By Brian Orion
Utilities across the country have been fighting to curtail net energy metering (NEM) programs in favor of value of solar tariff (VOST) programs, claiming that NEM results in a cost-shift to non-solar customers. However, NEM programs may actually undercompensate solar customers for the true value their systems provide, resulting in a substantial subsidy to non-solar customers in the absence of well-designed VOST programs.
Under NEM, a customer’s meter spins forward when the customer is taking power from the grid, and backwards when it sending power to the grid. The utilities argue that if solar customers are allowed to zero out their bills, they’re paying no portion of the grid infrastructure costs that other electricity users are paying. As more solar customers switch to NEM, these infrastructure costs are being borne by a smaller pool of remaining customers, thus increasing their costs.
According Karl Rabago, who helped to pioneer the first-in-the-nation VOST program at Austin Energy, no utility has yet produced a study to back up the claim that non-solar customer prices are increasing as a result of NEM. In fact, a recent study by Crossborder Energy showed that non-solar customers in California actually receive a small net benefit for every kilowatt-hour of energy sent back to the grid under NEM. And these benefits are even greater in the commercial and industrial sectors, where there is less potential for cost-shifting because rate structures tend to more closely align the customer’s rates with the utility’s actual cost of service.
As such, many solar advocates are looking to VOST programs to ensure that solar’s true value streams can be reflected in the rates provided to solar customers. In general terms, VOST programs aim to separate the charges paid by customers when taking utility power and the credits provided to them when supplying power back to the grid. Some programs, like the pioneering one in Austin Energy’s territory, do this by means of installing a separate meter. Instead of having one meter that rolls forward when the customer takes power, and backward when the customer delivers power, the customer has two separate meters to track these flows. Customers still pay the full amount of the retail power they consume, and separately, receive credits for the amount they supply to the grid. These credits are determined by a formula that takes into account a number of different value streams provided by solar, including energy cost savings, generation capacity savings, avoiding line losses, a value for hedging against traditional power fuel costs, transmission and distribution savings, and environmental benefits.
By separating the flows of power into separate meters, this program increases the transparency around how solar customers are compensated. And charging customers for the full cost of the power they take avoids any argument that solar customers are not paying their fair share of infrastructure costs.
Despite the potential of VOST programs, some solar advocates believe that NEM should be preserved, if for no other reason than it has proven effective and relatively straightforward for the customer. Groups like The Alliance for Solar Choice, which is comprised of companies that make a living on financing solar systems, want to support NEM policies since they create bankable assets capable of attracting third-party financing. A study by Clean Power Research concluded that solar is worth $0.128/kWh for the typical system in the Austin Energy territory. This price is comparable to retail rates in many areas, suggesting that the rates under VOST and NEM programs may be comparable.
However, in some areas, the value of solar greatly exceeds the retail rate of electricity when factoring in the full range of societal benefits solar provides. An additional study by Clean Power Research looked at the value of solar across a number of utility service territories in Pennsylvania and New Jersey. The study factored in broader societal benefits like economic development benefits and a reduction of conventional energy market prices due to lowering demand. When factoring in these values, the study found that the true value of solar is actually $0.25/kWh to $0.32/kWh. A study of the California territory by the Institute for Local Self-Reliance reached a similar conclusion, placing the value of solar at $0.33/kWh in California.
These prices greatly exceed the retail rate of solar in many states. This means that merely rolling a meter backwards under NEM significantly undercompensates solar customers for the value they provide. Not only do these studies refute the claim that non-solar customers are subsidizing solar customers, they show that the opposite is true – in many cases, solar customers are providing benefits to the system far in excess of what they are being provided in credits under NEM. These benefits are experienced by non-solar customers in the form of lower electricity rates than they would otherwise pay. This amounts to a substantial subsidy to non-solar customers.
If done correctly, VOST programs will correct this unfair penalty to solar customers. A properly designed VOST program should provide a long-term price so that solar customers and third-party investors can lock in long-term savings without going back in front of regulators to fight about the price every year. And it is not worth abandoning the success of NEM unless the VOST methodologies for calculating the value of solar incorporate the full range of societal benefits these systems provide.
There are significant challenges involved in replacing NEM with properly structured VOST programs. But the day we see the full value of solar reflected in the rates provided to solar customers is the day we unlock the true potential of solar in the market.
About the Author: Brian Orion is a Principal at Lawyers for Clean Energy, a boutique clean energy law firm in San Francisco. He advises companies in the solar, electric vehicle, energy efficiency, and climate change arenas on corporate governance, business transactions, intellectual property, and regulatory compliance. He graduated, cum laude, from the University of California, Hastings College of the Law, where his academic record earned him selection to the Thurston Society and the law review.
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