Last month Minnesota became the first state to adopt a formula for calculating a “value of solar” policy. The move is a response to the net metering fights that are beginning to rage across multiple states in which utilities are pushing back against rooftop solar customers that want to be credited for excess solar power they put on the grid.

Utilities are rightfully fearful that rooftop solar and net metering is a direct threat to their business model. At the heart of the “value of solar” policy is the idea that customers would generate payments from their excess solar based on an approved value of solar, rather than bill credits, which intrinsically are linked to the retail electricity rate. Under current net metering, a bill credits policy is the standard.

Additionally the policy pegs solar power at a 25 year contract rate rather than a fluctuating solar price. Customers are capped at 120 percent of annual on site consumption with generation beyond that being forfeited to the utility.

The 25 year locked in contract rate would impact borrowing/financing costs for solar because it gives lenders long term visibility into what sort of payments solar customers can expect. It would be a modest aid in lowering financing costs for consumers.

The idea behind the “value of solar” concept is that utilities should pay a price for solar analogous to what utilities have avoided paying by having access to that power. For example, a utility avoids building additional power plants, gets fixed prices over the long term from its generator (rooftop solar customers), and potentially reduces distribution/transmission costs.

The goal of the Minnesota policy is to find some compromise that will keep utilities and customers happy. Institute For Local Self-Reliance’s John Farrell, who authored a report on the policy, writes:

The value of solar delivers a transparent, market-based price for solar. It solves problems for utilities and for utility customers around compensation for distributed renewable energy generation. But its ultimate success lies in whether electric utilities can be convinced that accommodation of customer-owned power generation is in their best interest, or whether any concession of their market share is a deadly threat to their economic livelihood.

To be fair, determining the “value of solar” is complex and in Minnesota it included 8 separate factors, ranging from avoided fuel cost to avoided distribution capacity to avoided environmental cost.

No doubt utilities will gripe about the accounting that forces them to pay for avoiding non tangible costs like carbon emissions avoidance, which were pegged to the national social cost of $37 per metric ton.  This is truly a first, forcing utilities to account for the environmental cost of carbon emissions. On the other hand, some of the cost avoidance is very tangible, given the fact that no utility can get a 25 year locked rate on natural gas, the cost of which I believe is likely to increase over time.

The ultimate value of solar has not yet been finalized in Minnesota but there’s a significant disparity between what the utilities want (7.4 cents per kilowatt-hour) and policymakers’ draft value (14.5 cents per kilowatt-hour). But even some compromise, like 10 cents per kilowatt-hour, would be a victory in the sense that solar customers would begin viewing the system as offering a locked in value of power generation and not a bill credit.

All this raises a question: What’s in it for the utility? Well, the price of retail electricity ticks up a few points every year. Under net metering, customers get credits based on power. Those credits increase in value as retail power rates go up. But under “value of solar,” remember that the solar value is locked in for 25 years so utilities will be locking in a low rate. If anything, rooftop solar customers are likely to see their bill creep up because they’re paid a fixed rate for their power, a rate that’s determined today. Also important is that under value of solar, renewable energy credits are transferred to the utility, not kept by the generator.

Unfortunately, adoption of “value of solar” is at the discretion of Minnesota utilities. It would take a bold utility with a long term outlook to adopt it. I view that as unlikely though the prospect of avoiding protracted net metering fights could spur utilities in other states into considering the new policy. Because fight as they may, utilities can’t avoid the reality that rooftop solar is here to stay. And their power’s getting more expensive while solar power is only getting cheaper.