Center Stage: Distributed Generation And Net Metering

Net energy metering (NEM), or net metering, was introduced in 1996 in California, to incentivize the installation of distributed rooftop solar PV systems, which were expensive at the time. The intention was to provide a simple-to-understand means of rewarding customers who invested in an emerging and expensive technology. In the case of California, for every kWh fed into the grid, the customer would get a credit equal to the prevailing retail tariff. Nobody believed that many customers would take advantage of the rather generous scheme, but they did (Box).

Distributed solar: From too little to too much

California adopted its original net energy metering (NEM) scheme in 1996, known as NEM 1.0, as part of a new law, SB 656 with the aim to “encourage private investment in renewable energy resources, stimulate in-state economic growth, enhance the continued diversification of California’s energy resource mix, and reduce utility interconnection and administrative costs.”  

NEM 1.0 required every electric utility in the state to offer net metering to residential customers up to 0.1% of the utility’s peak electricity demand, which was soon surpassed.

In 2013, California’s Assembly Bill 327 increased the cap for net metering and mandated rate reforms to mitigate cost shifts between solar and non-solar customers in what became NEM 2.0.

From virtually zero in1996, the penetration rates for residential rooftop PVs on net-metered rates increased to 11.4% as of May 2022 making California a leader in the country in customer-owned solar capacity installations. The 3 large investor-owned utilities complained that they were losing an estimated $3 billion annually from solar customers, a burden which was shifted to the non-solar customers.

The California Public Utility Commission (CPUC) opened a proceeding in 2020 to consider potential changes to NEM 2.0, which became highly contested.

In mid-December 2022, the CPUC adopted a successor tariff, called NEM 3.0, for new solar customers with significantly reduced credit for the excess generation fed into the grid – a decision unpopular with many would-be solar customers. n

Fast forward to 2021 where over 72 GW of customer-owned distributed generation has been installed (Fig on page 20), mostly solar, roughly 5.6% of total US generating capacity. Its contribution is smaller as a percentage of generation since typical systems operate at a rather low-capacity factor.

Penetration levels vary dramatically across states and regions, reflecting policy conditions, electricity prices, and solar insolation levels. In the residential market, participation levels are highest in Hawaii, over 20%, followed by California at 10% – with many others catching u (map on next page).

Starting from a negligible base distributed solar has moved to stage 4

The rapid adoption of rooftop solar, in both residential and commercial sectors, has exceeded the initial expectations of the regulators who now face many challenges including claims that the overly generous subsidies for solar adopters have resulted in higher retail tariffs for the non-solar customers, as previously reported in this newsletter. The issues of cost shifting and the unsustainability of the original NEM policies have become rather contentious in states with high penetration of distributed solar. What used to be a minor irritant has grown into a massive headache.

In May 2023, the National Academies of Sciences, Engineering and Medicine released a report titled The role of net metering in the evolving electricity system. It notes that, “Over the last 3 decades, there have been fundamental shifts in the electricity system, including the growing adoption of clean distributed generation energy technologies such as rooftop solar. Net metering, which compensates customers for excess energy they contribute to the grid, has been instrumental in supporting the integration of these systems into the grid, but these policies may need to change to better address future needs.”

The report, produced through a peer reviewed collaborative process “… explores the medium-to-long term impacts of net metering on the electricity grid and customers” while examining “… how net metering guidelines should evolve to support a decarbonized, equitable, and resilient electricity system.”

A rational examination of how net energy metering (NEM) started, how it has evolved, the problems and criticisms it currently faces, and where it is, or should, be headed is long overdue. The National Academies’ report is comprehensive, factual and unbiased.

It defines net metering as “… a means to compensate customers for the output of their behind-the- meter (BTM) DG (most-notably, rooftop solar), some of which they may consume themselves and some of which flows back to the electricity grid,” and points out that,

“Where implemented, net metering has been successful in supporting DG adoption, particularly solar, leading to BTM DG levels that exceed 10% in a handful of states and are forecasted to increase in others.”

At first glance, this is as it was intended, but the report notes that, “The increasing adoption of distributed solar is one of the factors contributing to rapid and dramatic changes in the electricity system. Net metering needs to evolve because the electricity system is evolving.”

“Net metering as a billing mechanism used to compensate customers for the output of their BTM DG. ‘Traditional’ net metering offsets customer electricity consumption on a volumetric (kilowatt-hour) basis with production from BTM DG, effectively crediting production at the retail rate of electricity.”

In recent years, policymakers have adopted several net metering “variants” that credit BTM DG production at a different rate from BTM consumption including,

• “Buy-all/sell-all” rates; where consumption is charged at the retail rate paid by other customers and production is credited at what may be a different rate;
• Applying “value of solar” (VOS) to calculate the credit for excess solar production; and
• The adoption of “feed-in-tariffs” that set credits for exports into the grid based on the costs of production or to achieve a certain level of deployment.

