Spread of Net Metering, & Utility Backlash — Net Metering History Part 3

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by Roberto Verzola

[Roberto Verzola is the author of Crossing Over: The Energy Transition to Renewable Electricity, a book published by the Friedrich Ebert Stiftung which was launched on March 23, 2015. The online version of the book as well as the article this post comes from can be downloaded freely. See Part 1 here and Part 2 here. The author may be contacted at rverzola@gn.apc.org. All references are indicated in the e-book.]

Net Metering Spreads

Despite stiffening opposition from utilities, some 16 U.S. states had a net metering program by 1996, going up further to 22 U.S. states by 1998. Of the 22, six enacted net metering laws, 14 established net metering programs via public utility commissions and the regulatory process, and utilities in two states implemented a net metering program voluntarily. In 2000, the number had gone up to 30.

In 2001, California RE advocates managed to pass a temporary measure raising the maximum size allowed for net metering from 10 kW to 1 MW, opening the scheme to larger structures and business establishments. The measure would end August 2002. A major legislative fight ensued, with solar advocates trying to extend the measure, and utilities trying to stop its extension. The measure was extended, but utility lobbyists managed to insert deal-breaking amendments. Net metering credits for large-scale solar producers were reduced by up to 50%. Customers were required to install an additional meter, at the customers’ expense, unnecessarily complicating the scheme, as well as making it more expensive. An enthusiastic businessman who was also an environmentalist, Fred Adelman, submitted his net metering application for a 30-kW system immediately, on the day the 10-kW cap was lifted. He received an email from PG&E requiring that before he could connect to the grid, an engineering impact study would have to be performed at the customer’s expense. Nothing happened for a month. When Adelman called PG&E to follow up, he was informed that he would be charged $605,000 because the company would have to upgrade their local distribution network first. Adelman eventually got the charges reduced to $11,000, but only after a long and costly legal battle. In short, even with a net metering law passed, hostile utilities continued to sabotage the program.

The year 2012 was a watershed: that year, 99% of all installed PV systems in the U.S. were net-metered. The trickle of do-it-yourself citizens who now had the means to generate their own power was turning into a flood. In September 2012, alarmed U.S. electric utility executives gathered in Colorado and agreed that distributed generation (DG) in general and net metering in particular was a “disruptive technology” that threatened their centralized business model with “declining retail sales,” “loss of customers” and “potential obsolescence.” They decided to launch a major effort to stem the tide. Their main target: net metering and its parity pricing feature.

The “net metering war”, as some accounts put it, began in earnest in 2013. By this time, there were net metering programs in 43 U.S. states and the District of Columbia. South Carolina became the 44th in December 2014. Where net metering is not mandated by law or the regulators, utilities usually credit those who send their surplus to the grid the avoided cost of the exported electricity, which is usually lower than retail price. The battles, however, continued to rage. As a 2013 news story put it:

“The fate of rooftop solar net metering—the credit homeowners get for putting kilowatt-hours on the grid—is being fought in states across the country . . . . Utility companies, which make their money selling electricity from centralized power plants, have sought or are seeking to limit the payments for the distributed generation coming from thousands of solar panels.

“The Edison Electric Institute, which represents investor-owned utilities, has identified distributed generation as a potentially ‘disruptive technology’ that could compete with utility companies . . . . “In state after state, utility companies are seeking to change net-metering programs.”

Utilities Against Net Metering

The utilities’ main target has been the parity pricing scheme behind net metering. They argue against it in a number of ways. Edison Electric Institute (EEI), which “represents all U.S. investor-owned electric utilities,” uses the following argument:

“Because of the way that net metering policies originally were designed, net-metered customers often are credited for the power they sell to electric companies, usually at the full retail electricity rate, even though it would cost less for the companies to produce the electricity themselves or to buy the power on the wholesale market from other electricity providers.

“Many energy experts agree that net-metered customers should be compensated at the wholesale price for the electricity they produce, similar to other electricity providers. This reflects the fact that electric companies buying this power still must incur the costs of delivering the power to their customers, including the costs of maintaining the poles, wires, meters, and other infrastructurers required to deliver a reliable supply of electricity.”

Thus, EEI argues, net-metered customers should be credited only for the wholesale price (what we call in the Philippines the average generation charge or the “blended cost” of electricity), not the retail price of electricity. Net-metered customers, EEI insists, must still pay for the “cost of transporting and delivering the electricity through the electric grid to reach a customer.”

