opposed to selling it to the grid under the feed in tariff.
Moreover, VOSTs are calculated by the regulatory board. Keep in mind that the initial policy passed 3-2, meaning one swing vote can kill the solar market. From the report:
Each year, a new VOS tariff would be calculated using current data, and the new resulting VOS rate would be applicable to all customers entering the tariff during the year. Changes such as increased or decreased fuel prices and modified hourly utility load profiles due to higher solar penetration will be incorporated into each new annual calculation.
Customers who have already entered into the tariff in a previous year will not be affected by this annual adjustment. However, customers who have entered into a tariff in prior years will see their Value of Solar rates adjusted for the previous year’s inflation rate as described later.
Commerce may also update the methodology to use the best available practices, as necessary.
Going back every year to justify, plead, and beg for a VOST that hopefully make the solar market survive for another 12 months is crazy and instantly takes away any long term investor from coming into the market. Getting rid of a strong net metering policy for a 12 month window of survival is a very short sighted view by those trying to get in and get out. Let’s take another look at VOSTs and see that NEM policies the backbone of what got solar to where it is today, not a short term regulation.
(Author’s Note: It’s been pointed out that the last paragraph is confusing. The VOST tariff rate between the utility and site host is fixed for the term of the agreement. The threat to the industry is the potential cliff at each regulatory review which I seek to point out in the last paragraph.)