Whether you’re looking at solar for your home or business, the amount you currently pay for electricity will play a major role in the ultimate economic proposition. Naturally, the cost of electricity produced by the solar system will be compared to what otherwise would be charged by the utility, to determine your short- and long-term savings.
Many people don’t realize, however, that the electricity pricing in many markets is intentionally designed as a significant incentive to go solar. Let’s take a look at the three primary ways in which electricity is priced in the U.S.:
Static Pricing: Utilities using static pricing charge a fixed amount for each kilowatt-hour of electricity delivered. No inherent incentive (in rate design, at least) for solar or energy efficiency. Most major utilities no longer utilize this sort of rate structure.
Tiered Pricing: Most utilities use tiered pricing for residential and commercial customers, at least for a portion of the year. Under tiered pricing structures, customers are charged a low rate for a specified amount of usage, and then higher per-kilowatt amounts for usage beyond this baseline. The more you use, the more you pay. Such rate structures are designed specifically to encourage on-site electricity production and conservation.
By way of example, Southern California Edison (SCE) utilizes five pricing tiers for its primary residential rate schedule. At Tier 1, electricity costs 12.6 cents per kilowatt-hour. Those who use lots of electricity, however, end up paying Tier 5 rates of 31.2 cents per kilowatt-hour. This means, of course, that the latter units of electricity consumed cost nearly three times more than the first units.
|SCE 2012 Schedule D (Domestic)|
Those who use high-priced Tier 4 and Tier 5 electricity will find significant financial benefit in installing even a relatively small solar system, as each kilowatt-hour produced by solar will result in a high avoided cost (what they would be paying SCE) relative to the cost of electricity produced by the solar system. Put another way, your solar system reduces the amount of electricity purchased from the electricity, thus ensuring that our hypothetical homeowner never again pays Tier 4 and Tier 5 rates. In many cases, in fact, it’s a no brainer from a financial standpoint. By design, tiered rates are an important incentive for installing residential and commercial solar.
Time-of-Use Pricing: Utilities predominantly use time-of-use pricing for commercial customers, but such rate structures are slowly making their way into the residential sector. As one might assume, under time-of-use rates the customer pays varying amounts for electricity depending on the time of day the electricity is consumed. Generally, prices are higher when electricity demand is high, such as summer afternoons, and lower in the evening and in cooler months. Time-of-use pricing typically requires a ‘smart meter,’ and generally provides even more encouragement for solar and energy efficiency measures than tiered-rate pricing.
In fact, time-of-use rates make solar particularly attractive since peak pricing tends to occur in the middle of the day during summer months – precisely when solar systems are operating at their maximum efficiency. As such, solar works very well at ensuring that those on time-of-use rates don’t pay high energy costs for using electricity during periods of peak demand. Even if, however, you’re not using electricity at periods of peak demand, but your system is generating electricity, you will (thanks to net metering) receive a bill credit equal to the retail rate in effect when that electricity is produced. When you later need to purchase electricity from the utility (at night, for example) your credits will go a long way in buying electricity at the much-lower rates in effect at that time.
That means, for part of the year at least, residential solar owners on time-of-use rates may be credited $.30 per kilowatt-hour or more for electricity produced during the day, but then buying electricity in the evening at $.10-$.12 per kilowatt-hour. Again, businesses and homes on time-of-use rates should take a close look at solar to reduce their energy costs.
Some have charged that tiered, time-of-use, and other forms of dynamic electricity pricing are an indirect subsidy to solar owners, since they avoid paying considerable sums to utilities. These critics are missing the point. As mentioned already, dynamic electricity pricing is expressly designed to send market signals to customers and – should they find themselves paying more for electricity than they would prefer – encourage them to explore options (including solar) for reducing electricity costs. In fact, they can help make your solar purchase one of the smartest investments you’ve ever made.