What’s behind the two cents per kilowatt-hour that TECO pays to people who produce more energy than they consume (so-called net producers)? Profiteering, based on my analysis. TECO appears to earn a profit from net solar energy producers because its two cent purported “cost of generation” is not accurate.
TLDNR: Tampa Power appears to profit off homeowners that produce more energy than they consume by paying less than the fair market rate for it, and reselling that energy to its customers at full rate.
The Starting Point: Tariffs
Have you ever looked at the “tariff” of your power company? That’s the document that sets the rate you pay for electricity. It can be an insightful (though difficult) thing to understand. Tampa Electric Company (TECO) tariffs can be found online, and include the rate it pays homeowners for their solar production (buried in Schedule 3, the NM-1 rate for net metering, which then refers to the COG-1 rate paid to net producers of solar power, found in Schedule 8). That rate varies, but it has been widely reported as being about two cents per kilowatt-hour. Yet consumers pay about twelve cents per kWh for electricity they consume. Is the cost of power really 85% for distribution?
I was recently looking into solar for my own home, and started digging into why the rate TECO pays homeowners for energy they contribute to the grid is so much less than the rate homeowners pay for their own electricity. (Note: by this I mean extra energy contributed by the homeowner, above what they consume over the course of a year: the “net producer”.) It was having a big impact on the decision to invest in solar or not and the size of the array.
First, I was surprised to find out that the rate TECO pays is not fixed, unlike the rate we consumers must pay, which is fixed. The residential rate for consumption is set as a result of the Florida Public Service Commission which regulates what power companies may charge for their energy. So I had to dig deeper. That’s where I came across the COG-1 rate and how TECO calculates it.
Second, I would be remiss if I didn’t say that there is good reason for at least some difference between what a homeowner pays to TECO for power they consume and what a producer earns from TECO for extra power they generate. After all, homeowners don’t pay to install the power poles or the wires used to distribute energy. Transmission, maintenance, and administration is no small cost. So the rate paid to homeowners for their excess production should be less. But how much less? One way would be to start with the full rate and subtract the cost of transmission (including maintenance of that infrastructure). Another way would be to start from zero and add up the costs of production. TECO does the latter. On the Schedule 8 of TECO’s tariff, it’s called the COG-1, or “cost of generation” rate.
Whoever came up with that term was clever. It tries to imply that TECO will pay solar producers the same rate as its own cost of producing that same amount of energy. But that’s not really true. When we look into the details of how the COG-1 rate is calculated, we see that TECO appears to pay homeowners a fraction of what it pays to other institutional producers (other power companies), and, most importantly, is also based solely on fossil fuel rates, not newly-developed solar farms.
In Schedule 8, the tariff calculates the COG-1 based on an “as available energy payment rate” or AEPR. So the “cost of generation” title belies what it really is: TECO’s cost of non-renewable fossil fuels–fuel it would have to burn if not for the solar energy added to the grid. The complexities emerge when you consider that energy demand and fuel costs fluctuate, but the ability of the power company to supply energy is fixed (or more accurately, has a maximum output). Depending on how much power the community needs, the rate TECO pays to net solar producers changes. That’s all fine an dandy, but how does it calculate the “as available energy rate”?
“The Company’s Own Production Cost” = Fuel Only Cost
First, we need to understand a key parameter used by TECO to calculate what it pays homeowners. That’s what it calls its “own production cost” which it defines as the sum of its “fuel cost.” (Tariff 8.102):
Notice anything missing from that definition? How about the capital costs of production? No? Just the variable costs, like fuel? Hmm, OK, well, it also defines “fuel cost” as each facility’s “input/output equation, its heat rate performance factor, and the composite price of supplemental fuel.” (Tariff 8.102):
It then further defines supplemental fuel as the “cost for additional fuel” at “market prices” plus the cost of delivery to its facility. Such fuels are “coal, oil and natural gas.” (Tariff 8.103):
Again, no mention of capital costs. It seems that TECO has completely eliminated its renewable energy sources from its definition of its “cost of production” and relies exclusively on fossil fuel. But TECO has a considerable amount of renewable energy as part of its mix of sources, and that amount is set to increase with its proposed additional solar farms. Regardless, it’s clear that TECO pays homeowners for renewable energy based on fossil fuel energy rate. And only that. Why?
