The Net Metering Fight
Understanding the Latest Issue in the Nation’s Rapidly Changing Electricity Market
21st Century Energy Markets Challenge Utility Companies to Adapt
Advancements in technology have enabled consumers to install solar panels on their roofs more cheaply than ever before. This presents utility companies—which have for decades monopolized the energy markets—with new challenges.
Utilities, which own the energy grids that distribute power, now must reckon with how to make money selling energy to consumers who can produce it themselves. They need to figure out how to regulate use and maintenance of the energy grid as more consumers sell rooftop-generated solar power back to the utility company. And they must learn to adapt to a world with increasingly cheap and reliable renewable energy.
These questions are playing out now around the country over a billing practice called “net metering.” The practice allows ratepayers with rooftop solar to sell excess power back to utilities for retail prices, offsetting the upfront costs of small-scale renewable energy.
The practice of net metering has existed since the late 1970s, but now utilities are saying that existing net metering policies amount to a subsidy that is too expensive for the utilities to shoulder as more people adopt rooftop solar. The current controversy centers around the correct value of the surplus energy, as utilities seek seek to lower the price they pay for electricity from rooftop solar owners.
In 2016, net metering policies are likely to change in at least 10 states.
How Net Metering Works
When homeowners and businesses install rooftop solar panels, the electricity they generate can be used to offset their monthly electric costs through the billing practice referred to as net metering. If they produce more energy than they use, consumers can sell the surplus power back to the utilities.
Based on the “net” difference between what people with rooftop solar generate and use, customers can lower their power bills or even get “negative” power bills, where the power company pays the customers for their excess electricity. Regardless of the particular rate that utilities pay for power generated by rooftop solar units, net metering makes rooftop solar systems more affordable by lowering electric bills and offsetting the cost of rooftop panels.
Net metering originated in the United States in 1979 as a way to compensate customers for their investment in renewable energy. This practice allowed utilities to capitalize on the growth of residential rooftop solar and other small-scale renewables, methods of distributed generation that stand in contrast to the classic centralized generation model normally supported by utilities.
As of January 1, 2016 41 states and Washington, D.C. had mandatory net metering rules in place, but the rates that power companies pay to solar customers vary greatly. Some utilities reimburse customers for their solar power at the higher “retail rate,” which is the same rate that they charge customers for grid power, also known as “parity pricing.” Other utilities reimburse customers at the lower “wholesale rate,” which is closer to the utility’s cost of producing or purchasing electricity from a third party. The variety of rates depends on the pricing decisions that state Public Utilities Commission make on a regular basis.
Until 2013 —when Public Utilities Commissions in California and Arizona considered raising monthly fees on solar users— most state policies and regulations favored the expansion of rooftop solar and so paid the higher retail rate. The use of solar skyrocketed around the United States as a result of practices like net metering and other incentives for installation, jumping 34 percent from 2013 to 2015.
The Growth of Solar
Solar power is a major source of economic growth in the United States. Between 2008 and 2012, the coal industry lost almost 50,000 jobs. Between 2010 and 2015, solar industry jobs more than doubled from 93,000 to over 200,000, while less than 68,000 people were employed in the coal-mining industry in 2015.
The cost of solar has also dropped precipitously due to gains from economies of scale in Chinese production, ease in financing and favorable policies like tax credits and consumer rebates. In 1977, the average global price of solar power was $76.67 per watt. In 2015, the cost of solar plummeted to just 70 cents per watt, a decline of over 99 percent. The average levelized cost of electricity for new solar projects, $125.30 per megawatt hour (MWh), is now comparable to the same measure for new advanced coal generation, at a cost of $115.70 per MWh. Solar is even more affordable in comparison with the average levelized cost of electricity for new advanced coal projects with carbon capture and storage, which costs $144.40 per MWh.
