Net Metering, Disruptive Change and Emerging Rate Policy Issues

7/27/2019 Net Metering, Disruptive Change and Emerging Rate Policy Issues

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Net Metering, Disruptive Change

and Emerging Rate Policy Issues

The Council of State Governments

CAPITOL RESEARCH

ENERGY AND ENVIRONMENT

THE COUNCIL OF STATE GOVER NMEN TS

A unique conuence o challenging and revolu-tionary actors is occurring in the normally steadyand predictable utility industry. Electricity demandplateaued in 2007 ater years o stable growth and

it may stay at or several years to come. Increasedenergy efciency rom both the private sector andstate/ederal directives, more stringent environmen-tal compliance regulations, planned retirements ocoal-fred power plants and the substantial increasein the availability o relatively aordable domesticnatural gas have uniquely coalesced at roughly thesame time.

Undergirding all these changes in market andregulatory orces is the emergence and utilization o21st century computing capability via the applica-tion o smart grid technology, while the rate recoverymechanisms used in some states to pay or projectsand new consumer options is based on a mid-20th

century model. These new technological applicationsand devices oer great promise or utilities, grid man-agers and consumers by giving them the capability tomanage energy use, reduce harmul air emissions andprevent power outages. Policies surrounding thingslike net metering also have given consumers a fnan-cial incentive to harness renewable energy eitherthrough owning their own systems or through attrac-tive leasing options to have solar panels installed bythird party companies. Rootop solar installationsgrew 76 percent between 2011 and 2012 and providemore than 3,000 megawatts o installed capacity.1

Depending on perspective, these can be excitingprospects or ones o potential strategic concern.

Smart Grid, Distributed Energy and Net

Metering Generation BasicsSmart grid is a comprehensive term that describes

the technological advancements o the transmissionand delivery o electric power. In essence, smart gridencompasses the utilization o 21st century inor-mation technology and computing processing toremotely monitor and automate aspects o the elec-tric grid. The grid traditionally has been made up osubstations, transormers, transmission lines, switchesand a variety o other physical components. By apply-

ing new technological advancements to the existinggrid inrastructure, electronic devices can now havetwo-way digital communication with a utility to helpmanage load, voltage and directly monitor outages.2

This automation allows the simultaneous andefcient monitoring o millions o devices that couldhave signifcant uture ramifcations or consumersand the economy. For example, utilities previouslyhad to wait or customers to report outages duringa storm, but with smart grid technology, grid manag-ers and utilities can immediately locate problems asthey occur. Minimizing outages and quickly repair-ing storm damage can save money, reduce hard-ship and delays or customers. It also allows betterprioritization o the utilitys assets and personnel.The advanced sensing and computing capabilitieso these smart systems also can detect when criticalcomponents o the grid may be damaged or near the

end o its useul lie and indicate repairs beore majorproblems happen.

One o the practical outcomes rom the increaseduse o smart grid technology is the growing expansiono distributed energy technologies. These technolo-gies are reerred to as distributed because they aretypically small, modular devices placed at or near thepoint o energy consumption, rather than a tradition-al centralized system, where electricity is producedat a large utility some distance away that transmitspower on existing inrastructure through substationsand power lines. Examples o distributed energy


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are ound more commonly in photovoltaic systems,localized wind turbines, uel cells, and combined heat

and power systems, which recover heat that normallywould be wasted in an electricity generator by usingit to produce steam or hot water heaters, heatingor cooling. When connected to the electric grid withsmart technology, distributed energy can provideutilities options to meet peak power demand, powergeneration and localized distribution with discretebatches o electricity.3

Another beneft o distributed generation is theability to help so-called microgrids isolate themselvesrom disturbances by continuing to provide powerduring outages with the local utility. The most com-mon example supporters o expanding microgriddevelopment use is the New York University Medical

campus, which invested heavily in an efcient cogen-eration plant that utilized natural gas and combinedheat and power. The medical campuss systemcreated almost continuous electricity and providedheat when Hurricane Sandy was causing tremendousdamage to the New York/New Jersey area.4

Net metering is one policy nexus that utilizesthe connective, two-way unctionality o smart gridtechnology with distributed energy. According to arenewable energy consortium, the Database o StateIncentives or Renewable Energy, managed by theU.S. Department o Energy, 43 states have adoptednet metering policies allowing customers o certain

electric distribution companies the ability to generatetheir own electricity, which can be used to oset theirelectricity usage.5 Net metering is an increasinglyattractive option or consumers because it also allowsa customer to sell excess power to the utility. Homesand acilities are connected with a smart meter thatcan communicate directly with a distribution com-pany or utility, which measures the net quantity oelectricity that the customer uses. These meters spinorward when the customer uses electricity rom thedistribution company and spin backward when thecustomer generates excess electricity. In essence, theexcess electricity is exported to the electric grid andused to power other homes or businesses in the area.6