The simple answer to the EEI argument is that the liability for these transport and delivery costs have been transferred to the neighbors who used the exported surplus, because this surplus registered on their meters. Thus, all the costs which EEI claims are being avoided by their net-metered customers are actually being paid by other customers who used the surplus. If this seems confusing, imagine again our analogy with the LPG tanks. The owner of the backyard biogas digester returns one of the three tanks he ordered, pays only for two, and asks his neighbor to pay for the third instead. The neighbor, accepting this transfer of liability, agrees to pay for the tank as well as its delivery charge. So everything is fully paid for.

EEI, on the other hand, wants to credit the customer who returned the third tank only the cost of the tank’s contents, and to bill him—and the neighbor as well—the delivery charge for the same tank. The EEI position will in fact result in double-charging. If you want to be polite, call it a hidden subsidy.

Another vocal critic of net metering is the American Legislative Exchange Council. ALEC uses an interesting analogy to support its position against net metering:

“Imagine you have a home vegetable garden and have had a very good year and a bumper crop of tomatoes. Do you consider it somehow appropriate for you to send those tomatoes down your local grocery store and expect to sell them to the grocer at the same price that he sells to the public? How would that help him pay his rent, and maintenance and heating bills for the store? The taxpayer has already paid you to grow tomatoes. Why, you have even made the grocer pay to have the tomatoes carried from your house to his store. Won’t this arrangement raise the cost of tomatoes and other groceries to other shoppers? Well, that’s exactly what net metering does. It forces the grocer—the utility—to buy a wholesale product at retail prices.”

The ALEC analogy is faulty because it is incomplete. A full analogy would involve you ordering, say, 30 kilos of tomatoes from your grocer (which your grocer perhaps imported out of state), delivered to your doorstep, for which the grocer charges you the retail price that covers all the grocer’s costs, including the transport of the tomatoes from another state to the grocer, plus of course the cost of home delivery, the grocer’s profits, government taxes and so on. As the ALEC analogy says, you have a bumper crop of tomatoes. So you accept only 20 kilos of the delivered tomatoes. But your next-door neighbor, who also wants tomatoes, agrees to get the other 10 kilos. So your grocer’s delivery service brings the 10 kilos to your neighbor instead, which your neighbor pays for in full. As for the 20 kilos which were delivered to you, you also paid for them of course—in full. Clearly, the grocer was in fact fully paid for his 30 kilos of tomatoes.

ALEC is arguing that your refund should only cover the wholesale price; you should still pay for inter-state transport, delivery charges to your home, the grocer’s profit, and government taxes for the 10 kilos you returned, although your next-door neighbor already paid for them. ALEC is trying to justify the double-charging that is currently being inflicted by U.S. utilities on non-net-metered solar PV owners, who are sending their surplus to the grid to be used by their neighbors but are getting credit only for the wholesale cost of electricity.

Whether it involves electricity, water, tomatoes or LPG, crediting only the wholesale and not the full retail price of returned items that were absorbed and fully paid for by neighbors is double-charging. If you are at the grocery checkout counter, and you decide to return an item you just paid for, and which the next person on the line agrees to buy for its full price, you have the right to demand a full refund.

ALEC further claims that net metering advocates “miss the fact that they are using utility property without paying for it.” ALEC is apparently referring to the fact that the net-metered surplus passes through utility-owned posts and wires on its way to the neighbor.

Our reply: The boundary between utility and customer property is the electric meter. It is the equivalent of the grocer’s checkout counter. While the “dirty” 50 kWh was travelling on transmission and distribution lines, it was the property of the utility. As soon as it passed the customer’s electric meter, turning it forward, it became customer property. And as soon as the net-metered customer’s 50-kWh solar surplus passed his electric meter and reversed it on the way out, that 50 kWh became utility property. The ownership change occurs at the electric meter, like the ownership change that occurs at the checkout counter. ALEC is wrong to claim that solar rooftop owners “are using utility property without paying for it.” It is the utility, as the new owner of the 50-kWh solar surplus, which used its own posts and wires to deliver the surplus to the next-door neighbor. And since this 50 kWh will register on the neighbor’s meter, the utility will get fully paid to the last dollar for its service.