Small-scale rooftop solar will play an important role as the United States and other countries transition to a low-carbon economy by retiring old fossil fuel power plants and ramping up renewable energy. Bloomberg New Energy Finance (BNEF) estimates that renewables will account for two-thirds of the $12.2 trillion that will be invested in global power generation between 2015 and 2040. BNEF predicts small-scale solar will grow to 1.8 terawatts by 2040, a 17-fold increase from 2014, and utility-scale photovoltaic solar will grow 24-fold, to 1.9 terawatts. By this estimation, rooftop and utility-scale solar will each make up about equal proportions of overall electricity production over the next 25 years.
The technology needed to successfully transition to a low-carbon economy already exists. Now, the main challenge is how to properly value electricity that flows from customers to utilities, instead of the other way around. This will be achieved successfully only when utilities, policymakers and solar companies can work together to develop mutually beneficial solutions that capitalize on the economic and sustainability benefits of solar power.
Policymakers, solar companies and utilities don’t always see eye-to-eye on the costs and benefits of net metering.
Utilities use the money from electric bills to maintain the grid and, in some cases, generate power. Since solar users have lower power bills, some utilities, regulators and utility industry groups claim that they are not sufficiently contributing to grid maintenance and are shifting those costs to customers that do not have solar. Utilities see these lower bills as endangering their legal obligation to provide consistent power and to maintain grid infrastructure. As a result, they argue that solar-equipped consumers are not paying enough for their use of the grid under some current net metering policies.
Utilities are particularly fearful of a scenario where grid maintenance costs rise, renewable energy costs drop and more rooftop solar customers leave the grid entirely. As customers leave, infrastructure and generation rates would continue to rise for the remaining ratepayers, giving them even more incentive to defect from the grid and switch to renewables. This phenomenon received widespread attention when a utility industry report referenced a similar occurrence in the telecom business and referred to it as a “death spiral.”
So far, solar customers have had either negligible or net positive effects on non-solar customers. A 2014 study commissioned by the Nevada Public Utility Commission (PUC) affirmed the findings of most other cost-benefit analyses of net metering: "non-participants are very nearly neutral and will experience neither a large benefit nor a cost due to new (net metering) installations." Ultimately the Nevada PUC disregarded the study findings because it took issue with some of the pricing assumptions that the study made. Regardless, this highlights utilities’ fear that the burden on non-solar customers, and their own business model, could grow as more people continue to install rooftop solar.
Solar customers and installers argue that they are actually subsidizing the power grid, and warn utilities that they are depending on an outdated billing model. Surplus energy generated by solar panels reduces the strain on electric grids on summer days when demand soars and utilities are forced to buy additional power at high rates from third parties. Distributed generation also benefits all ratepayers by lessening utilities’ need to build and maintain new, expensive power plants and transmission lines because the electricity is used closer to where it is generated.
But under today’s utility business model, these firms often make money by building new infrastructure, including power plants. This model poses a challenge in integrating additional solar power onto the grid because utilities have little incentive to support this type of distributed energy.
Utilities and solar companies often see themselves in opposition to one another, but they are actually better suited to cooperation than competition. Utilities want to avoid the “death spiral” by maintaining revenue and retaining ratepayers, and solar companies know that the majority of their customers will need to rely on the grid for at least some of their electricity when the sun is not shining.
Net metering may not be a perfect policy solution. But until broader reforms are made to utility business models and regulations, many experts see it as a vital tool to integrate renewables into the energy economy, cut carbon emissions, and transition away from fossil fuels. By facilitating the use of small-scale renewables, net metering helps states meet their greenhouse gas reduction targets.
Solar’s Setback in Nevada
The Nevada Public Utilities Commission (PUC), the authority that regulates power utilities in the state, voted in December 2015 to cut net metering payments and to raise fixed fees on solar customers.
The changes took effect on January 1, 2016. For customers with rooftop solar, NV Energy, the state utility, will reduce the amount of money solar customers are paid for the energy they generate (known as “excess energy credit”) from 9.2 cents per kilowatt hour (kWh) to 2.6 cents per kWh in three-year increments by 2028. NV Energy is also raising the fee charged to solar customers to make up for the lower revenue received from them. Fixed fees for solar customers will rise every three years from the current rate of $12.75 per month to $38.51 per month by 2028. NV Energy currently charges $8.72 per month in fixed metered fees for non-solar customers.
