Utilities and Net Metering

Why do some utilities seem to dislike net metering? –John Smith, Bertha, Minnesota

Net metering has become the main policy for homeowners and businesses in the United States to generate onsite renewable electricity, often with photovoltaics (PV), and offset their bills at retail rates. Net metering is a state-level policy, and all but a few states currently have a net-metering policy for at least some consumers at certain types of utilities. Residential customers of investor-owned utilities are the most commonly allowed.

However, net metering can raise potential concerns for utilities, such as:

  1. At what point does net metering stop looking like energy efficiency and start looking like a competitor who sells higher priced electricity than could be found elsewhere?

  2. Will other customers have to pay for these higher rates and is that fair?

  3. If net metering is adopted by a significant percentage of customers in the future, how will the utility continue to cover fixed costs as revenues decline?

  4. Is the utility providing a storage service with the electric grid, for which the costs aren’t being compensated?

  5. Can renewable energy be acquired elsewhere at lower costs than through net metering?

At the same time, net metering can potentially provide utility, social and generator benefits, such as:

  1. Reduction of air emissions (social)

  2. Lower costs of energy during some peak time periods (utility)

  3. Some peak capacity benefits (utility)

  4. Avoiding transmission and distribution losses (utility)

  5. Avoiding the need for batteries (generator)

  6. Getting paid more for your renewable electricity than wholesale rates (generator)

What has resulted over the years is social compromise in many states — one that has been highly contentious in some cases. On one hand, net metering is allowed, but there are limits to how large a system can be, what happens if/when you generate more than you consume in a month or year and how many customers can utilize net metering. As with most political compromises, utilities and generators have different degrees of happiness on the details.

Ultimately, not all utilities are the same, and in many ways their differences reflect their business needs or corporate culture. Rural utilities generally have higher fixed costs per customer than urban utilities and are more sensitive to reductions in electricity sales to cover these costs. Some utilities are very sensitive to “cross-subsidization,” i.e. a few customers benefiting at the expense of others. Still others have supported net metering for a long time and actively support customer-sited renewable generation. If you looked at 10 different utilities across the country, you would get 10 different net-metering situations.

It is interesting to note that Germany, the world’s largest photovoltaic market, doesn’t use net metering at all. Instead, PV systems are generally connected on the “utility side” of the meter, sending the solar electricity directly into the distribution grid — the onsite electric bill doesn’t change. This removes many of the utility’s net-metering concerns, and the debate becomes how to fund feed-in tariffs (general tax, electricity tax, carbon tax, etc), and not about revenue loss, cross-subsidization or other utility operational issues. While not necessarily easier, many issues are somewhat simplified.

Retail rates are usually set by a cost of service study that estimates what generation, transmission, distribution and customer service costs are associated with each customer class — usually residential, commercial and industrial. Residential loads tend to be smaller and “peakier” than commercial or industrial loads, which means that it costs more — mostly in generation and distribution (poles, wires, and transformers) — to supply a kilowatt-hour in this sector than to industry. While net metering is convenient and relatively simple for the customer, some of the costs of serving the customer (e.g., customer service, poles and wires) haven’t changed. So some utilities believe that the value of electricity fed back into the grid is less than average retail rate, and net metering is therefore a subsidy.

In fact, all of this is much more complicated. Rate making is chock-full of “cross subsidies,” both within the residential class and across classes. Rural and densely packed customers (think New York City) cost more to serve than suburban customers, but we don’t draw such distinctions. Nor do utilities “red line” customers who are poor credit risks. Residential customers generally don’t need the high reliability levels demanded by commercial and most industrial users, though they pay as if they do.

Rates reflect cost, but not necessarily marginal costs. From a marginal cost perspective, a net-metered customer may in fact be providing power to the local grid that is much cheaper than peak electricity costs to generate and deliver. There may well be circumstances where customers are subsidizing the rest of the system through net metering.

In the end, most utilities and their regulators don’t want to do battle with customers over who might be subsidizing whom. So long as the number of net-metered customers remains manageable and there is not broad under-recovery of costs or cross-subsidization, most utilities shouldn’t be headstrong opponents.

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Mike Taylor is currently the Principal of Knowledge at the Smart Electric Power Alliance (formerly the Solar Electric Power Association), having previously served as the Director of Research, Director of Research & Education, and Technical Services Manager. While at SEPA, Mike has published dozens of reports, hosted dozens of webinars and conference sessions, successfully applied for and managed several U.S. DOE grants, and has extensive contacts and experience within the solar industry.

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