By Paula Mints
Founder/Chief Market Research Analyst

Net metering and interconnection are rights afforded distributed generation (DG) residential and commercial solar system owners through the U.S. Energy Policy Act of 2005. The act required publically owned utilities to offer net metering and left the various policies up to the states to enact.

In 2004, before that energy policy was enacted, 39 states had net metering and interconnection standards and policies. At the beginning of 2016, 43 U.S. states and three territories had net metering policies, and four states had policies similar to net metering that the Database of State Incentives for Renewables & Efficiency refers to as “statewide distributed generation compensation rules other than net metering.”

In the U.S., the availability of net metering was a key driver in the adoption of residential and small commercial solar. Net metering allows DG system owners (or lessees) to receive a credit for the electricity their solar systems generate. In the early days of net metering the electricity generated by the owner’s solar system was purchased monthly by the utility with, typically, the excess credited and rolled over to the following period or granted to the utility at the end of the year. Utilities paid for the net excess or credited the electricity generated by net metered solar systems at avoided cost, a market average or in some cases, at the retail rate.

The concept of avoided cost is essentially a comparison point used by utilities (in this context) to arrive at reference price point for buying electricity from another source. The Public Utility Regulatory Policies Act of 1978, affectionately known as PURPA, defined avoided cost in general as the cost of generating power from another source. In 2005, the Energy Policy Act amended PURPA and, as previously noted, obligated publically owned utilities to offer net metering. In terms of DG residential and commercial solar, avoided cost comes into play in terms of how utilities pay for a system’s net excess electricity. Not only is there no standard for the state-by-state definition of avoided cost in the context of net metering, there is no standard as to how net excess electricity will be compensated.

Some states use a definition of avoided cost based on short run marginal cost — diminishing marginal returns — and some states use a definition based on long run marginal cost — returns to scale. Basically, avoided cost is a reference point derived by some means to set a price for power. In the case of DG residential and commercial solar the method by which avoided cost is calculated is very important — it is also important in setting power purchace agreement rates.

In the early days of net metering, it was not typical for customers to be paid for the net excess generated by their solar systems at retail rates or favorable market rates. In many cases, utilities owned the net excess electricity generated by net metered systems while the owners of these systems had no right to the excess electricity. In the early days of net metering customers were solely looking to save money — the potential of making money at the DG system level is fairly recent.

Net Metering in the Spotlight

From 2005 through 2015, the residential application in the U.S. grew at a compound annual rate of 53 percent. Though net metering is only one driver of this growth, it certainly makes the economic case for the homeowners, particularly when net excess electricity is credited at retail rates. Figure 1 offers residential solar growth in the U.S. from 2005 through 2015.

Figure 1: US Residential Application Growth, 2005-2015

Utilities did not expect solar industry growth to accelerate so significantly, and there is no doubt that they see this growth in terms of revenue decay.

Currently, and it must be stressed that there is no clear trend in terms of outcomes, the following changes to net metering are being sought on a case by case basis:

• Additional or increased fees for net metered systems: Depending on the fee, this change can dissuade potential buyers/lessees, and high fees can upend the economic benefit for buyers/lessees
• A switch to time-of-use rates: Higher prices for electricity during peak times and lower payment for net excess during off peak times can upend the economic benefit for buyers/lessees
• Lowering the reimbursement for net excess to avoided cost: Danger of undervaluing net excess and upending the economic benefit for buyers/lessees
• Changing the rules for reimbursement for net excess: A blast from the past that could (in the worst case) result in the net excess being granted to the utility
• Making all of the above retroactive: So many dangers, so little time to list them

The utility argument for altering how net excess is compensated and for adding additional fees is economic. Utilities argue that ratepayers with solar systems (leased or owned) are renting less electricity from the utility and thus not paying their fair share for overall maintenance. The argument continues that the costs are unfairly shifted to ratepayers without solar systems on their roofs.

Establishing a fair fee for solar customers over and above the base fee all ratepayers pay is not simple. The addition of fees for solar customers should not be overly punitive or appear as a referendum against DG solar. After all, ratepayers without solar systems benefit from the clean energy generated by ratepayers with solar systems. Also, the electricity future likely includes more self-consumption and more microgrids as well as a new operating and revenue model for utilities. Fighting this change is futile.