This policy reversal will cause severe damage to the basic economics of grid-connected rooftop solar in the state. Three solar industry leaders—SolarCity, Vivint and Sunrun—have already closed their operations in Nevada. SolarCity has cut more than 550 jobs in the state as a result of the change in policy, and some solar owners have filed a class action lawsuit against NV Energy seeking damages for erasing the benefits of solar programs and rebates.
Perhaps even more damaging for the solar industry is that these rate changes apply to not only new customers but to the approximately 17,000 existing solar customers, many of whom have signed long-term leasing contracts that are now uneconomic.
The decision by the Nevada PUC to roll back net metering is a direct challenge for local solar owners and installers in the state and represents an extreme example of what can happen when state utilities and regulators are out of step with the broader energy transition.
While some states impose limits to the total amount of rooftop solar allowed on the grid, known as “solar caps,” others are strengthening their policies to allow more rooftop solar on the grid. For example, New York’s Reforming the Energy Vision (REV) program aims to restructure utilities so they can profit from integration of more renewable energy into the grid. New York also suspended its cap on solar photovoltaic systems covered by the state’s net metering program in October 2015. In New Mexico, regulators dismissed a proposal by a local utility, El Paso Electric, to impose new fees on solar owners.
Net Metering Fights Around the Country
In 2015, 27 states instituted regulatory or legislative action on net metering policies, according to a report by the N.C. Clean Energy Technology Center. The two biggest sources of contention between the utilities and rooftop solar advocates have been 1) adequate compensation for rooftop solar customers and 2) whether or not to impose limits on the amount of electricity solar customers can sell back to the grid. In the past, several studies by state governments, including Mississippi and Maine, have demonstrated the net benefit that consumers with rooftop solar create for all customers
Despite fears that the ruling in Nevada could dictate a similar decision in California, the California Public Utilities Commission voted to preserve the retail rate net metering for rooftop solar systems. This rejects most of the mechanisms proposed by utilities to lower compensation for customers, including raising fixed charges from 2-3 cents per kWh to 4-5 cents per kWh to account for transmission costs. This decision will remain in effect until 2019, when the CA Public Utilities Commission will revisit net metering policies as a new regulatory structure takes effect.
Arizona sought to find common ground between the electric utility Arizona Public Service (APS) and the solar industry. In October 2015, the commission rejected a solar fee increase (Docket No. E- 01345A-13- 0248) proposed by APS. At present, APS collects 70 cents per kWh from its net metering customers.
APS admitted to funding two secretive nonprofits with an anti-solar agenda, channeling the money through a political operative associated with the Koch brothers and their donor network. SolarCity in turn also admitted to funding an advocacy group that attacked APS. An investigation is underway regarding allegations of commissioner’s close ties with the utility company. The utility regulators hope to develop a financial model acceptable to both sides. APS is expected to file another appeal in June 2016.
Southern Arizona-based UNS Electric, a small utility with fewer than 100,000 power customers, also filed a proposal to slash its net metering payments from 11 cents per kWh to 5.84 cents per kWh. This is the rate that it pays for grid-scale solar generation.
In May, 2016, lawmakers, solar advocates and power utilities agreed to scrap two competing ballot measures that would have changed Arizona’s net metering law in favor of a compromise reimbursement system for rooftop solar owners. The agreement creates an opportunity for mediated settlement talks to preserve solar with buy-in from Arizona Public Service Co. and potentially other utilities in the state. Gov. Doug Ducey is helping mediate a compromise among citizen groups, solar companies and utility-sponsored lawmakers. The potential brokered agreement will be the latest this year, coming on the heels of a compromise between utilities and solar companies in New York.