The report examines the economics of net metering and its variants from the vantage point of

• The customer with BTM DG participating in net metering;
• Non- participating customers;
• The electricity system, the utility that serves all customers and the society as a whole.

Not surprisingly, what is good for solar customers may not be so good for non-solar ones. Similarly, while modest levels of distributed solar penetration can be accommodated by the existing distribution system, higher and locally concentrated levels may be a different story.

“Moving forward, to enable the integration of BTM DG into the electricity system to maximize benefits for all customers, traditional net metering needs to be revised to align value streams, costs, and compensation.”

The report shows the popularity of distributed solar between residential and commercial customers (visual below). It continues to grow in both sectors.

What’s the explanation? High and rising retail rates and falling PV costs. Residential solar PV system costs have fallen by 69% ($8.50 per Watt) over the past two decades, while large commercial system costs fell by 77% (visual next page). And they continue to fall while retail tariffs are high and continue rising in many parts of the US.

The cost trends are certainly moving in the direction of cheaper PV systems, many of which are now paired with stationery batteries and/or electric vehicles (EVs) which are basically large batteries on wheels.

Consequently, distributed solar has reached a turning point where it can no longer be treated as it was when it was an infant industry that had to be subsidized and supported through generous subsidies. This has turned net energy metering into a controversial issue with no easy solutions. The report acknowledges that,

“Discussions about net metering and broader policies addressing distributed generation (DG) and other distributed energy resources (DER) are occurring within a multifaceted policy environment.”

“The broader context also includes growing interest in utility business models and regulatory innovation, particularly as new and emerging technologies are deployed.”

Moreover, it is clear that this is a universal problem with many similar challenges facing countries around the world.

“By the end of 2008, 50 countries had implemented feed-in tariffs, either nation- wide or in at least some specific jurisdictions, and by 2010 feed-in-tariffs (FITs) had spread to 63 jurisdictions.”

The Academies’ report offers a number of important findings and similar number of recommendations – far too many to include – such as,

“The rate impacts of net metering on non-participating customers depend on how the cost impacts to the utility compare to the revenue impacts. When net metering is coupled with retail rate structures that recover fixed utility costs via the volumetric energy (cents/kWh) component, revenue reductions will generally exceed utility cost reductions, leading to upward pressure on non-participant rates for the utility to recover its costs.”

The findings are sensical, factually-based and carefully worded not to offend anyone, as are the recommendations such as,

“Regulators should strive to develop retail rate structures – for both DG and non-DG customers – with usage-based energy prices that correspond as closely as possible to the social marginal cost of producing and delivering electricity, inclusive of time- and location-specific environmental or other externality costs (insofar as they are not already internalized) ……..”

Or

“To the extent possible, BTM DG compensation rates should be location- and time-based, tied to available distribution capacity, to indicate where that DG would have the greatest value (e.g., in relieving or avoiding distribution constraints and/or displacing local generation with high emissions). ………..”

Who could disagree?

A whole chapter is devoted to equity considerations – who gains at the expense of whom? The arguments are definitely worth reading.

What about the future? What do we do when retail rates are high and rising – as in many places – and the cost of solar and batteries keeps on falling – which is true nearly everywhere?  

“A confluence of changes in technology, policy, economics, and customer expectations have driven fundamental shifts in the electricity system over the last two decades. Amid the global imperative to reduce greenhouse gas (GHG) emissions, innovations in and rapidly declining costs of distributed generation (DG) and distributed energy resource (DER) options have made the demand-side of the electricity system much more dynamic. Customers can choose among more and different energy products and services and can actively manage their electricity use and even generate their own electricity. These changes are precipitating the need for innovation in utility business models and regulatory frameworks to keep pace.”

The Academies’ report tries hard to remain objective with observations that few would disagree with, such as,

“In this context, net metering has played an important role in increasing the deployment of behind-the-meter (BTM) DG. Distributed solar has proliferated over the last two de-cades to a degree that may not have been easily imagined 20 years ago.”

The fundamentals apply to all states in the US and virtually all countries around the world. The specifics, however, differ greatly from one place to another.

In a broader context, it is the rapid growth of consumer-owned energy resources or CERs – including rooftop solar – that is impacting the electric power sector, especially at the distribution level. And it is at this level that rules and regulations matter. n

This article originally appeared in the July 2023 issue of EEnergy Informer, a monthly newsletter edited by Fereidoon Sioshansi who may be reached at [email protected]"

https://nap.nationalacademies.org/catalog/26704/the-role-of-net-metering-in-the-evolving-electricity-system?utm_source=NASEM+News+and+Publications&utm_campaign=9ce47bc999-EMAIL_CAMPAIGN_2023_05_15_05_25&utm_medium=email&utm_term=0_-9ce47bc999-%5BLIST_EMAIL_ID%5D&mc_cid=9ce47bc999&mc_eid=3e9d2d277e.