Well, Schedule 8 of its tariff is a decade old, and in 2010 there wasn’t a whole lot of solar, especially not homeowner solar. So it may have made sense to define it this way at the time, though I’m still a bit skeptical because 650 MW of Tampa Electric’s energy mix was solar as of 2020, representing about 12.5% of its overall capacity (650 / 5,191). Regardless, it’s clear that the COG-1 doesn’t account for the cost of production of solar and it begs the question about the recent proposed rate hike to pay for TECO’s additional 600 MW of solar energy capacity and whether it’s updating the COG-1 rate to reflect the cost of producing renewable energy regardless of source. As far as I can tell, the COG-1 is stuck in the past, harming residential solar and benefitting TECO. The goal should be for it to pay net producers a fair market rate for the type of energy they produce–and a rate that can actually be reflected by TECO’s own costs if it just incorporated its capital costs of building solar. At a minimum, it should revise the COG-1 to reflect its energy mix that includes 12% solar, and the cost of that generation. Ideally, there would be parity between the type of energy produced and the rate paid (i.e., if you’re a net solar producer, you get paid the fair market rate for solar production, not fuel-based production). I haven’t researched that question deep enough in the recent regulatory application (a crazy-long and complex set of documents), but it seems revision to the COG-1 rate has been completely overlooked by regulators in my opinion. I’ve reached out to the Florida Public Service Commission for comment, and will write another post if and when they do. I also reached out to solar advocacy groups, including
Clean Energy Florida, Votes Solar, Southeast SDN, and Solar United Neighbors of Florida. None responded to this post for any further comment, which I thought was highly unusual. Why not? Do they actually care about solar, or just their own interests? Anyway, let’s move on.
COG-1 Rate Payment Examples
Let’s look at some examples TECO provides for how it calculates the rate it pays net producer homeowners.
In the first example, TECO has enough capacity to serve all the community’s power needs. In such a situation, the solar producers are producing energy, so TECO must reduce its own production so that the net amount of power delivered by both TECO and the homeowners meets the available demand:
I am guessing this is the most common scenario, but who knows. Other examples include when production from net producers is needed to meet demand:
This scneario might occur sometimes, like peak demand, or when one of TECO’s facilities is down for repair or maintenance. A third and fourth examples are also included where TECO buys power from others, “off-system” and some other unspecified producers:
OK. So what’s the takeaway here? Apparently there is some other entity willing to supply large amounts of power to TECO to meet demand, but only at the comparatively high rate of 4.0 cents per kilowatt hour compared to its own cost of about 1.3 cents for fuel-based energy. Why wouldn’t net producers get the same rate? One would think including such an incentive would lead to more people oversizing their solar arrays so that they could sell energy, but no.
Cost of Solar Production > Cost of Fuel Production
Now let’s take a look at the real cost of producing a kilowatt hour of solar energy. To keep the math simple, I’ve made some presumptions, based in part on PVWatts output estimates and didn’t account for the reduced output of panels over their lifetime.
