Our Take: Complicated Economics of Community Solar Gardens Subject of Debate

The Star Tribune recently ran an article called “Complicated economics of community solar gardens subject of debate.” Seeing how the Strib did not seek our opinion on the topic for their article, I’m providing it below.

First and foremost, Minnesota’s Community Solar installations are a mess. These solar installations are small, inefficient, and expensive. According to the article in the Star Tribune, Xcel Energy currently purchases power from the solar gardens at a price of 13.5 cents per kilowatt hour, which is 4.3 times more expensive than the electricity generated at the Sherburne County (Sherco) coal-fired power plant in 2016.

Cost data for Sherco are gathered from the Federal Energy Regulation Commission (FERC) Form 1

What’s worse, community solar is more expensive than other forms of solar. For example, utility scale solar can take advantage of economies of scale. Xcel produces solar electricity for costs between 7.5 cents and 8.5 cents per kilowatt hour, which is still about 2.5 times more expensive than electricity from Sherco, but less expensive than Community Solar.

Amazingly, 58 percent of Minnesota’s solar comes from more-expensive Community Solar installations. That means these “solar gardens” are an incredibly bad deal for Minnesota families and businesses who must pay more for their electricity.

How much more? The Star Tribune article states the Community Solar initiative cost Xcel (and therefore electricity consumers) about $85 million per year last year, and these costs are expected to double to about $170 million in 2019. According to the utility, this increase in costs will result in customers paying an extra $39 dollars.

It is important to note the extra costs associated with Community Solar will not be transparently displayed on electric bills, they will be hidden in the fuel cost charge, which primarily includes the pass-through costs for natural gas and coal.

Xcel opposes Community Solar gardens largely because they have no financial incentive to support them.

As the Strib puts it:

“Xcel buys power from solar gardens and administers the program but makes no profit, although it gets credits to meet state solar energy goals.” [Emphasis added]

Solar garden subscribers effectively buy the output of independent power producers, who in turn sell their electricity to Xcel, which then distributes it onto the grid. Solar garden subscribers receive a credit on their Xcel bill equal to the output from their share of the solar garden.

Essentially, Xcel and the solar gardens are scrambling after the same subscribers, Chan said. “Community solar gardens are by far [Xcel’s] largest form of competition.” [Emphasis added]

The fact that Community Solar gardens are owned by independent power producers means no 10 percent profit on capital for Xcel, and it means they must spend time and resources administering these programs. Community Solar also increases electricity rates, which reduces demand for electricity, so it makes perfect financial and business sense for Xcel to oppose Community Solar.

Although Xcel’s opposition to Community Solar may stem from a rational self interest, the utility company isn’t wrong. Community Solar is a bad deal for Minnesotans, no matter how renewable energy advocates try to spin it.

Unsurprisingly, those exact renewable energy advocates took issue with Xcel’s accounting methods for the Community Solar program. According to the Strb article:

“Clean-energy advocates and solar power developers say Xcel’s calculations don’t consider “avoided costs” derived from the solar gardens, including damage to the environment from fossil fuels. In other words, “How much is Xcel not spending?” said Gabriel Chan, an assistant professor at the University of Minnesota’s Humphrey School of Public Affairs.”

“Xcel, and its customers, will avoid spending money on gas or coal for fuel since sun is free, Chan said. As the solar gardens grow, Xcel also can avoid costs of building new fossil-fuel power plants and maintaining old ones, he said. Some transmission costs are avoided because solar gardens tend to be close to power customers.”

So, how much is Xcel not spending?

The short answer is about 2 cents per kilowatt hour, meaning the cost of Community Solar is 655 percent more expensive than the “savings” it would provide.

The longer answer is below.

Unfortunately, Assistant Professor Chan furthers a pervasive myth that wind and solar can actually replace fossil fuel or nuclear plants. This is simply not the case. Wind and solar only produce electricity when the wind is blowing or the sun is shining. In Minnesota, wind produced electricity about 35.5 percent of the time in 2016, and solar produced electricity about 15.7 percent of the time.

This means that despite the enormous investment and extra costs associated with wind and solar power, Minnesotans will be required to pay for maintaining its existing coal and natural gas plants to fill in the gaps 64.5 percent of the time for wind power, and 84.3 percent of the time for solar. Furthermore, Minnesota has built more power plants after the renewable energy mandate was passed in 2007, even though demand for electricity has been essentially flat.

Power plant data is from the United States Energy Information Administration

Most of these power plants have been wind and solar installations, but many of them have been the natural gas plants (i.e. new fossil fuel plants) used to ensure reliability by providing electricity when the wind isn’t blowing or the sun isn’t shining.

And remember, electric companies in Minnesota are government-approved monopolies that are guaranteed to make a 10 percent profit on every single dollar they spend on infrastructure, which means ratepayers must pay for the fixed costs of coal and natural gas power plants regardless if they are used or not.

On the other hand, there will be avoided costs for coal and natural gas through the Community Solar program if the sun is shining, but these savings are vastly overstated. The fuel cost per kilowatt hour of electricity for coal is about two cents, but ratepayers must still pay the fixed costs for coal and gas plants, like capital costs and paying employees etc. Therefore, the entire argument that Community Solar can provide some windfall of cost savings for consumers is completely unsupported by the data.

Spending 13.5 cents to “save” 2 cents makes no sense. At the end of the day, Community Solar costs 655 percent more than it “saves.” The Community Solar program means Minnesota is building solar power in one of the most expensive ways possible, which is why we should dismantle this wasteful program as soon as possible.

If nothing else, the high cost of Community Solar should have it’s own line-item on the electricity bill of every Xcel Energy customer. After all, sunlight is the best disinfectant, right?