Highlights:

  • Rapid growth in rooftop PV is making net metering a major policy challenge for state PUCs and legislators
  • While there are many potential solutions, they are untried, very complex, or only partially address challenges raised by net metering
  • Ultimately, any successor policy to net metering needs to adequately address the interests of all involved stakeholders
  • States are taking different policy paths, potentially leading to discovery of best practices (i.e. a classic example of states as ‘laboratories’ for policy)

Net Metering is Remaining Policy Uncertainty for Solar

The surprise renewal of the solar investment tax credit at the end of 2015 seemed to promise the solar industry a future free from public policy uncertainty. Such a feeling was short lived, however. Nevada’s contentious decision to change net metering for existing customers has since ignited a national policy debate regarding a practice that has been central to the widespread expansion of rooftop solar in the US.

Net metering refers to a specific rate structure, often established by state statute, that requires utilities to credit excess generation from distributed facilities (in this case rooftop solar installations) at retail rates. Basically, if you have solar on your roof and you generate more power than you need, your meter ‘rolls’ backwards, reducing your utility bills considerably (potentially to zero).

When net-metered distributed systems constitute very low levels of market penetration, the impact on utilities’ revenues and the overall system are relatively limited. However, when penetration levels increase, net metering can have very large impacts on utility economics and force them to shift costs to other ratepayers.

Rapid decreases in distributed solar costs have led to rooftop solar reaching rate parity in many jurisdictions, driving significant growth. Accordingly, net metering is one of the most contentious state energy policy issues right now and will be for at least the next several years.

Understanding the challenges posed by net metering, and their potential solutions, is key to shaping a regulatory system that promotes distributed solar in a fair, economic manner. Much of the discussion so far has been limited to analyzing policies in specific states; this article establishes a basic framework to examine the pros and cons of net metering successor policies more broadly.

This article is part 2 of a three-part series on the future of solar in the United States. Part 1 provides an overview of recent price declines for solar power and discusses how to reach 10% of U.S. generation by 2025. Part 2 (this article) describes the brewing policy battles over net metering and discusses potential successor policies. Finally, Part 3 will discuss the potentially disruptive impacts of solar growth on wholesale energy markets.

Net Metering Always Destined to be Temporary

Net metering emerged as a compromise to benefit distributed generation, particularly solar. Public policy concerns about both environmental issues and consumers’ right to provide their own power led to the policy being broadly adopted beginning in the 1990’s.

Notably, while many states already had net metering policies, the Energy Policy Act of 2005 specifically encouraged states to adopt such policies.

Net Metering Policies in the United States

Net metering mandatory in 41 states

Source: DSIRE

A key aspect of net metering is that it satisfies a central rate-making principle: it keeps rates simple. Customers readily understand the concept of being reimbursed at the familiar retail rate. Utilities also find it relatively simple to administer net metering at retail rates. Maintaining this administrative efficiency is a key challenge for any successor to net metering.

From a utility’s perspective, net metering is problematic for two reasons:

  1. Each utility needs to accept excess generation and reimburse it at the retail rate
  2. Increased distributed solar will decrease retail sales, hurting utility revenues

While the first issue is directly net metering, the second is closely related. By making it cheaper to install rooftop solar, net metering leads to increased distributed solar which reduces retail sales and, depending on regulatory structure, can hurt utility revenues. Although most of the ‘debates’ about net metering focus on the reimbursement question, some utilities are certainly motivated by fear of falling sales (and what they mean when combined with other disruptive factors).

From a rate perspective, reimbursing rooftop solar at retail rates can be problematic because retail rates do not match the cost structure. A utility has significant fixed charges that are currently tied to volumetric rates – basically, rate types do not match cost types.

Reducing the volume of retail sales for a utility thus reduces their reimbursement for fixed costs. A recent study by LBNL supports this concern, finding that net metered solar can reduce both a utilities’ revenue and returns to shareholders.

Although rooftop solar can reduce utility sales and revenues, it can also have other benefits, like deferring distribution upgrades or reducing wholesale power purchases. Accordingly, there have been many “value of solar” (VOS) studies in the last several years that seek to quantify the system costs and benefits of solar.

The scope and methods of these studies vary considerably – they often look at different costs and benefits of solar, making them difficult to compare. On the high side, a study on the value of solar in Maine found that, on a 25-year levelized basis, distributed solar could be valued as high as $337/MWh due to:

  • Reduced energy costs ($81/MWh)
  • Reduced capacity costs ($45/MWh)
  • Reduced transmission costs ($16/MWh)
  • Reduced pollution social costs ($96/MWh)
  • Solar integration costs (-$5/MWh)
  • By reducing market prices ($66/MWh)
  • By mitigating price volatility/uncertainty ($37/MWh)

These numbers are higher than other value of solar studies but they are thought provoking and considerably outweigh the price of rooftop solar. In general, value of solar estimates will vary significantly depending on location, timing, costs/benefits included, and broader market trends.