The Utilities’ Perspective

Finally, for the sake of argument, let us accept the utilities’ perspective, that the 50 kWh that goes into the net-metered customer on one hand, and the 50-kWh surplus exported by the same customer, should not count as a single transaction involving a simple transfer of liability, like returning an item that is then paid for by another customer, but should be treated as two completely separate transactions.

Let us accept that the 50-kWh consumption by a customer can be treated and metered separately from his 50-kWh surplus that he exports to his neighbor. In such a case, utilities are now in a position to price exported surpluses separately from regular electric meter readings. The utility still bills the solar customer the full retail price of his 50-kWh consumption. When the customer subsequently exports his 50-kWh surplus to a neighbor, the utility also bills the neighbor the same full retail price of 50 kWh for the exported surplus. The question now is: what value should be assigned to that solar surplus? How should it be priced? EEI, ALEC and their allies are proposing to price it below retail. They want to deduct the cost of transmission, distribution, etc. and keep these for themselves, and then credit the exporter of the surplus for what remains, what they call the “wholesale price” of electricity. Very roughly, this means half of the retail price will go to them, and half to the exporter of the surplus.

What is wrong with this scenario? At least two things:

1. Let us trace the path of the 50 kWh once more. At the genco, the 50 kWh passes through several transformers as it is stepped up in voltage and sent through the transco’s very-high-voltage transmission lines. At the end of the final transmission line, the chunk passes through more transformers to make it more suitable for the DU’s high-voltage distribution lines. Eventually, the chunk is stepped down further in voltage and until it is suitable for the DU’s low-voltage lines that serve residential and commercial neighborhoods. Throughout this process, the chunk accumulates charges representing the added-value of the hundreds of kilometers of those transmission and distribution lines. Finally, the 50-kWh chunk reaches the customer’s premises and is promptly consumed. This 50-kWh transaction registers as a forward movement on the meters of the genco, the utility, and the customer.

When the sun is high in the sky, on cloudless days, the solar rooftop customer generates a surplus of 50 kWh, so it goes out to the grid. Under net metering it will simply reverse his meter back to zero. But the utilities want it metered separately so that they can assign a lower price to this outgoing surplus. As soon as it is metered, the solar surplus is on the grid, owned by the utility. (See Figure 4.)

Net Metering 4
Figure 4. The solar surplus and the equivalent amount that it replaced

Electricity follows the path of least resistance, and the longer the wire, the greater the resistance. Thus this surplus is delivered from the net-metered customer to his nearest neighbors who have some appliances turned on, a distance in the order of a hundred meters or less. (We assume one neighbor only, for simplicity.) This neighbor-to-neighbor transfer of surplus avoids the cost of moving electricity from the gencos to the consumer, a distance in the order of hundreds of kilometers. It avoids the costs of going through high-voltage transmission and distribution lines, transformers, and their associated supervisory control and data acquisition systems. One-thousandth the distance roughly means one- thousandth the cost. Thus we can say that the cost of this neighbor-to-neighbor transfer, like returning an item and asking a delivery service to bring the item to a next-door neighbor who will pay for it instead, is negligible. It is too cheap to matter. Yet, the DU will charge the neighbor the full delivery fee for this chunk, as if it had delivered the surplus from a distant generating plant through the utility’s high-voltage lines and transformers, to the neighbor.

The cost of that neighbor-to-neighbor transfer is “negligible”, but it is not zero. So, not charging for it is still a loss to the utility, isn’t it? Far from it. Rather than recover this negligible amount from the neighbor, the utility actually has better options. First, there are carbon markets which are bound to grow as global warming and climate change take their inevitable toll. Distributing carbon-free electricity commands value in these markets. Also, most utilities are required to distribute some renewable electricity, under what are usually called renewable portfolio standards (RPS). Utilities may be subject to fines if they don’t meet their RPS obligations. Utilities that are over-quota can sell their surplus to those that are under-quota. Hence, moving a net-metered customer’s surplus to a neighbor is again worth money to utilities. In fact, in a market where prices will be set by much larger chunks of renewable electricity distributed on the grid over hundreds of kilometers from wind and solar farms, it will be worth much more than its actual cost.

Should the utilities then spare the neighbor of these transmission, distribution and other charges? If they did, it would be a windfall to the neighbor, who is expecting—and willing—to pay the full retail price for his meter reading.