I consumers generate more electricity than theyconsume, they receive a credit that is typically ap-plied to their monthly power bill. The value o thecredit is determined by a methodology approvedby the state public utility commission or publicservice commission. The size and capacity o powerloads available or net metering vary rom state tostate. Overall, the Solar Energy Industries Associa-tion, a trade association o solar energy companies,

estimated in 2012 that roughly 220,000 customersnationwide utilized net meteringprimarily throughsolar photovoltaic systems on homes and business.7 AJuly 2013 report published by the advocacy organiza-tion Environment America ound that Arizona hasthe most cumulative solar power capacity per personin the country, while Caliornia leads the nation withoverall installed solar capacity at 1,033 megawatts.8

The U.S. solar photovoltaic systems market can bebroken down into three segments: customer-owned,third-party owned and utility-owned. The astest-growing segment o the residential rootop solarindustry is the third party business model, which grew

76 percent between 2009 and 2011. Many consumersfnd contracting with a third party an easier way toaccrue the benefts o solar power that can reducepower bills, while allowing a private company toshoulder the upront costs o installation and owner-ship o the inrastructure.9 The solar installationcompanies, in return, get the ederal tax advantage othe alternative energy investment tax credit, whichprovides a 30 percent dollar-or-dollar credit againstederal tax liability.

The American Recovery and Reinvestment Act o2009 created a program in the Treasury Departmentcalled Section 1603, which allowed developers toreceive a direct ederal grant in lieu o the 30 percent

investment tax credit. The Solar Energy IndustriesAssociation said the program has supported morethan $7 billion in private sector projects.10 Combiningederal tax incentives with state programs, renewableenergy mandates, accelerated depreciation schedulesand long-term contracts allowed in purchase poweragreements or lease scenarios can be fnanciallyrewarding or third-party companies. Venture capi-talist Nat Kreamer, CEO o Clean Power Finance,estimated that as much as 45 percent o an inves-tors expenses can come back through avorable taxtreatment in the frst year o a loan and the returnon investment can be in the high single digits and

mid-teens.

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Fundamental ShiftsAlthough the total number o customers utilizing

net metering and distributed options is relativelysmall nationwide (less than 1 percent o the popula-tion), the growing consumer interest and anecdotalevidence o its expanded use across the country hassome in the utility world seriously questioning thelong-term viability o the traditional power deliverysystem. David Crane, the president and CEO o theutility group NRG Energy, said at a March 2013conerence hosted by The Wall Street Journalthatutilities do realize that distributed solar is a mortal


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threat to their business because utilities increasinglywill have to split the cost o continued inrastructureupgrades and maintenance with ewer customers.12

The Edison Electric Institute, the largest umbrellaorganization representing investor-owned utilities,published a report in January 2013 highlighting thestrategic challenges ahead or the industry. The reportcalled distributed energy resources and demand-sizetechnologies potential game-changers that could

aect the uture economic viability o utilities. Itound, While the various disruptive challengesacing the electric utility industry may have dier-ent implications, they all create adverse impacts onrevenues, as well as on investor returns, and requireindividual solutions as part o a comprehensive pro-gram to address these disruptive trends. Let unad-dressed, these fnancial pressures could have a majorimpact on realized equity returns, required investorreturns, and credit quality. As a result, the uture costand availability o capital or the electric utility in-dustry would be adversely impacted. This would leadto increasing customer rate pressures.13

In practical terms, here is the long-term potentialfnancial problem or the utility sector. As distributedgeneration and energy demand gain market shareand consumer acceptance or utilization through nu-merous ederal and state incentive programs, utilitiesare acing a declining loss o revenue. Utility projectsthemselves are very long-lived assets that rely on afnancial rate-recovery model set by state public util-ity commissioners or public service commissions thatspread costs to consumers out over a lengthy periodo time, usually over several years. Utilities, however,must continue to keep pace by providing integratingtechnology or distributed energy and metering, aswell as maintaining the existing fxed costs o power

generation, transmission and distribution inrastruc-ture or customers when they need to reconnect tothe grid. But on cloudy days, evenings or during timeso particularly high demand, distributed customersstill need power and the utility is obligated to provideit instantaneously to maintain reliability.14 Further,many states like Caliornia and Massachusettsrequire utilities to pay net-metering customers at thehigher retail rate or the power they generate ratherthan the wholesale rate regardless o i or when theutility needs excess peaking load. This potentiallycan lead to a signifcant drop in uture revenue ora utility, and without revenue, it is difcult to attract

capital in the private market to pay or uture inra-structure or make the new technology investments toenable enhanced distributed options that customersdesire. 15