No Clear Successor to Net Metering

Unfortunately, despite these studies and the broad recognition that current net metering is not a permanent solution, there is no clear successor to net metering.

The overriding challenge is that the ideal solution needs to balance the competing interests of ratepayers, utilities, solar companies, and solar homeowners (whether they rent, lease, or own rooftop solar) with solutions overseen by state PUCs, legislatures, or both.

Impacts of Specific Net Metering Successors on Projected 2050 Distributed Solar PV

Alternatives examined by NREL generally reduced rooftop solar deployment

Source: NREL

Ultimately, whatever solution is chosen will have major ramifications for utility economics, the utility business model, overall customer rates, rooftop solar installations, and carbon emissions. In light of this importance, it is perhaps understandable the debate is becoming contentious.

There are many potential solutions to the challenges posed by net metering. All of these solutions have trade-offs and a combination of several is likely needed. The most important goal is to align the currently misaligned incentives of all major stakeholders.

The rest of this article reviews nine potential solutions, examines their pros and cons, and hopefully provides a clearer picture of the way forward. Unfortunately, not all of these have been tried – PUCs and utilities are conservative by nature and first movers are needed to test how effective these solutions are and identify best design practices.

Suggested general reading:

 

Fixed Charges

By far, utilities’ favored solution to net metering seems to be increasing fixed charges, based on the reasoning that utilities’ fixed costs should be recovered through fixed charges. The North Carolina Clean Energy Technology Center found that 61 utilities in 30 states proposed increasingly monthly fixed charges for residential customer classes in 2015.

Critically, fixed charges are also attractive as they do not require state legislatures to take action to repeal net metering policies. Hence they can be implemented relatively quickly.

At first glance, aligning utility cost and rate structures makes sense and avoids cost shifting to non-solar customers.

However, there is a very good reason rates are structured this way. Including fixed charges in volumetric rates encourages energy efficiency (by making it more profitable) and reduces electricity costs for low impacts consumers (as they use less electricity).

In light of these regulatory goals, it is not surprising that most PUCs have either refused to raise fixed charges or only increased them moderately.

Pros

  • Simple and easy to implement
  • Simple and easy for consumers to understand
  • Maintains utility profitability

Cons

  • Conflicts with major PUC rate making goals
    • Energy conversation
    • Limit impacts on low income ratepayers
  • Can seriously hurt growth of rooftop solar
  • Long term, could drive grid defection from solar with storage

Suggested Reading

  1. A strong opinion piece on why fixed charges are problematic: http://www.utilitydive.com/news/tong-and-wellinghoff-why-fixed-charges-are-a-false-fix-to-the-utility-indu/364428/ 

 

Continuing Net Metering

Okay, this is not really a successor policy to net metering, but is a viable option for many states. Although rooftop solar is reaching high penetration levels in certain states (Hawaii and the Southwest), most states still have relatively limited levels.

While net metered capacity in these other states is generally growing, they still have several years before penetration levels are high enough to threaten utility profitability or cause significant cost shifting. These states can wait several years before they need to adopt a successor to net metering, allowing them to evaluate how effective other states are at net metering successors.

In light of this fact, it may be in the interests of all stakeholders in these states to delay action on net metering until ideal policy solutions prevent themselves (i.e. a wait and see approach).

Pros

  • For many states, there is limited downside to waiting a few years, making this an ideal policy solution
  • Continues a policy that is simple to understand and implement
  • Allows rooftop solar to continue to grow and mature in individual state markets

Cons

  • Not really an option for high penetration states
  • Proactive action to find a successor to net metering could be preferable
  • As customers will install solar based on current policies, will need to either grandfather them in or ensure they are aware that net metering is likely to change

 

Net Billing

This is not a necessarily a widely used term, but it is an apt descriptor. Net billing allows customers to continue to meet their own demand with their excess generation compensated at lower than retail rates. Usually, these rates are based on the utility’s avoided costs – the cost it would take for the utility to generate electricity itself or to purchase it from the wholesale market.

This approach, while reducing financial incentives for solar, directly addresses utility concerns that compensation of excess generation at the retail rate is unfair.

However, value of solar studies have found that the benefits of distributed solar include many factors beyond a utility’s avoided costs. Net billing may thus undervalue the benefits of solar PV to the broader system.