The argument over who owns the net excess electricity generated by a DG solar system is simple. The electricity is fed into a common grid, all electricity customers use it and the generator of the electricity owns the net excess and deserves to be paid a market rate for it.

At the core of the utility’s argument, and often unmentioned, is a reduction in its revenues.

A Comparative Trip Down Memory Lane

Four states have been front-and-center currently in the net metering landscape: Arizona, California, Hawaii and Nevada. These states offer examples of the way things could play out as the net metering argument spreads from state to state. Reference years provided as examples are 2006, 2009, 2013 and 2016.

Arizona, Abandon all Hope Ye in APS Territory

In 2006, Salt River Project (SRP) purchased net excess at an average monthly market price minus a price adjustment, while Arizona Public Service (APS) and Tucson Electric Power (TEP) credited net excess at retail rate and granted the electricity to the utility at the end of the calendar year. There were no specific fees for solar system owners/lessees.

In 2016 things are very different; the state net metering policy credits net excess at retail rate with net excess paid at avoided cost. APS ratepayers, whether they leased or bought their systems, pay a $0.70/kWp monthly charge. For many, the changes in net excess compensation along with the additional fees for ratepayers in APS territory could swing the economic argument away from leasing or owning a solar system.

Table 1: Arizona Net Metering Overview, 2006, 2009, 2013 and 2016

California: Walking the Fine Line of Compromise

California’s solar system owners came through a recent high profile fight over net metering relatively unscathed, though the result is not perfect. The net metering landscape has changed from no fees to a one-time interconnection fee and non-by-passable monthly charges for all electricity consumed from the grid. Though the charges are relatively modest, system owners beware; charges always go up and almost never go away. Ratepayers with solar systems will also be forced into time-of-use billing and will be credited or paid for net excess at the rate equal to the 12-month spot market price. To this last, spot market prices are not always favorable and in an oversupply situation can be downright penurious.

Table 2: California Net Metering Overview, 2006, 2009, 2013 and 2016

Hawaii: Not an Island Paradise for Solar

In October 2015, for all those applying for interconnection/net metering after Oct. 12, 2015, the Hawaii Public Utilities Commission voted to end net metering, offing instead three options: grid-supply, self-supply and time-of-use tariff. This decision effectively put the brakes on Hawaii’s strong market for DG residential and small commercial solar.

Table 3: Hawaii Net Metering Overview, 2006, 2009, 2013 and 2016

Nevada: Et tu, Brute?

Nevada’s recent net metering decision slammed the door shut on the state’s DG solar installation industry, outraged current solar customers and set a precedent that — if not overturned by legislation or lawsuit — will be considered in states across the country. Specifically, by making the new rules essentially retroactive the decision of Nevada’s Public Utilities Commission (PUC) could cause potential DG solar system owners/lessees to think once, twice and maybe delay adoption.

Nevada’s PUC increased the monthly fee paid by net metered solar customers from $12.75 to $17.90 and will credit net excess at avoided cost. Existing solar customers will be phased into the new rates in three years for the monthly fees and over 12 years for the lower net excess rates.

Table 4: Nevada Net Metering Overview, 2006, 2009, 2013 and 2016

The Trend is That the Fight is On — As Usual

Net metering serves the market function of setting a price for kWhs of electricity. A DG solar system (homeowner or small business) generates electricity and the owner/lessee of the system sells the electricity that it does not need (the net excess) to the utility. The electricity that is generated is used by all ratepayers. The value proposition is clear. Reasonably the sellers want to profit from the electricity they sell or at least receive a credit on their electricity bill that fairly values their net excess generation.

Unreasonably, utilities would prefer not to pay a fair market price for the net excess.

Changes to net metering programs are being considered all across the U.S., and there will be wins, losses and new fees. Trends to be very concerned about include the switch back to crediting net excess at avoided cost instead of at retail rates and to higher fees for net metered solar customers. The most disastrous potential trend is to make changes to net metering retroactive thus encouraging potential customers to reconsider. This last trend must be fought vigorously. The U.S. solar industry is up to the fight.

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