For the provision of electricity, legislatures and regulators have historically encouraged the construction of large, centralized power plants that are connected by a network of long transmission and distribution lines that terminate at a home or business. In the 1990’s, technological advances and progressive regulatory policies started putting this centralization paradigm into doubt by facilitating the devolution of generation from a centralized core closer to the customers’ premises.

The development of this technology – called “distributed generation” – and the regulatory changes needed for its widespread adoption parallels decentralization movements in other network industries, such as telecommunications. Internet technologies and interconnection policies are allowing the migration of network intelligence from a centralized telecommunications core to the end user’s phone or computer. Similarly, regulatory changes such as “net metering” and technologies such as photovoltaics, wind turbines, microturbines, and fuel cells, are increasing the migration of centralized electricity generation down to the customers’ premises.

Net metering is an example of a simple regulatory change that can significantly enhance the economic incentives for using these new technologies. The phrase refers to how the energy produced and consumed at a home or business that generates its own electricity is tabulated. Electricity produced in excess of what is used on the premises will spin the electricity meter backwards, allowing the customer to earn the retail value of the electricity generated. Without net metering, the excess production is tabulated by a second meter and is usually sold to the utility at “avoided cost” – essentially the wholesale rate that is much lower than the retail price.

Since the standard electricity meter usually accurately registers the flow of electricity in both directions, net metering not only helps to maximize the value of distributed generation, but does so with little cost to the consumer. In other words, the meter spins forward when the customer uses more electricity than is being produced, and spins backward when the customer is producing more electricity than is needed. Therefore, any excess electricity produced will offset the same amount of energy purchased from the utility.

Without net metering, federal law under the Public Utility Regulatory Policy Act (PURPA) requires distributed generators to use a double meter – which separately tabulates energy consumed at the retail rate and energy produced at “avoided cost.” Some utilities though have set their avoided costs very low, thus weakening the incentive for consumers to use distributed generation. This disincentive is exacerbated with intermittent forms of energy – such as solar and wind – since the consumer makes little money selling back excess energy during especially sunny or windy periods. Double metering is also flawed because of the added expense to the utility of reading the second meter and processing a monthly check.

The only major cost of using net metering for distributed generation is the decrease in demand for utility-supplied electricity. The utility’s revenue loss, however, is usually minimal and comparable to having the customer reduce electricity use by investing in energy-efficient appliances. Other costs to utilities include administrative expenses – such as application review, processing, and billing troubleshooting. But utilities also benefit because reliability of the network is improved when customers supply their own electricity, particularly during peak periods.

Net Metering Policies in New Jersey

Many states require at least some of their utilities to offer net metering, and New Jersey is no exception. Although most state net metering rules were enacted by state utility regulators, New Jersey and many other large states such as California and Massachusetts have enacted legislation requiring net metering. For example, the New Jersey legislature enacted the Electric Discount and Energy Competition Act (EDECA) in 1999, which is restructuring legislation that also requires utilities in the state to offer net metering to residential and small commercial customers generating electricity with photovoltaic and wind systems.

In September 2004, the New Jersey Board of Public Utilities (BPU) enhanced the state’s existing net-metering policy for residential and small commercial customers. The rules are arguably the most progressive set of regulations governing renewable on-site generation of electricity in the nation. They expand the number of customers who can use net metering to help recoup the cost of installing on-site renewable energy systems, and add provisions to simplify and expedite the process for customers to interconnect renewable energy systems to the New Jersey electric delivery system.

The original net metering policy applied only to photovoltaics and wind generation, but now the class of customer generators who may be eligible to participate is expanded by extending the option to all Class I renewable energy technologies – including solar technologies, wind, fuel cells, geothermal technologies, wave or tidal action, and methane gas from landfills or a biomass facility (provided that the biomass is cultivated and harvested in a sustainable manner).

In addition, the new rules increase the maximum customer-generator capacity for renewable energy systems to two megawatts (2MW) from 100 kilowatts. The original law had capped net metering at 0.1% of the utility’s peak demand or at an annual financial impact of $2,000,000. New Jersey’s two-megawatt, net-metering limit is one of the highest in the country and is crucial to allowing renewable energy to contribute a significant share of the state’s future energy needs. The state’s Renewable Portfolio Standard requires the construction of 300 MW of new Class I renewable energy by 2008, and to provide at least 20% of new demand from renewables by 2020.

The new rules simplify the grid interconnection procedures by clarifying the requirements and making the process more transparent and cost-effective. They also set strict deadlines for utilities to interconnect with distributed generators. Three levels of interconnection were created. Level 1 applies to inverter-based customer-generator facilities, which have power ratings of 10 kW or less. Level 2 applies to customer-generator facilities that have a power rating of 2 MW or less and meet IEEE 1547 and UL 1741 standards for compliance for operation with an electric-distribution system. Level 3 applies to customer-generator facilities with a power rating of 2 MW or less that do not qualify for either the Level 1 or Level 2 interconnection review procedures.

The BPU’s rules are consistent with the National Association of Regulatory Utility Commissioners’ (NARUC) “Model Interconnection Procedures and Agreement for Small Distributed Generation Resources.” Moreover, the amendments were reviewed by PJM, the mid-Atlantic regional transmission operator, and found to present no significant challenges to the reliability of the electric transmission system. The BPU will continue to work with the PJM to ensure that future regulations guarantee the safe coordination of the system. Under PJM’s current rules, units under 2MW are not required to submit metered data to them. If regulations change to modify the MW size of units, operational coordination with PJM may be necessary.

Conclusion

The centralization paradigm that has guided the generation of electricity over the past century is slowly breaking down as a result of new distributed generation technologies and progressive regulatory changes – such as the BPU’s net metering rules. Our rules all but eliminate most of the administrative roadblocks to distributed generation, and will create strong incentives for consumers to install renewable energy generators at their homes or businesses.