Net metering has become controversial in recent years and a rate hike for home solar owners in Nevada in December 2015 is the front lines of the brewing war. The Public Utilities Commission has created a new rate class for home solar, and it’s putting the distributed solar industry in that state at risk. And it’s not the only state where this is happening. California is seeing serious pressure from utilities regarding net metering and their Public Utilities Commission barely kept net metering intact.
Obviously, there’s an issue in the mix, and obviously, utilities commissions are challenged to deal with it. So what is it, and what should be done about it?
What is Net Metering?
As it is mostly implemented, it’s straightforward. A homeowner puts solar panels on their roof. They generate electricity. When the homeowner consumes the electricity generated by the solar panels, they get it for “free.” When the homeowner doesn’t consume the electricity, it goes into the grid for use by others on the grid at their expense. When the homeowner needs more electricity than their solar panels produce, they draw it from the grid.
There are two numbers that become important for the net part: the number of kWhs drawn from the grid and the number of kWhs sent to the grid. Subtract the second from the first, typically make sure it isn’t below zero or some other cap, and the homeowner only pays for the net amount of electricity that they consumed from the grid. There is no model where homeowners are paid by the utility for excess electricity that they produce under net metering plans that I’ve seen.
Net metering strongly incentivizes solar home deployment because it’s effectively competing with retail electricity prices, and usually peak or near-peak time-of-use billing prices. The capital cost of the solar panels and initial installation is an easy business case at retail electricity prices, hence the reason why SolarCity, Sungevity, and several others offer $0 down leases.
Net metering is good for society because it enlists consumers and their money in the generation of carbon- and pollution-neutral electricity. This helps with climate change and clean air in urban areas, both of which have costs which are borne by other segments of industry and society. This is the same argument for any form of renewable generation, in that it avoids the vast majority of negative externalities associated with most other forms of electrical generation.
Why is This a Problem for Utilities?
It isn’t at very small penetrations. Globally, the evidence is that, when rooftop solar is below 1.5% penetrations, utilities do okay. As rooftop solar is dominantly generating at peak times, the generation means that consumers are paying for peak generation and utilities don’t have to.
However, when penetrations start reaching higher levels, with numbers of 1.5% to 3% from what I’ve seen from Denmark and the like, then utilities start suffering fiscally. Their most profitable customers start not paying for electricity. Consumers always have the highest electricity costs, with industry getting significant price breaks for a variety of reasons, some of which benefit the utility, some of which are politically motivated to incent businesses to set up in jurisdictions.
This is compounding a couple of existing structural financial problems at utilities in the developed world:
- Demand is flat. Efficiencies, which utilities are often legislated to fund and promote, have been effective in reducing demand per capita or business, all else being equal. Shift of heavy industry to jurisdictions with lower labour costs and the shift of developed nations to knowledge work and service economies has meant that electrical demand is relatively flat while GDP and population increase.
- Stranded assets. Many utilities have coal generation assets which are becoming stranded. As an example of the systemic problem in coal generation, the USA’s second largest coal provider just declared bankruptcy. Many coal thermal plants are still paying off their capital costs, but it’s clear that regulations and policies related to climate change and air pollution are going to require that they be sunset before their expected end-of-life date. Financial institutions are taking this into account when utilities ask for funding of various types and putting appropriate interest rates on loans if they give them at all.
- Transformation demand. States, the federal government, and consumers are demanding that utilities provide increasing amounts of carbon- and pollution-neutral electricity. This means building wind- and solar-powered generation or buying clean energy from providers, which has often been at a premium to mostly amortized coal. This economic balance is changing, but utility-scale wind and solar plants are still high capital cost items requiring funding. See the stranded assets point for why this might be a problem for utilities.
- Grid maintenance. This is pointed to as the proximate cause most of the time in most superficial discussions of net metering. Basically, utilities still have to pay for the wires, transformers, poles, line workers, trucks, distribution management software, and the like. This has a cost which is hidden in consumer rates.
- Regulated rates. Utilities are regulated monopolies for the most part. They are allowed to charge specific rate structures to different classes of consumers based upon utilities asking utility governance boards for permission to do so. They cannot charge what the market will bear, but what external stakeholders allow them to charge. They can’t adapt quickly. If, for example, the price of methane jumped 300% in January, they can’t pass that cost on to consumers directly, but must do a bunch of fiscal modelling around possible costs of fuel and wholesale electricity prices, project that forward several years, make a bunch of assumptions, figure out what they need to charge in order to cover the cost of business and transformation, and then ask the utility board for permission to charge that. And utility boards and politicians get beaten up when the price of electricity rises, even if it’s low compared to neighbouring jurisdictions.
So, in an environment where utilities are fiscally challenged compared to where they were a decade ago, net metering mandated by states is putting increased fiscal strain on them by taking away one of their most profitable revenue streams.
You can see why utilities would want to eliminate net metering, cap it, switch it to wholesale instead of retail rates, or charge a distribution fee to consumers, essentially unbundling the grid costs from the electricity costs. All of those approaches that have been suggested by utilities in various jurisdictions.
There’s another level of discussion on this, however, and that’s the political football of climate change and renewables, a place where utilities have not been neutral parties.
Net metering for solar is like renewable generation of other forms. It’s a strong net benefit for multiple sectors, but it’s a cost for utilities. This runs into two types of headwinds, especially in the USA: climate change denialism and libertarianism. Many utilities are major fossil fuel owners and climate change deniers or downplayers. Many coal generation types are libertarians, believers that if the market doesn’t price negative externalities, it’s not their problem. The Koch Brothers are big into coal for example, and have been funding both climate change denialism and libertarianism promotion for a couple of decades.
What Does This All Mean?
It means that utilities benefit by taking net metering from something based on retail prices of electricity and finding ways to water down that value proposition. But society doesn’t. Overall, society loses, because more coal and methane get burned to generate electricity instead of solar power generating that electricity. That comes with climate change impacts and pollution in populated areas that impacts lots of people’s lungs, especially children and the aged, but also a lot of productive workers who take more sick days.
Utilities are in a tough place and regulators aren’t necessarily helping them. Utility boards don’t have any mechanism to assist utilities with their fiscal problems except letting them raise rates, which they don’t like to do because they get beaten up for it.
States and federal agencies have to step into this to a certain extent. The transformation to clean energy is necessary for overall societal health and prosperity. The costs of transformation of electricity generation have to be spread around, just as the benefits are spread around.
Utilities only have a few levers to pull, and net metering is one of them. Trying to get net metering watered down makes sense in their worldview. But it shouldn’t be allowed by society at larger levels. We need bigger solutions to help utilities with their structural problems.
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