Allocating costs and benefits of a US renewables initiative requires transparent, well-informed and rigorous public discussions by all relevant stakeholders

Renewable energies have experienced resurgence in the US in recent years, thanks in part to falling photovoltaic (PV) prices and various federal and state tax incentives. 

However, some of these incentives appear set to shrink over the next few years.

At the same time, use of taxpayer resources to support renewables continues to meet with wariness from some quarters, as exemplified by the backlash to the Solyndra debacle (the 2011 bankruptcy of a large solar company that enjoyed taxpayer-funded loan guarantees).

Therefore, promoting renewables with little need for taxpayer support must be an attractive proposition to many public officials in the US.

In this context, net energy metering or net metering has gained increasing traction as a way to support adoption of renewable power generation by households and businesses (part of what is referred to as “distributed generation” or “DG”) without ostensibly burdening taxpayers.

User-friendly arrangement

Net metering, currently used in 43 states and the District of Columbia, refers to a billing arrangement whereby utility customers with their own DG systems - for example, solar or wind - can sell electricity that they generate in excess of what they consume at any time back to the utility and receive a credit at full retail rate against power that they do consume from the power grid.

In some states, customers can even carry their net excess generation (NEG) forward to future billing cycles, and get paid (at varying rates) at the end of the billing year for any remaining NEG.

Net metering goes hand in hand with many states’ policies requiring electricity suppliers to obtain a certain share of power from renewables, commonly referred to as Renewable Portfolio Standards.

Due to its user-friendly nature, net metering has the potential to proliferate among utility customers, especially if they can overcome the perception that on-site solar power involves significant costs.

A helping hand from solar installers

Aimed squarely at that perception, various solar companies such as SolarCity and Trinity Solar are promoting solar installation deals that require no upfront costs to customers and may result in combined monthly utility bills, after net metering where applicable, and monthly payments under a long-term lease or power purchase agreement, being lower than the utility bills that would otherwise be the case.

The success of such third party financing model has been touted by the Solar Energy Industries Association.

Utilities cry foul

Although renewables remain a small part of the overall mix of power generation in the US - solar power, for example, provides for less than one percent of the nation’s energy needs - certain members of the utility industry are already sounding the alarm on net metering based in part on projected trends; in turn, proponents of renewables have pushed back.

At the heart of the debate is how the costs of investing in and maintaining and operating the poles, wires, transformers, meters and other infrastructure involved in transmission and distribution of power (grid costs) should be allocated.

Utility representatives argue that, to the extent that net-metered customers are credited at the full retail electricity rate - which includes not just the cost of the power supplied by or through the utility, but also an allocation of the grid costs (currently charged in proportion to power consumed) – such customers are effectively avoiding paying the grid costs associated with;

• the electricity that they receive from the grid as to which they apply the credit, as well as
• the use of the grid in selling power back to the utility.

Additionally, Edison Electric Institute (EEI) - the trade group representing US investor-owned utilities - argues that grid costs per se are increased by sales to the power grid: “…electric companies face integration challenges associated with the variable, fluctuating levels of power created by wind and solar DG systems”.

EEI further argues that such costs are being shifted to customers who don’t or can’t access net metering: “…if net-metered customers do not contribute to the fixed costs of … the grid…, a company’s remaining customers will face higher rates to pay for these costs” – possibly substantially higher, according to one industry argument.

Wealth disparities worsened?

Also, as a “social fairness” argument, many non-net-metered customers have been portrayed as middle- to low-income households who are made to bear grid costs avoided by more affluent, net-metered customers.

For example, at an annual meeting in 2013, Southern Company (a utility based in Southern US) CEO Thomas Fanning told shareholders that if solar customers are not paying the utility for the use of the electric grid, then “… you in effect have a de facto subsidy of rich people putting solar panels on their roof and having lower-income families subsidize them”.

The Center for American Progress (a liberal think tank) has sought to rebut this type of argument in this research piece, but with some acknowledged limitations on the data used.

Just fair compensation, ergo no subsidy?

Proponents of renewables argue that net-metered customers are either receiving fair compensation for the power sold to the grid, or even providing more value than they receive back, if valuation of their services includes currently non-market-priced benefits of DG such as;

• clean air and environment,
• public health improvements,
• creation of green jobs,
• energy self-reliance, and
• enhanced grid resilience (by off-setting peak demands on the grid).

EEI counters that societal and environmental benefits are hard to quantify and it would be unfair to include them in valuation of power sold to the grid when they are currently excluded from utilities’ rate-setting.

Also, except perhaps in respect of grid resilience, query whether it is fair if such general societal benefits are paid for by a higher allocation of grid costs to non-net-metered customers.

Utilities’ business model under siege?

Utilities’ concerns regarding net metering might go deeper than championing the interests of non-net-metered customers.

In addition to the threat posed by DG to the monopolistic nature of the US utility business model, many in such industry foresee a "death spiral" occurring in their business where, if DG proliferates, aided by net metering, customers without DG will increasingly bear the grid costs.

