At first glance this is a pretty straight forward issue. If you put solar modules on your home or business, you are generating clean, emissions-free electricity. Right? Well, it depends…in part on how you paid for your system. If you bought it either with cash or with your own source of financing, you can claim that your electricity is clean. If you worked with a third party to install solar as part of a power purchase agreement (PPA) or leasing arrangement, it is likely that you don’t have a claim to the “cleanness” and “greenness” associated with your electricity.
This not only has implications for greenhouse gas (GHG) accounting for individual residents or businesses but also California counties and cities that are trying to estimate how a large uptick in distributed solar projects in the last couple years affects their climate action plan. For that matter, it also could affect how California estimates the effects of distributed solar on statewide GHG emissions.
Renewable Energy Credits
My EPIC colleague Nilmini Silva-Send has posted recently on this blog about renewable energy credits (see here, here, and here). Her posts do a good job of explaining what renewable energy credits (RECs) are and how they work. To summarize here, RECs are the clean energy attributes of renewable electricity. By way of analogy think about milk. When you milk a cow you have both milk and cream, which can be sold separately. Renewable electricity similarly can be seen as two products – electrons and renewable attributes (or “greenness”). The upshot here is that when you split electricity into two products and sell off the renewable attributes or RECs, you are left with “null” power, which has the same environmental impacts or attributes as the average electricity from the grid.
As Severin Borenstein explained in a post earlier this year for UC Berkeley’s Energy Institute at Haas blog, solar companies that own the system and sell you electricity or lease the system to you typically own the renewable energy credits and are basically selling the customer the remaining “null” power. In such cases, as Borenstein explains, you can’t have your cake (claim that your electricity is renewable) and eat it too (allow your solar provider to sell your RECs, presumably in exchange for a slightly reduced energy rate).
Trends in Third Party Ownership
The third party ownership model for solar emerged in the mid-2000s but really took off around 2010, when it accounted for about 20% of all new installation in California. It has helped to expand the solar market and has made it easy to get customers to “yes.” The figure below shows this trend.
Source: U.S. Solar Market Insight Report, Q3 2012 via US DOE
In 2014, according to GTM, 72% of all new installations nationwide were third-party-owned. A quick look at publicly available data on solar in California (see CA Solar Statistics) to determine the capacity of systems owned by third parties was inconclusive since the data set appears to be incomplete, at least as far as indicating whether systems are owned by third parties. Nonetheless, given the trends in the figure below including the projected decline in market share, it is likely that about half of all systems would fall under third party ownership model.
Implications for GHG Accounting
The prospect of having null power on rooftops throughout the community raises a couple issues related to GHG accounting. First, it will increase the total level of emissions in a GHG inventory. When determining the level of emissions in a particular geographic area (e.g., city or county) for a GHG inventory, we start with the total electric supply – often called gross generation. We are not concerned only with the electricity supplied by the grid but also the electricity self-generated by customers, after all some of that generation has emissions too (think cogeneration). If only a portion of the self-generated PV is emission free, the total emissions will be higher than if all of it is.
Second, if only half of the electricity generated by distributed PV is emissions free, then the GHG reductions into the future from that PV will be smaller. This effect may be minor today but as the amount of PV increases and supplies a higher percentage of gross generation, it could be more significant. As noted above, some have projected that the market share of third-party owned systems will decline. Nonetheless, they will represent a large proportion of currently installed systems and likely will continue to be a sizeable chunk of the market.
To illustrate the potential effects of third-party ownership on GHG accounting, we developed a simple example (figure below). We took the CEC electric forecast for SDG&E to see what would happen if we assumed that half of the distributed PV was null power. We also assumed that all RECs were owned by the third-party company, which may not be true in all cases, including some large commercial or institutional systems. Nonetheless, here is what we found. (For basics on climate projections see this post) While the emissions for the baseline year (2014) and business-as-usual projection would increase slightly (an average of about 1.5% or 100,000 metric tons CO2e), the level of emissions after we took into account the effects of increased PV and the Renewable Portfolio Standard (RPS) through 2030 increased by almost 5% (or 275,000 metric tons CO2e) by 2020 and about 14% (or 600,000 metric tons) in 2030. In other words, if we don’t take into account the REC ownership issue for third-party owned systems, we could be underestimating the overall level of projected emissions and overestimating the potential reductions resulting from distributed PV.
The range of error in GHG accounting is relatively high. It is necessary to make assumptions and rely on forecasts and model results, which contain their own range of error. And the third-party ownership of PV systems is no different. While we suspect that a large chunk of distributed PV installed in CA could be considered null power, we have little evidence to back up this suspicion. As mentioned above, the publicly available data on this is spotty at best. Further, even if we did come up with a good estimate of how many PV systems were owned by third parties, we would then need to know how many (if any) customers own the RECs. More assumptions! On the other hand, not attempting to quantify an effect that we think is probably not zero could compound the errors in the process. And as the amount of installed PV grows, so to0 will the overall error in our GHG estimates.
I want to be clear that third-party-owned systems represent additional PV and reduce overall emissions. It is just a matter of who gets to claim those reductions. It is really a GHG accounting issue, which seems to be playing an increasingly important role as we attempt to demonstrate that the reductions we think we are getting are real, additional, and verifiable. As I have written about before, it is important that we identify these sorts of issues and develop commonly accepted methods to address them.