Solar Tax Matrix Part 1

This article is longer than usual, so I have broken it into two parts. I start this month with a discussion on a utility’s fixed costs incurred to provide service to all customers when they need it and how those costs are recovered. I will conclude the article next month with a discussion on how solar customers are subsidized by non-solar customers without a specific solar charge.

Al Gore visited the Alabama Black Belt back in February. AL.com reported, “… he spent about half an hour in Hayneville railing against corporate greed, investor-owned utilities, environmental injustice and, of course, climate change.”

Mr. Gore criticized Alabama Power for what he called a “solar tax” on residential customers who install solar panels on their houses that is higher than what other utilities charge. He said, “We ought to sharply reduce, if not eliminate, the solar tax here in Alabama. It’s really a disgrace that this southern state, with abundant sunshine, is deprived of the advantages of the solar revolution being enjoyed by people all over the world simply because the monopoly electric provider has dominance, and total political control over the policy makers and law makers in the State of Alabama. It’s sad.”

Mr. Gore’s “solar tax” is a reference to Alabama Power Company’s Capacity Reservation Charge for customers that have solar generation at their home. He and environmental groups allege that the Capacity Reservation Charge inhibits the use of solar power by Alabama homeowners and businesses. The Capacity Reservation Charge is being challenged at the Alabama Public Service Commission by the Southern Environmental Law Center (SELC) as “…unreasonable, unjustly discriminatory, contrary to the public policy, and otherwise unlawful because it makes it more difficult for solar customers to recover their investments in solar panels.”

Mr. Gore and environmental groups know better, but are more interested in advancing their renewable energy agendas than in protecting the poor people in Alabama. Their arguments ignore the fact that there are real costs associated with making electricity available to all customers 24 hours a day, 7 days a week, even if a customer gets a majority of their electricity from rooftop solar panels. Without Alabama Power’s Capacity Reservation Charge, the people in Alabama who do not have solar panels or cannot install them on their houses would pay more for their electricity because someone has to pay for the on-demand electric service for Alabama Power’s solar customers.

To understand that fact, and understand that Alabama Power is not profiting from the Capacity Reservation Charge, you need to understand the electric utility cost structure and the electric utility rate structure.

About one-third of an electric utility’s cost goes to repay the utility’s investment in its distribution system. That investment is in the distribution poles, transformers, wires and equipment you generally see along the roads and in your yard or neighborhood. That expense is a fixed cost. Those costs are incurred regardless of how much electricity any customer uses or how much electricity the utility sells.

A second third of the utility’s cost goes to repay the investment in electric generating plants and high-voltage, cross-country transmission lines, substations, and other transmission facilities needed to move large amounts of electric power from the generation plants to population centers where people live and electricity is used. Those expenses are also fixed just like the distribution expenses and are not dependent upon how much electricity any customer uses or any amount the utility sells.

The final third of the utility’s cost is spent to make or generate electricity. That cost is used to buy or convert a fuel, such as natural gas or coal, to electric energy that can be transmitted across transmission and distribution lines to keep the lights on and businesses running. Those generation costs are variable because they are dependent upon how much electricity is used or generated.

Think of the fixed costs as your car payment that must be paid regardless of how many miles you drive. If the car sits in your driveway all month, you still have a car payment. The variable generation costs are like the cost of gasoline for your car. The more you drive, the more gasoline you pay for and use. Just like your car payment, the fixed costs of electric service must be paid regardless of how much electricity is used.

Utility rates are not generally structured to collect fixed costs in a monthly fixed customer charge. They are based more on the amount of electricity consumed rather than the fixed costs required to serve the customer. Fixed costs are recovered over time through the usage charge so long as all customers participate and use electricity from the utility. However, when a customer reduces the amount of electricity they buy from the utility, for instance with installed solar panels, they do not pay their share of the fixed costs incurred to provide their service. Other non-solar customers have to pay more to make up the difference. It is like you paying part of your neighbor’s car payment because he uses Uber.

I will continue the article next month by discussing why a utility’s Capacity Reservation Charge prevents the subsidization of solar customers and actually helps the poor people the utility serves.

I hope you have a good month.