I've read a good deal of public discussion recently on net metering and the unfair costs it is said to impose on the host utility, or on other customers in the utility territory through cross-subsidies. This position is echoed in personal conversations I've had with many industry participants. The arguments posited might be summarized as follows:
When a utility pays retail or near-retail prices for power injected onto the grid by customers with distributed energy resources (DER), that payment amounts to a "subsidy" for those customers or the energy service companies that lease the DER to them. The reason given is that the customer's payment exceeds the utility's avoided energy cost.
The spread of DER cuts into the amount of energy sold by the utility which reduces utility revenue while the cost of maintaining the grid for all remains the same. Thus, affluent customers who can afford DER -- say, solar photovoltaic panels on their home -- get a break (the "subsidy") while less affluent customers shoulder a greater burden to keep the system running.
And if the customer in question leases solar PV from an energy service company, then the subsidy flows to that third party, which is an unintended consequence of flawed policy.
These arguments conclude that utilities and/or low-income customers are treated unfairly by net metering policies and remedies are needed, and swiftly.
Fair compensation for DG
Most industry people I speak to appear to accept these arguments at face value. And, at face value, they make sense to me as well. I'd like to make a few points on behalf of a more well-rounded, long-term view that reflects the interests of all stakeholders and shows that sometimes intuition falls apart under analysis.
The well-regarded Regulatory Assistance Project (RAP) issued a position paper about one year ago titled, "Designing Distributed Generation Tariffs Well: Fair Compensation in a Time of Transition." The findings show that, at times, net-metering policies can be unfair and at other times net metering's value to the grid exceeds the cost. Each case must be evaluated separately and best practices for evaluating services to the grid must be used. There is no over-arching conclusion or discovery from their exhaustive analysis about net-metering policies that indicates cross-subsidy occurs or that utilities are hurt financially.
Here is a central statement in RAP's paper that is critical to a discussion of net metering: "The regulator's challenge in this time of transition is to support policies that use the legacy systems wisely while nurturing the evolution of the systems that will facilitate the transition to a far more efficient, environmentally benign, transactive electricity sector."
RAP's recommendations to regulators
Policies for industries in transition, as electricity is today, must address today's realities yet take into account current trends that will shape tomorrow.
After reading the RAP's paper and discussions with thought leaders in the energy industry, I now think that demands for reforming net-metering policies are premature and those who have already done so, like Wisconsin, are likely a mistake. The total value of DER and net metering policies across all stakeholders, now and into the near future, requires a deeper and broader discussion. It is incorrect to say that net metering is a cross-subsidy from wealthy homeowners to middle and lower classes because costs and benefits change based on time, location, technology, policy and other factors.
RAP recommends against fixed monthly to address net metering inequities. Here is why: "Modifying retail rate designs to collect distribution costs in a fixed monthly customer charge is not a preferred path. Rate design of this type tends to penalize apartment dwellers and other urban residents, who typically impose lower distribution costs on the utility than the average customer.
"Setting the tail block of an inclining block rate structure at the long run marginal cost is more equitable than increasing the fixed monthly charge because it does not discriminate against low income and low volume electricity consumers, it does not discriminate against urban and apartment dwelling consumers and it is consistent with valuing the avoided cost component of DG at the long run marginal cost."
RAP makes three other points I would like to mention in this context. One, recognize that value is a two way street. Customer-side meter resources such as distributed generation, energy efficiency, demand response and storage produce value for the electric system. Likewise, the grid offers valuable services to DG customers; therefore, all parties should be fairly compensated for the services they provide to each other with due consideration of the full range of benefits and costs associated with each service delivered.
Two, remember that cross-subsidies may flow to or from distributed generation owners. Value doesn't only flow from the utility to the consumer. Regulators should seek to remain objective and allow for the possibility that the value provided to all customers by DG may be greater than the costs incurred to support the presence of distributed generation tariffs. Conversely, regulators should be open to the possibility that non-participating customers may be getting less value from distributed generation than they are paying to support those tariffs. We can't know without doing detailed analysis similar to what's in the research, and the RAP paper demonstrates how to do that analysis.
Three, subsidies have acquired a pejorative cast in the net metering discussion. They are bad, the thinking goes. But are they? It's common knowledge that infant-industry subsidies are a long tradition in the U.S. -- look at railroads, highways, telecom, even agriculture. At some point an industry becomes mature and should compete without subsidies; however, regulators should be mindful that financial assistance to prove up promising new industries is a long-established and important practice in the U.S.
In addition to this analysis by RAP, ElectricityPolicy.com published a fine article by Jim Kennerly titled, "Rate Design Pathways to Fair Utility Rates for Solar PV in a Distributed Energy Age" with excellent analysis, though not as detailed as RAP's, on December 2, 2014.
I'll end by reiterating that fairness, transparency, objectivity and a methodology for assessing DER's costs and benefits among all stakeholders should prevail. That approach is likely to have diverse outcomes depending on local factors for utilities and their stakeholders.
View all SMART GRID Bulletins click here