Such customers would then be incentivized to adopt DG themselves, decreasing demand for the utility's services at an ever faster rate.

When that potential trend is examined together with innovations in energy storage technologies and continuing declines in the prices of PV and other renewables, it is not difficult to envision a future where large swaths of the population enjoy their own DG, save any excess generation in efficient storage devices for future use, and take advantage of the grid only as a back-up power source.

Such scenario has the potential to shake the utilities’ current business model to the core. Already, a leading bank (Barclays) has downgraded the US electric sector due to the types of threats to the utilities’ business model discussed above.

On the other hand, utilities offer various benefits which seem sustainable. The industry provides customers access to power sources such as oil and gas, coal, nuclear, hydroelectric, as well as solar and wind - with benefits of economy of scale - that are not available or readily scalable via DG.

Moreover, some conventional fuels (e.g. natural gas) tend to provide more reliable, predictable and adjustable power output than solar or wind.
Such diversity of choices is essential to the country’s energy security.

Some of the more adaptable utilities are even throwing their considerable weight behind supporting DG themselves.

Breaking the impasse?

Perhaps in recognition of the value and concerns of utilities, the Natural Resources Defense Council (NRDC), a prominent US environmental advocacy group, issued a joint statement with EEI to US state regulators in February of this year.

The joint statement recommends, among other things, the following;

• recovery of utilities’ “non-fuel costs” should reflect their costs of maintaining and improving the grid, and should not be tied to levels of power consumed; and
• when they use the grid to import and export electricity, customers with on-site DG must provide reasonable cost-based compensation for the utility services they use, while also being compensated fairly for the services they provide.

It is quite possible that, under the principles of the joint statement, utilities should be able to recover grid costs based not just on actual usage, but availability as well, of grid services, analogous to how banks might charge fees for making revolving loan facilities available, in addition to interest on loans actually made thereunder.

New questions

The joint statement suggests that the current net-metering model will need to be refined or even revamped.

For example, will power sold to the grid be credited at less than full retail rate?

Alternatively, would net-metered customers have to pay some type of surcharge? There is contentious precedent for that.

Arizona imposed such type of surcharge on net-metered customers last year, although in an amount that was much smaller than what was requested by the major local utility, disgruntling supporters of the latter. In California, utilities have aggressively pushed for grid fees that would add about $120 a year to solar users’ bills.

The joint statement may even contemplate alternatives to net metering.

Value of solar (VOS) tariffs

For example, Minnesota adopted a VOS tariff option, as an alternative to net metering, for investor-owned utilities in a law passed last year.
Under that option, customers with PV generation would be billed for their gross electricity consumption, and will receive a VOS credit for their gross electricity production.

In January of this year, the state’s Department of Commerce promulgated a methodology for calculating the VOS credit that is intended to provide fair compensation to PV customers while allowing utilities to recover reasonable grid costs.

Presumably, a utility will pick VOS tariff over net metering when it believes that the former will offer better recovery of grid costs based on equivalent “net” power usage.

However, certain solar industry representatives have objected to VOS on the basis that it allegedly gives utilities more scope to throttle the market size and/or pricing of solar DG.

Conclusion

It is not yet clear how the joint statement’s principles would impact the specifics of utility rate design around the country; the devil is of course in the details, and none of the approaches to grid cost recovery mentioned above obviates the need for workable, standardized methodologies to allocate such costs fairly, including valuing customer-generated power appropriately.

Regulators should also consider how future rate design

• might impact the economics of third party-financed solar installations, discussed above, given the importance of the latter to DG; and
• should factor in potential secular declines in demand for power from the grid if DG proliferates, and the implications thereof to optimal grid size and costs.

The interaction of diverse stakeholder interests, differences in values of and output from multiple forms of power generation across geographies, and continuously evolving technologies (and pricing thereof) of renewables and power storage and management, virtually assures the unavailability of any one-size-fits-all solution to the aspirations and concerns as to net metering.

This article can only highlight some of the salient aspects of this evolving policy debate, but one take-away is the need for accuracy and intellectual rigor in framing the issues.

In retrospect, the idea that 1 kWh sold to the grid by a customer turns her meter back by 1 kWh may be too simplistic - even if politically appealing in terms of its user- and seemingly tax-friendly features – and does not adequately account for externalities imposed by such approach.

Optimally identifying, measuring and allocating costs and benefits of a renewables initiative requires transparent, well-informed and rigorous public discussions by all relevant stakeholders - including utilities, customers, renewables industries, legislators, regulators and relevant NGOs – preferably from the outset.
Well-balanced, stakeholder-driven solutions must be crafted to sustain the current momentum of renewables in the US.

Wilfred Chow is a US-based researcher and writer on corporate responsibility, governance and ethics and sustainability. He previously served as a managing director and associate general counsel at a leading financial services firm in the US.