Pros

  • Narrowly deals with compensation of excess generation
    • Does not conflict with other rate making goals
    • Addresses most pressing problem for utilities (cost shifting and remuneration)
  • As long as compensation rate is fixed, relatively simple to understand and implement
  • Also relatively easy to calculate

Cons

  • Narrowly deals with compensation of excess generation
    • Some utilities may still be concerned about declining retail sales
  • Does not necessarily reflect the full value of distributed solar

Suggested Reading

  1. A good example of net billing in practice in Mississippi: http://www.greentechmedia.com/articles/read/Mississippi-Regulators-Strive-for-Compromise-With-New-Net-Metering-Rule

 

Value of Solar Tariff

The many recent studies on the value of solar raise an excellent point about energy choices and rate making: our current framework for addressing the system benefits from different sources of electricity is relatively limited. Rooftop solar has many potential benefits and provides value that should ideally be reflected in in rates; similarly, all other electricity sources have benefits and costs that are not necessarily reflected in current market and regulatory designs.

A value of solar tariff would compensate rooftop solar based on the benefit that it provides to the grid. However, there are three major, interrelated issues: calculating the value of solar is very complex, it can vary considerably over time, and it is highly location dependent.

Ultimately, however, we may want to head towards a system that accurately reflects all costs and benefits for all energy sources. A value of solar tariff would be a great first step and could be a harbinger of more drastic retail regulatory reforms.

Pros

  • Can align interests of ratepayers, utilities, solar companies, and solar owners
  • Ideally, rate structure should reflect the full value that rooftop solar brings to the grid
  • First step in a broader focus on making sure rates and market design reflects benefits and costs of specific electric resources

Cons

  • Exceedingly complex to calculate, varying by location, over time, and by benefits included
  • Serious disputes over what costs and benefits to value
  • No real track record
  • Potentially very difficult for consumers to understand

Suggested Reading

  1. A list of existing value of solar studies: http://www.seia.org/policy/distributed-solar/solar-cost-benefit-studies
  2. An overview of VOS tariffs: http://www.nrel.gov/tech_deployment/state_local_governments/basics_value-of-solar_tariffs.html
  3. An in-depth study on designing VOS tariffs: http://www.nrel.gov/docs/fy15osti/62361.pdf

 

Minimum bills

Minimum bills are somewhere between net metering and fixed charges. Instead of increasing fixed charges for all customers, all customers would have a minimum bill level. If a customer does not have a net metered solar installation, their bills would largely be unchanged as they would use more electricity than the minimum bill level. If a customer does have a solar installation, they would still receive net metering credits but the minimum bill would be a ceiling on how much these reduce their bills.

Overall, this approach has key benefits compared to other options. Unlike increasing fixed charges for all customers, it (generally) only impacts solar customers. Getting the minimum bill right is a challenge – ideally it would be high enough to avoid utility cost shifting but low enough to continue to incentivize solar. It also discourages customers from building large systems that export large amounts of solar to the grid.

In many cases where addressing net metering is urgent, an appropriately-priced minimum bill could be an ideal stopgap solution until better solutions can be developed.

Pros

  • Directly addresses utility concerns about compensation of excess generation not reflecting their fixed cost structure
  • Encourages ‘right’ sizing of customer systems
  • Relatively simple to understand
  • Depending on market design, could continue to encourage solar installations

Cons

  • Depending on design, could negatively impact certain rate payer classes
  • May limit solar cost effectiveness at current levels, reducing installation levels
  • Again, relatively limited track record, so first movers needed to understand practical implications
  • Worryingly, could be unfair to rooftop owners as utilities could get ‘free’ electricity

Suggested Reading

  1. Short but solid discussion of minimum bills: https://energyathaas.wordpress.com/2016/01/04/billing-tweaks-dont-make-net-metering-good-policy/
  2. A short but useful example: http://www.greentechmedia.com/articles/read/why-the-massachusetts-net-metering-compromise-could-be-a-model-for-other-st
  3. Also short, but section 4.3 provides an overview: http://www.nrel.gov/docs/fy15osti/64850.pdf

 

Utility-Owned Rooftop Solar

Basically, the idea is that utilities should be able to own rooftop solar, just like they do existing power plants. They would then sell to the homeowner the electricity that they consume and any excess power sent to the grid would be used by the utility to serve other customers.

However, regulatory changes may be needed to both allow and govern utilities to own distributed solar. Further, few utilities have expressed any interest in owning their own rooftop solar assets and it is not necessarily a natural extension of their business model and expertise.

