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Time to rethink net metering

Net metering—the process where a home or business generating its own electricity can run its meter backward and sell any excess electricity it generates to the grid for a bill credit—has become a common power industry phrase since Idaho adopted the first net-metering program in 1980. By 1998, 22 states had adopted net metering. 

The Energy Policy Act of 2005 further encouraged net metering, mandating that state regulatory commissions consider whether electric utilities should be required to make net metering available upon request to their customers. Today, 43 states and the District of Columbia have put net-metering programs in place. 

Besides this regulatory encouragement, a number of other factors are encouraging utility customers to generate their own electricity.  One is falling technology costs, especially for a popular form of distributed generation (DG), rooftop photovoltaic panels.  Other DG resources increasing in popularity are fuel cells, energy storage systems, and even microgrids—a small-scale version of a utility’s centralized electricity system.  Today’s low natural gas prices and a host of incentives from state and federal governments have spurred the move to self-generation as well.

Cost and fairness issues

For electric utilities, net metering holds great implications. The most obvious is the potential effect that net metering will have on a utility’s revenue stream.  When customers generate their own electricity, they’re of course buying less of the utility’s electricity, which leads to revenue losses.  Lower revenues in turn affect a utility’s growth prospects. 

Growth is important for electric utilities because it enables them to access capital markets at reasonable costs.  This is essential if a utility is to continue making investments in its electric system—investments that help to further expand DG opportunities for self-generating customers, as well as to ensure continued system reliability for all customers.

Lower growth prospects, though, aren’t the only downside to net metering for utilities.  A drop in revenues also makes it more difficult for utilities to meet their fixed cost obligations.  These fixed costs can include customer service costs, system maintenance costs, investments in distribution wires and equipment, and if the utility generates its own power, investments in generating plants.  It’s important to point out that even when self-generating customers begin generating a portion or even all of their electricity, the utility continues to incur fixed costs on their behalf by standing by to provide back-up electricity service when the self-generating customer’s facilities aren’t operating, or aren’t meeting their full needs.

To compound the direct revenues lost to self-generating customers, utilities must often pay them the full retail cost of any electricity they buy back from them.  In many instances, if DG customers earn credits in a particular billing cycle that exceed the cost of the electricity they bought from their utility during that period, they can also apply their excess credit to later billing cycles, when they aren’t producing enough power to meet their own needs.  

Paying credits at the full retail rate costs the utility money because that cost will be higher than the cost that the utility actually avoids by purchasing the DG power.  For example, in centralized markets, a utility can buy all of its power needs at the wholesale rate.  This rate will always be less than the full retail rate it would have to pay to buy the same power from a customer.

A few states have gone even further than allowing individual customers to net meter by adopting “virtual net metering” or “community net metering” programs.  Under these types of programs, a single DG customer can serve multiple loads, or multiple DG customers can aggregate their generation and loads and pretend to be a single customer.  In either case, excess generation at one site can be used at another site as though it were a single net-metered customer.  Community solar gardens or parks are an example of this type of virtual aggregation. 

Under “virtual” or “community” net metering, utilities lose the revenues of multiple customers at once, magnifying the impact to the utility.  Of the 43 states with net metering programs, 14 also have some form of virtual net metering. 

Public policy considerations

If a utility is recovering any of its fixed costs in retail electric rates that vary with customer usage, and most often, they are, self-generating customers—real or virtual—are then no longer contributing their full share of their utility’s fixed costs.  To the extent that self-generating customers don’t bear their full share of their utility’s fixed costs, the utility’s other, non-generating customers must then pick them up.  This can lead to higher rates for those not installing their own DG. 

As more customers generate their own electricity, there’ll be upward pressure on rates for non-generating customers to enable electric utilities to recover their fixed costs.  These non-generating customers, faced with ever increasing electric rates, may be incented to install DG themselves, further raising costs for the remaining customers.

There are various rate designs and rate structures that allow utilities to cover their fixed cost investments in the face of declining revenues.  Decoupling of sales from revenues, implementing lost revenue adjustment mechanisms, or simply shifting costs are a few of the more common approaches.  But these still result in non-participating customers paying higher rates as a result of some customers installing DG.  

Rate designs may be needed that separate out fixed and variable costs.  DG customers would then continue to pay their fair share of their utility’s fixed costs through some kind of non-by passable surcharge.

Importantly, it’s not just net metering that creates these hidden subsidies.  Any time a resource is procured at an above-market price (or a price exceeding a utility’s avoided cost in the case of vertically integrated utilities), a subsidy is created.  For example, feed-in tariffs at above-market prices or above a utility’s avoided costs create the same kind of subsidy between DG participants and non-participants.

Such cost shifting and resulting subsidies also occur if customers are paid for demand-side resources at a rate greater than the utility’s cost savings from the customer’s action.  Tax credits or exemptions represent a subsidy from the taxpayer to owners of DG, but at least do not raise electric rates for other customers (although they do raise costs for other taxpayers).

Net metering programs also commonly err in treating all DG equally, regardless of their value to the utility system.  For example, DG located in areas of a utility system with constrained distribution capacity may in some individualized circumstances reduce congestion on the distribution network and result in utility cost savings. 

In addition, DG that can generate during a utility's peak-demand periods has more value than DG production during off-peak periods.  Consequently, DG should be paid for their production based on the value of the power provided to the utility, rather than based on the system of subsidies created by net metering. 

Some of the other key public policy issues raised by net metering include:

  • Should those net metering programs that provide credits at the full retail rate for mature technologies be eliminated or changed to reflect more appropriate pricing?   
  • Should self-generating customers pay for their usage  based on time of use and be compensated for generation based on the value of that generation at the time it is produced to ensure that their costs to the system and benefits are in balance?
  • Should net metering programs be targeted only at new technologies that have long-term potential but that may need short-term subsidies?  Should such net metering programs be limited in scope and have sunset provisions?
  • Should customers who self-generate continue to pay their share of the fixed costs of the utility distribution grid upon which they rely, even though they reduce their consumption?  For example, should fixed costs be recovered through a customer charge paid by all customers connected to the grid, with variable costs recovered through a separate charge that varies with customer usage? 
  • Should customers who self-generate be required to pay the full retail rate for all their usage, with the utility paying for all power generated by the customer at the applicable wholesale rate in the case of organized markets or avoided cost (as determined by regulators) in the case of traditionally regulated companies to avoid higher costs for non-self-generating customers?

 

Significance for utilities and customers

State public utility commissions initially adopted net metering programs as a way to encourage new technologies, especially renewable technologies.  Many state programs often include a broader spectrum of incentives including financial rebates, tax incentives, and low-cost financing.  One of the largest subsidies for renewable technologies comes from mandatory set-asides for renewable DG in many state renewable portfolio standards.

As DG technologies have become more cost-competitive, however, and as the trend among utility customers for generating their own electricity grows, the need for subsidizing them should diminish. 

Solid reasoning is needed to ensure that these new technologies are encouraged in a way that’s fair to all electric utility customers. 

Rick Tempchin is executive director, retail energy services, for the Edison Electric Institute, the association of U.S. shareholder-owned electric companies. The association’s members represent approximately 70 percent of the U.S. electric power industry. More at www.eei.org.

 

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