We argue that this added-value belongs neither to the utility nor to the neighbor. Who invested the money to generate renewable electricity at the point of use, bypassing the expensive transmission and distribution system of the grid? Who displaced 50 kWh of conventional electricity, resulting in less greenhouse gases, less energy insecurity, less local pollution and less displacement of local communities? Who avoided electricity from expensive peaking plants, thereby bringing the average cost of electricity down?For these things, we have the RE-adopters to thank. They created all these added values; they should get the credit for the neighbor’s potential windfall.

2. Let us now consider the actual value of the solar surplus itself. U.S. utilities would value it at roughly the same rate as the average generation price, about half the retail price, the utilities keeping the balance. Yet, utilities themselves pay a range of prices for other types of electricity that they buy. During peak hours, they regularly pay higher than retail for electricity coming from oil- or natural gas-fired plants, not the retail price minus delivery and other charges. Solar surpluses typically occur when the sun is shining brightly high in the sky, when demand for electricity is high and utilities buy electricity from peaking plants at prices higher than the retail price. This peak-hour price is what utilities usually avoid when they are taking surpluses from solar rooftops. If solar surpluses are to be paid the avoided price of electricity, should not solar surpluses be paid higher than retail rates too?

In fact in many countries that implement feed-in-tariffs, solar electricity (and other clean renewables) are bought at higher than retail prices, because their societies value these types of electricity more: they don’t cause health problems, displace communities, poison the environment, warm the globe and change the climate, deplete non-renewable resources, and so on. They also create more jobs, rely on local resources, enhance energy security, ease regional and global tensions around contested oil reserves, and do not cause nuclear proliferation. The debate instead in these countries is: how much higher than the retail price do clean renewables deserve?

Thus, parity pricing for renewables is already the middle ground between, on one hand, those who believe they should be valued higher than retail as most feed-in-tariff implementations do and, on the other hand, those who think they should be priced lower than retail as many utilities insist. Anti-net metering lobbyists do not want a compromise. They want their unreasonably extreme position to prevail. To make this happen, they have been calling parity pricing a “subsidy” for renewables. We have already explained earlier why this is not a subsidy at all: crediting the net-metered customer the full retail price for his surplus is no different from crediting a customer at a grocery checkout counter the full retail price for an item he is returning, knowing that the next customer on the line is willing to pay for it, also at the full retail price.

Now, let us face the issue of subsidies squarely. We have shown that parity pricing under net metering is no subsidy. This does not mean that we do not want subsidies for renewables. Not all subsidies are bad. Subsidies are a valid option for governments to encourage things to move in a desired direction, or to support important efforts that cannot otherwise take off the ground or cannot do so fast enough. Subsidies to renewables belong to this category. Renewables will help improve our energy security especially under worst-case scenarios like peak oil. Renewables also reduce pollution and mitigate climate change. Solar panels on rooftops do not displace communities, poison them, or cause nuclear proliferation.

Historically in the energy sector, however, the biggest subsidies have been enjoyed by the nuclear and fossil-fuel industries. G20 governments, for instance, continue to subsidize fossil-fuel exploration to the tune of $88 billion per year, more than twice what the top 20 private companies are spending. A report of the U.S. Energy Information Administration released on March 12, 2015 shows that in 2013, the electricity sectors which received direct subsidies from the U.S. federal government included: fossil-fuel ($4.1 billion); nuclear ($1.7 billion); transmission and distribution ($1.2 billion); solar ($5.3 billion); wind ($5.9 billion). The U.S. EIA emphasizes that their report does not include all subsidies. In addition to money from governments, producers of dirty electricity enjoy hidden subsidies too. By externalizing large parts of their costs, fossil-fuel-based generating plants (and think-tanks that they fund) enjoy enormous hidden subsidies that are eventually paid for by local communities and the general public in the form of health costs, social costs, environmental costs and costs from climate-related disasters. The utilities’ demand for impact studies, one-time “net-metering” charges, recurring “meter-reading” charges, etc. from their net-metered customers are not only artificial barriers against distributed renewables. They are also hidden subsidies for the utilities themselves.

In summary, under the scenario implementing what the utilities want, they will be overcharging the neighbor with imaginary transmission and distribution costs which were never incurred. They will also be underpaying net-metered customers for their high-value surplus. The result: hidden subsidies for the utilities. The various costs can be more properly assigned and fairly calculated of course. But this will then complicate things a lot, requiring additional metering equipment and major changes in billing and accounting procedures. In the end, we will end up with something that is very much like a full transfer of liability from the owner of surplus to his neighbor. And this can be implemented very simply if we accept for billing purposes the readings from meters that reverse when power flows in the opposite direction. In short, we will end up with something very much like net metering.

