Featured Insights

Net Energy Metering Fair Compensation or Unjust Subsidy

Net Energy Metering Fair Compensation or Unjust Subsidy

   Subject Matter Experts:

Tim Mason
   Senior Consultant
   Black & Veatch’s energy business

   Dan Wilson
   Renewable Energy Consultant
   Black & Veatch’s energy business

June 2013 Issue

Archives of Energy Strategies Report.

Net Energy Metering: Fair Compensation
for Clean Electricity or Unjust Subsidy?

Did you know that your neighbor down the street who installed solar photovoltaic (PV) panels on his roof might be affecting your electric bill?  In fact, there is a significant chance that he is.  The real question, though, which Black & Veatch is trying to answer in California, is this: Is your neighbor’s solar array raising or lowering your bill?

An increasing number of U.S. electric utilities offer incentives for homeowners and business owners who “go solar.”  For the customer, the idea is to watch his electric bill melt like a box of crayons left on the rear window shelf of his car on a sunny day in July. One of the most prevalent incentives—and the mechanism by which the customer can reduce or almost eliminate his  bill—is the net energy metering (NEM) tariff, which applies to customers whose PV is connected to the household circuitry “behind the meter.” 

A solar-equipped house typically follows this daily pattern: during daylight hours the PV panels generate more electricity than is used and power is exported to the grid, causing the meter to run backwards. At night, power is taken from the grid because the solar panels are not generating.  NEM allows solar customers to earn credits for the power they send back to the grid (to put it another way, the utility is required to buy this power from the customer), offsetting the nighttime consumption. In California, incentives are structured so that over the course of the year the PV generation balances out consumption and therefore the bill is close to zero.

NEM has existed for almost 20 years in California. Now, the plummeting cost of installed solar systems makes this a cost-effective decision for many consumers—especially in areas where the electric rates are high and the sunshine is plentiful. Some California utilities now have 5 percent or more of their customers on the NEM tariff, and the number is growing quickly.
In addition to lowering customers’ electric bills, solar advocates argue that NEM offers benefits to the utility system. This brings us to the wrinkle in the concept, one of the largely untold tales in the push for clean energy.

There is an increasing concern that current rate structures do not allow utilities to recover the costs needed to serve the net-metered customers, and these costs are being shifted to non-NEM customers. 

This was not an issue several years ago when NEM customers were rare, but utilities are now afraid of a customer backlash because of the cost shift.  Since California is at the forefront of this issue, it is being closely watched by the rest of the industry. 

Black & Veatch is leading a study for a California utility examining the cost of service for NEM customers.  The objective is to identify all of the costs which the utility incurs to serve the NEM customer, identify all of the benefits (such as avoided costs) that the NEM customer provides to the utility, and then quantify those costs and benefits. The tradeoff is hotly debated. 

Solar advocates often argue that NEM customers may in fact be under-compensated for the benefits they provide, including avoided costs for energy, generation capacity, fossil fuel reduction, transmission capacity, and greenhouse gas emissions which are now a real cost for utilities within California’s cap-and-trade system. It is also argued that since net-metered PV reduces demand on the system, the construction of new or replacement distribution lines are avoided.

The utilities claim that NEM customers are not paying their fair share when they can offset essentially all of their electric bills. They say that customers are not paying for services they still receive, such as transmission and distribution operations and maintenance, administrative costs, and public goods charges for low-income and energy efficiency programs.  NEM customers require these services since they are still using the grid as a backup for their PV systems.   Additionally, net-metered PV will not significantly reduce required distribution capacity, since the lines are designed to meet peak demand and PV output might be insufficient to fulfill this need.

Further, utilities argue that net-metered PV may actually increase utility costs in certain cases if, for instance, the variability of solar output causes voltage fluctuations that require distribution equipment upgrades.

A 2010 study sponsored by the California Public Utilities Commission showed that NEM costs slightly outweighed NEM benefits, and thus there was a small cross-subsidy from non-NEM customers to NEM customers; a utility-sponsored study came to the same result.  Other recent studies sponsored by solar advocates have shown that NEM benefits may slightly outweigh the costs. 

The results of Black & Veatch’s study in California are pending, but the bottom line is that while NEM customers should get full credit for the energy they generate and the benefits they provide to the utility, there are “sunk” infrastructure costs which PV generation does not avoid. 

A potential solution to this issue may be further “unbundling” of utility rate structures to allow them to charge customers for the individual services used, eliminating cross-subsidies. The topic is controversial—some solar advocates disagree that a cross-subsidy even exists, and many stakeholders do not yet believe that a major rate structure overhaul is necessary.  Black & Veatch’s study may be one of the most detailed and comprehensive to date on the subject of NEM, but it will not be the last.