Pros

  • Aligns interests of ratepayers, utilities, and solar advocates
  • Can continue solar installations
  • Utility control and planning could reduce technical challenges of integrating distributed solar

Cons

  • Could reduce market share of PPA/lease based solar companies
  • Utilities less well equipped to install and maintain solar systems
  • Potentially limited benefits for homeowners

Suggested Reading

  1. Not quite a discussion of utility ownership, but interesting idea about aligning utility interests with rooftop solar: http://www.greentechmedia.com/articles/read/California-to-Test-Incentive-for-Utilities-that-Pick-Distributed-Energy-Ove
  2. Section 4.2 has a solid overview of utility ownership: http://www.nrel.gov/docs/fy14osti/60613.pdf

 

Decoupling

Decoupling is a rate design that separates utility’s revenues from their retail sales. Originally implemented decades ago to encourage energy efficiency, decoupling ensures that utilities are fully compensated for their costs and make a profit regardless of how much electricity they sell.

In this sense, decoupling can align the PUCs and utilities’ interests in maintain the regulatory compact with the public policy goal of allowing rooftop solar.

However, decoupling is only a partial solution to net metering – it only addresses utility concerns about declining retail sales and not about the compensation of excess generation. Thus, decoupling would likely need to be coupled with other successor policies. Regardless, decoupling is probably good rate design anyways.

Pros

  • Clear, established history
  • Good policy anyways
  • Secondary benefits in terms of encouraging energy efficiency
  • In theory, means utilities would not care if distributed solar reduces their retail sales
  • Could begin process of broader utility model transformation

Cons

  • Only a partial solution – it does not address compensation of excess generation from net metered system
  • Several states have already enacted decoupling, limiting its usefulness in those states
  • Some utilities are likely to oppose, especially if they fear it is the beginning of a broader transition

Suggested Reading

  1. An introduction to decoupling: http://www.nrel.gov/docs/fy10osti/46606.pdf
  2. A more detailed overview of many aspects of decoupling: http://www.raponline.org/document/download/id/902

 

Utility restructuring

Beyond decoupling, broader restructuring of retail electricity can address the challenges posed by net metering. Although there would still be a monopoly utility maintaining the power lines (and compensated accordingly) customers would have greater ability to choose from whom they purchase their retail electricity.

In a best case scenario, retail competition could allow customers with solar PV to sell their excess generation to their neighbors or the broader electricity markets.

However, there are many issues and challenges with this approach. Market design is absolutely essential for restructuring, as evidence by New York’s ongoing REV proceeding. Further, other than Texas, residential customers have shown general apathy to selecting a retail provider over their default provider.

Pros

  • May be necessary in the long term anyways
  • If structured correctly:
    • Could provide continued support for rooftop solar
    • Market could be designed to more fully reflect the value of generation types than current rate structures
  • There would be no utility to oppose rooftop solar – rather, market rules will become most important factor

Cons

  • Process can be messy and would need a much more engaged, thorough consideration of benefits, costs, and implementation
  • Utilities may be radically opposed and will likely have stranded cost issues
  • Not clear whether economic case for rooftop solar would still exist in a competitive retail situation (especially if VOS considerations are not valued)
  • Retail choice to date has not been enthusiastically adopted

Suggested Reading

  1. An excellent overview of restructuring in general – Section III.C. specifically focuses on retail restructuring: https://ei.haas.berkeley.edu/research/papers/WP252.pdf
  2. Quick piece on how retail choice is lagging: http://www.eia.gov/todayinenergy/detail.cfm?id=1450

 

Battery Storage and Grid Defection

This is not a net metering successor policy or rate structure, but is a potential technological answer. Essentially, the continuing declines in rooftop solar and battery costs could make it relatively cheap for customers to go off grid. This could greatly reduce overall load, allow customer independence, and increase solar uptake.

However, this option is very risky, long term, and there is uncertainty whether it is even viable. At the least, full grid defection may be impossible in colder climates.

Pros

  • Can greatly defer needs for distribution investment
  • Can mitigate solar intermittency issues
  • Paired with other policy options and done right, can be win-win for all stakeholders (and environment)
  • Could limit regulatory influence on solar deployment

Cons

  • Widespread grid defection could have serious negative impacts on both remaining ratepayers and utilities
  • Alternatively, it is unclear to what degree grid defection will actually occur
  • While battery costs are declining, unclear when the economics will be favorable enough
  • Grid defection has uncertain impacts on wholesale electricity and broader decarbonization efforts

Suggested Reading

  1. Detailed report on the economics of grid defection: http://homerenergy.com/pdf/RMI_Grid_Defection_Report.pdf
  2. Great discussion of many issues related to grid defection with its own reading list at the end: http://www.vox.com/2016/2/5/10919082/solar-storage-economics