Finally, we offer another hypothetical case as the final test whether net metering causes losses to the utility or not: Someone runs a diesel-fuelled synchronous generator (one that can sync with the grid). Due to an accidental connection, it ends up sending out 50 kWh into the grid, reversing the careless owner’s meter by 50 kWh. The 50 kWh go to a neighbor whose appliances are on, turning
the latter’s meter forward by the same amount. The neighbor pays the utility for the 50 kWh added to his meter.

Here is the test: Is anyone else due any other payment? Specifically, did the accident cause the utility to subsidize the careless owner? Perhaps some unpaid transmission, distribution and other costs associated with 50 kWh of electricity?

Let us check all three perspectives. The neighbor’s perspective: He paid for 50 kWh which he actually consumed as reflected in his meter reading. So he has no problem. The neighbor’s payment, however, goes not to the careless generator owner who actually supplied the 50 kWh, but to the utility whose 50 kWh was erased from the meter. The utility’s perspective: The neighbor’s payment fully covers the lost income from the 50 kWh that the careless customer had already consumed but accidentally erased from his meter. So the utility should have no problem either. The careless owner’s perspective: Diesel is expensive. The retail price of the 50 kWh he extinguished when he reversed his meter is less than the cost of electricity from the diesel generator, so he is not happy with the accident. It is clear, however, that he got no subsidy from the utility when he reversed his meter. He owes nothing to the utility or to his neighbor. A utility claim to recover a “subsidy” would be spurious and will not prosper.

When you come to think of it, whether the export of 50 kWh was accidental or not is in fact irrevelant. If the careless owner intentionally generated more surplus and sent it out to the grid, we can go through the analysis once more, and the result will be the same: he would not owe anything to the utility or his neighbor. He would be losing money of course, but this is his own business, not the utility’s. However, if the cost of electricity from the generator were cheaper than retail (as it would be if he used rooftop solar panels), he would be saving money. Then he would want to do it again and again.

Thus, net metering encourages more private investments in solar panels and other low-cost renewables—something that even small-players and low-income families can participate in—without without any subsidy from the government or the utility.

The anti-net-metering Institute for Electric Innovation (IEI) makes a big case out of their finding that an increasing number of solar rooftops are being leased. Because of this, IEI says, the delivery charges that they want to credit to the utilities are going mostly to solar leasing companies.

IEI has inadvertently revealed the true problem with private utilities. It is called envy. The utilities are envious that money which can be going to them are now going to solar leasing companies instead. They are envious that renewables now seem to get more subsidies than they get. The solution is in fact simple: the utilities can compete with solar leasing companies and themselves offer similar services to their customers. Consumers can then decide, in true market fashion, whether to lease from the utility or from any of the competing solar leasing companies.

Utilities have been treating customers as captive clients who have no choice but to passively obey whatever terms the utilities dictate, just like mainframe computer and landline operators did in the past. They are so used to treating customers this way that under net metering, they get a persistent feeling that they are “losing” something. Of course they are, but it is not something they are entitled to. They are losing the competition in a freer market; they are losing customers and market share.

Low-cost solar panels on rooftops and small-scale wind turbines are permanently changing the rules of the game. Net metering will minimize transaction costs, remove barriers to entry, and make it truly easy for low-income families and other small-scale players to join. Users of electricity can now empower themselves, in more ways than one. Utilities cannot stop them anymore. Like operators of mainframes and landlines, utility operators must learn to adjust to the new realities and accept their reduced role in the future: at night, or when there is not enough sun or wind, or when there is too much sun or wind.

When they go to the government whining that they should be compensated for their “losses” under net metering, they are basically asking for more subsidies.

About the Author: Roberto Verzola has a degree in electrical engineering and has worked in the information technology sector since the late 1980s. But he has also been a social activist for most of his adult life, including three years as a political prisoner in the 1970s. Earlier this year, his book “Crossing Over: The Energy Transition to Renewable Electricity” was published by the Philippine office of the Friedrich Ebert Stiftung of Germany. Verzola is president of the newly-created Center for Renewable Electricity Strategies, a non-profit organization focused on helping local governments in the Philippines set up showcase communities which source 100% of their electricity from renewable sources. in a way that is economically viable both for investors and consumers. He may be reached at rverzola@gn.apc.org.

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