Questionable Cost Concerns Slow Net Metering

Net metering, which enables utilities to reimburse customers for solar power, is being reconsidered in many parts of the United States. The quarterly report “The 50 States of Solar,” published by the NC Clean Energy Technology Center in February, revealed 23 states changed their net metering policies during Q4 of 2014.

Will these adjustments, driven by requests from investor-owned utilities and the American Legislative Exchange Council (ALEC), stunt the growth of the consumer solar industry?

“I like the term ‘under fire’ because it really captures the fact that it’s in the target sights of a lot of utilities,” said John Farrell, director of democratic energy at the Institute for Local Self-Reliance. “In a lot of states, they’re launching a tax on net metering either through the legislature or through the regulatory commissions, trying to put taxes or fees on the customers that use net metering, or trying to shift the structure that all those customers use from volumetric pricing toward net prices.”

These proposals that may limit net metering and virtual net metering may substantially decrease growth in community solar. Virtual net metering allows low-income communities to share credits from community solar projects.

“I think community solar laws and virtual net metering are incredibly important,” Farrell said. “It’s a shame that only 11 states allow it. Only about 25 percent of Americans own a sunny rooftop that they can put solar energy on.”

Cost Concerns

Why is net metering being reined in by utilities? There are two aspects of revenue that concern utilities, Farrell said. Customer revenue is one aspect, but another involves shareholder returns.

A 2014 study by Lawrence Berkeley National Laboratory (LBNL), “Financial Impacts of Net-Metered PV on Utilities and Ratepayers: A Scoping Study of Two Prototypical U.S. Utilities,” showed the rapid growth of customers using net metering could impact overall return on equity (ROE) for utilities by 5.7 percent to as much as 20.2 percent if 10 percent of the residential market adopts solar power.

Impacts on customer costs were much lower. The LBNL report shows that even if solar adoption expands to 10 percent, customer rates experienced by two model utilities would only increase by 2.5-2.7 percent.

A 2014 report from ALEC, “Reforming Net Metering: Providing a Bright and Equitable Future,” raised concerns about unfair cost shifting among residential customers in which those who do not own solar would pay higher costs while those who did own solar saved money. ALEC said it considers this to be a social equity issue. ALEC has since produced a legislative resolution to propose adjusting fees so that solar customers pay higher costs toward grid maintenance and other expenses.  

Edison Electric Institute, which has advised utilities to encourage customers to be concerned about net metering, did not respond to a request for comment.

Are the adjusted fees that ALEC supports really justifiable? According to some in the solar industry and environmental community, they may not be.

“There is an argument we’ve seen that net metering shifts the costs onto other customers,” said Sean Gallagher, vice president for state affairs at Solar Energy Industries Association. “You really need to do a proper analysis to determine whether that’s correct. It’s insufficient to simply assume that because a customer’s bill is shifted, that bill is shifted to another customer.”

Cost-Benefit Tradeoffs

The core difficulty appears to be a problem with how utilities value solar.

“In states like Minnesota, where the politics are a bit more progressive, we get a value-of-solar law,” Farrell said. “The value of solar in Minnesota is higher than the net metering price.”

There are many factors that, if taken into account, might show that net metering benefits utilities substantially. According to Gallagher, these factors include avoided energy costs, avoided capacity costs, avoided distribution and transmission upgrade costs, avoided line losses, quantified suppression of market prices, and avoided costs of pollutants — SOx, NOx and carbon.

According to “A Review of Solar PV Benefit and Cost Studies,” a report published by Rocky Mountain Institute in 2013, states are having difficulty valuing how solar benefits distribution, changes the cost of grid support services, benefits grid security, creates social benefits, and reduces the environmental impacts of energy production.

The NC Clean Energy Technology Center report quoted the Regulatory Assistance Project as saying that potential cross-subsidies could flow either from distributed generation customers to non-participating customers or the other way around.

At the end of 2014, the NC Clean Energy Technology Center report said, “Net metering policy in the largest distributed solar markets was characterized by near-term expansions of net metering policies balanced by investigating future, more substantial changes to net metering policies. States are varying in their approach to cost-benefit analyses, considering the value that solar provides to utilities, and adjusting utility financial incentives and benefits to account for the benefits of solar.”

In Q4 of 2014, the report said, “There was action on five utility proposals to enact charges specific to net metering customers. PNM Resources in New Mexico and Salt River Project in Arizona both proposed substantial new demand charges on net-metered customers. Black Hills Energy in South Dakota withdrew a proposal that would have required new net-metered customers to go on a special tariff that included a demand charge. Conversely, if South Carolina’s net metering settlement is approved, utilities will not be permitted to propose specific customer charges until 2025.”

According to Smart Grid Today and The Washington Post, Salt River Project’s net metering charge has been enacted and is now in place.

There has also been substantial action in Hawaii, where solar power’s market popularity and competitiveness are considerable. According to the NC Clean Energy Technology Center report, a January proposal to increase the circuit threshold for solar, proposed by Hawaiian Electric, would have ended net metering, reducing credits for solar electricity from the retail rate ($0.295-$0.359/kWh) to a much-reduced tariff ($0.147-$0.223/kWh).  

Proactive Solutions

Some states are thinking proactively about how to address these financial challenges for utilities. California, New York, Minnesota, Massachusetts and Hawaii are considering restructuring utility regulation to better accommodate solar, the NC Clean Energy Technology Center report said.  

According to Farrell, utilities should look forward, not try to retain their 20th century business models. “Solar and distributed renewables are simply what’s going to make sense for the grid. We’re going to move toward a grid where there’s no monopoly for that distribution system. They’re going to be providing a platform where all sorts of people can transact. The technology we have these days is pushing us in that direction. Utilities are going to want policies that encourage private entities to generate energy and supply it to the grid system.”

However, Farrell said, the road to a utility business model that includes solar is unclear. “I don’t think many [utilities] see what it will look like,” Farrell said. “They’re really scared. The only thing we can think of doing now is to fight back and protect the way it has been.”

Utility Dive surveyed electric company executives and published the results in January.

“Executives responded that they know there is a future in distributed generation but they do not have a business plan for it,” Farrell said.

“There’s a lot of cultural inertia,” Farrell said. “It has mostly been a delaying action. I think [utilities are] just trying to buy time. Utilities do understand that the nature of the electricity system is changing.”

Lead image: Question marks. Credit: Shutterstock.

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A former mechanical engineer with graduate training in journalism and environmental studies, Kat Friedrich is a self-employed writer focusing on energy, sustainability and technology. She is the editor of Yale University's Clean Energy Finance Forum news website.

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