If I’m a DIY’er, the cost of a 10kW system (TECO’s maximum array size under Tier 1) is about $15,000 with a grid-tie microinverter setup on a rooftop with racking, wiring, and production monitoring. I haven’t included any tax incentives here, because it’s unclear to me whether power companies enjoy the same incentives (I suspect they do). PVWatts estimates my annual output in Tampa, Florida at about 16,000 kWh. The panels and inverters have an estimated service life of maybe 25 years (20 to 30). So, the total lifetime energy production from this array would be 400,000 kWh. That yields a per-kWh cost of 3.7 cents without accounting for (presumably negligible) cleaning and tree trimming maintenance. But that’s for a do-it-yourself’er without accounting for the cost of labor to install the system. For most people, they’re going to pay a contractor to install their system. I would estimate that cost, at retail prices (i.e. the contractor’s price of labor and equipment) to be roughly double. So, the retail solar consumer buying a 10kW grid-tie system might expect a cost of $30,000, and the corresponding per-kWh cost is then 7.5 cents. This back-of-the-envelope calculation is actually less than the Federal Government’s reported production cost of 12.8 cents per kWh for residential solar, as of 2020. And for utility-scale production, the levelized cost of electricity (LCOE) is 4.6 center per kWh. So what does TECO pay for homeowner solar energy production?
TECO pays only about $0.02 (two cents) to net producers. Why? Because the cost of generating electricity from fossil fuels is far less than the cost of generating energy with solar, so TECO is making an apples-to-oranges comparison by paying homeowners at its fuel-based energy cost rather than “clean” energy cost.
If we go a step further, it becomes apparent that TECO likely profits from net producers because it isn’t paying them the fair market rate of green energy production. That’s because it charges its energy customers its full cost of production, including its solar (capital) projects, not just the ongoing fuel-based energy cost. Remember, the average homeowner’s electric bill is going up 25% to pay for all of TECO’s new solar farms. Yet there doesn’t appear to be any revision to the COG-1 rate schedule. So the profit margin TECO may earn from homeowner net producers might be 50%–meaning TECO may actually earn fifty percent profit on its resale of your solar energy to its other customers! So why would anyone in their right mind invest in an oversized solar array when this kind of game playing is going on?
Now the above analysis is overly simplistic, but it’s all I had time for without really getting into the nuances. If the Florida PSC or TECO has anything to say about this topic (or any of the solar advocacy groups), why I missed something important, or otherwise, they’re always welcome to chime in.
Lower Cost to Distribute Solar Energy Locally
A further thought came to mind while writing this post. While I’m not an electrical engineer, I seem to recall from college physics that power created and delivered locally is less costly than transmitting power over long distances. Transformers are needed to change the voltage for transmission (high voltage has less resistance). So when homeowners are producing energy and supplying it to the grid, it should (I think) be consumed in the local area. The power company is sending less energy to a neighborhood whose net consumption is less because it’s being offset by some homeowners’ production. Applying that principle more broadly, it seems to me that the more distributed production is, the lower the cost of transmission since it should be consumed close to where it was generated. This is a good thing, and should make the grid more resilient to outages.
So how does that get accounted for in what the power company pays to net producers? Happily, it does. This is where TECO calls it “adjustment factor for line losses.” It seems almost improbable that in a given neighborhood of say 300 homes that there’s a net production. That’s because not everyone has solar, and very few of those that do are net producers. Yet despite that efficiency of local production + local consumption, the power company still charges end consumers who benefit from their neighbors’ solar production the full distribution cost as though all their energy originated from outside the neighborhood. A slight gotcha in the residential rate for people who don’t have solar and benefitting TECO, but not harming net producers.
Public Policy Implications
Where does all of this lead us? Well, it should be apparent that the regulators need to ensure they’re fully addressing the big picture on this growing issue. More people want to invest in solar, but the economics just aren’t panning out. Yet we’re all likely to be forced to pay for TECO’s solar builds by 25% rate hikes while TECO gets away with not paying individual net producers the same rate reflected by the higher cost of renewable energy. Perhaps the Florida Public Service Commission would do well to ensure the COG-1 rate schedule is updated to reflect reality and ensure that Florida homeowners are on equal footing with the power companies. Perhaps a renewables COG rate and a fuels COG rate–each being set according to the costs of production, which TECO would then pay to the co-generator according to the type of power being supplied.
What would also be interesting is to find out if TECO claims any federal tax benefits for net solar producers. That would further increase its profiting from homes that have large arrays installed.