Last year, Maine reached the 1 percent threshold, the maximum amount of power that distributed solar power producers in Central Maine Power (CMP) territory are allowed to generate on peak demand days. This triggers a review of the net metering policy as mandated by law, raising fears that the program could be abolished altogether. On January 14, 2016, CMP filed a letter with the Maine Public Utilities Commission requesting review on continuing or modifying the incumbent program.
A Republican-sponsored bill in Maine would scrap net metering for a system that lets utilities sign 20-year contracts with residential solar customers. A Democrat-sponsored bill would expand solar energy development and preserve net metering passed through committee with a 7-5 party-line vote.
The bill to preserve net metering would also expand solar energy development from about 18 megawatts today to 250 megawatts in five years, enough to power 40,000 homes, and about 2 percent of the state’s power needs. However, Republicans control the Maine House and Governorship, making it unlikely the bill will pass into law. In that case the Public Utilities Commission, where all three members were appointed by Republican Gov. Paul LePage, would take up the matter and likely gut the net metering program.
In Massachusetts, utilities are pushing for lower retail rates compared to wholesale rates and are asking for the existing caps on solar energy to remain in place, while the solar industry wants the caps to be lifted. The state legislature created a Net Metering Task Force in 2014, but it has yet to find a solution acceptable to all parties.
In November 2015, the legislators failed to raise the cap on net metering, keeping it at 5 percent for governmental customers and 4 percent for all other customers. As of mid-January 2016, 84 percent of the statewide private net metering cap is in use. National Grid has reached its public cap and is at 99 percent for the private cap. Caps for Eversource, which serves much of the Boston metro region, are expected to max out soon as well.
Another meeting on this issue is expected in the early spring of 2016. The Clean Energy Finance Forum reports that the likely compromise would be to temporarily raise the net metering cap by just 2 percent. This would be the fifth such increase since the program began in 2007.
On April 11, 2016 Gov. Charlie Baker signed a law that lifts the net metering cap for solar generation by 3 percent for all projects across the state, raising the private cap to 7 percent and the public cap to 8 percent. The law also reduces the amount that utilities reimburse commercial and residential producers by 40 percent. Solar advocates favored raising the cap even more as it removes some uncertainty in the industry and will incentivize the expansion of solar capacity. However, many in the solar industry oppose any cap at all. Solar producers could hit the new cap after just one year, which would stall new installations and dampen the total amount of solar power generated. Critics of the bill say that the tradeoff of rate reductions are imbalanced.
The Public Utility Commission of Texas will soon weigh in on whether to change the net metering rules for west Texas. In May 2015, El Paso Electric proposed doubling the residential monthly fixed charge (Docket No: 44941) for solar customers while decreasing their compensation rate. This proposal was rejected in New Mexico, another state served by El Paso Electric.
Rep. Dave Heaton (R) introduced a bill into the state legislature to introduce a lower wholesale rate for solar energy produced by rooftop solar customers. The Iowa Utilities Commission has publicly supported the continuation of Iowa's current net metering law. It is unlikely that the bill would pass under Governor Terry Branstad (R), who has supported other solar initiatives.
New Mexico lawmakers did not approve a measure that would have extended the state net metering incentive through 2024. The solar tax credit will officially expire on December 31, 2016.
While lawmakers were ostensibly concerned about how a state budget crisis would tighten finances and impede a solar subsidy, thousands of homeowners and small businesses in the state have invested a quarter billion dollars in rooftop solar. In 2015, $86 million was invested on solar installations in New Mexico. A record number of solar panels went up in 2015, and job growth within the industry jumped by more than 18 percent. However, with the 10 percent tax credit expiring at the end of the year, New Mexico joins other states where credits and incentives have started to disappear.
A group of the largest utilities in New York State and some of the largest solar companies in the country proposed a compromise solution for net metering policy. The deal would require big solar power plants or buildings with large solar arrays — rather than individual households — to pay utilities to make up for revenue lost by net metering customer compensation. While the large solar providers help support grid maintenance through utility fees, they can keep growing their residential customer base.