Fitch Ratings: Net Metering Can Destabilize Entire Utility Industry

Attention everyone concerned about the potential for net metering to completely upend power utility business models: Buckle up, because net metering is taking off.

Customer adoption of net metering policy has grown fast, according to Fitch Ratings’ new report Running Backwards: Net Metering Short Circuits Electric Sales, and has become a “small but rapidly growing component of total retail electricity sales.”

But despite the near-apocalyptic alarms raised by utilities in states like California, Colorado, and New Mexico, excess generation sales sold back to utilities through net metering made up just 0.01% of total retail sales in 2012 – raising the question: Are utility fears overblown?

Coal power plant demolition image via Shutterstock

Net Metering Powers Residential Solar PV Growth

First, a bit of background on what exactly net metering is, and what it does. Net metering is a policy where customers who have their own electricity generation facilities interconnected to the power grid are paid by their local utility for the energy they produce but don’t use and send back the grid.

Nearly every state has some form of net metering, and each one has different rules governing how much power can be sold back to the grid and the rate customers are paid for excess electrons.

The net effect of net metering has been a dramatic uptick in residential solar installations. Fitch reports net metering customers have increased at a 46.7% compound annual growth rate, with solar photovoltaic generation representing 85.8% of all electricity sold back to utilities through net metering in 2012.

Even more interesting, residential solar customers made up approximately 90.7% of all net metering customers, super-charging the rapid growth of solar PV systems across America. This trend is especially true in California, where two-thirds of residential installations under the California Solar Initiative program are third-party owned, and home to the three top net metering utilities by customer.

Top 10 net metering utilities chart via Fitch Ratings

In addition, new types of investor financing like SolarCity’s $54 million securitization is opening up entire new capital investment markets and funding new distributed solar installations while removing residential consumer cost barriers.

This means solar has truly become democratized for residents across many of the fastest-growing solar markets in America, strengthening public support against fossil-fueled efforts to roll back state renewable energy targets while adding thousands to home resale values.

Policy Fixes Could Prevent A Utility Death Spiral 

So on balance, does net metering equal a “utility death spiral,” as so many claim? Fitch reports that even though it has grown fast, net metering “has a minimal impact on retail sales,” and residential consumers are incentivized to participate in net metering by the high retail electricity prices charged by utilities.

Since more and more net metering customers means more and more distributed generation resources, and thus, less need for utility-scale centralized power sources and transmission lines, Fitch says the policy “can destabilize the entire utility industry.” Yikes.

However, solutions do exist to help utilities and net metering coexist. Fitch recommends regulators regularly adjust prices and cost-recovery mechanisms, along with creating caps on annual and aggregate net-metered installations. Taken together, net metering may just continue to fuel solar’s surge across America…without killing off the country’s electrical utilities.