The Growing Debate in StatesA growing dispute between utilities and solar ener-

gy providers and advocates is playing out across thecountry over the most appropriate way to continueincentivizing net metering and distributed technol-ogy. High-profle rate cases in Arizona, Caliornia,Idaho and Louisiana are largely centered on argu-ments raised by power providers that net-meteringcustomers are not paying the ull cost o the electric

services and system maintenance being providedto them because o generous incentive programs inplace. The utility Arizona Public Service estimatesthat each o the roughly 18,000 residential rootopsolar homes in its service territory shits about $1,000in costs annually to other ratepayers.16 Solar industryand installation companies and renewable energygroups argue these systems provide signifcant eco-nomic value to all consumers by reducing their power

bills and household energy consumption, as well asproviding numerous economic and clean air beneftsby reducing the need or uture power generationand transmission costs that most likely would comerom less environmentally riendly sources.

Those who support net metering believe mucho the utility pushback is a result o the potentialthreat net metering and distributed options couldhave to the utility industrys bottom line. A January2013 study conducted by an advocacy group calledVote Solar estimated that Caliornias net meteringprogram provides electricity consumers $92 milliona year in economic benefts and that it does not

produce a cost shit to nonparticipating ratepay-ers; instead it creates a small net beneft on averageacross the IOUs (investor owned utilities) residen-tial markets.17 In an interesting turn, conservativegroups not normally associated with the promotiono alternative energy have spoken out against plansin Arizona and Georgia to change the incentivestructure to promote rootop solar at their respectivestate public service commissions. Barry Goldwater Jr.has ormed an organization in Arizona to representsolar installation companies decrying reductions innet-metering incentives in TV and radio commercialsclaiming such changes will extinguish the use ohousehold solar power or the beneft o utilities.18

In solar riendly Caliornia, with the nations mostaggressive renewable energy targets o 33 percent by2020 and the nations leader in installed solar capac-ity, the issue o cost-shiting prompted legislators topass Assembly Bill 2514 in 2012, which directs thestate Public Utilities Commission to complete a studyanalyzing the ull costs and benefts o the statesnet energy metering program. The bill, sponsoredby Assemblyman Steven Bradord, also requires the


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Public Utilities Commission to examine the extent towhich ratepayers across dierent regions o the stateare receiving service under the net energy meteringprogram and the extent to which those customers are

paying the ull cost o the services being provided tothem by utilities.19

We need to get an understanding o the costs andbenefts o net metering, Bradord said in an April2013 ClimateWire story. Utilities say it is expensive,while the solar industry says it benefts the ratepay-ers. A.B. 2514 simply requires the PUC (public utilitycommission) to do the accounting and let us knowthe results so the Legislature and the public get a bet-ter understanding o how to design and implementsustainable programs to promote clean generation.20

Some state utility commissions, however, alreadyhave taken action against attempts to change netmetering programs. State utility commissions in

Louisiana and Idaho both ruled in late June and earlyJuly 2013 against petitions made by utilities to raisemonthly ees or residential and business customersthat use metering. In a July 2013 Wall Street Journalarticle, the Idaho commission raised concerns thatIdaho Powers proposal would discourage invest-ment in distributed generation and it suggested thatwhile customers may not be paying the ull cost oservices, more work needs to be done to establishthe correct customer charge.21 The utility proposeddoubling the current cap on power generation romnet metering customers to 2.9 megawatts in returnor lowering the credit rates it pays in addition to re-

quiring customers to give up extra generation creditsthey earn by the end o the year. The commission, inits rejection o the plan, criticized the utility or nottrying to resolve its specifc disputes with customersbeore seeking a rate increase. 22

Potential ResolutionsMany utilities acing a surge o net metering cus-

tomers believe conventional rate recovery methodsused by state public utility commissions may needa resh look. In states like New Jersey and Virginia,utilities can impose standby charges to recover thecosts associated with having backup power ready and

available or customers utilizing distributed genera-tion. Typically, the biggest expense or a utility is notthe power itsel but the cost to maintain the inra-structure necessary to deliver energy to customers.Virginias State Corporation Commission in 2011approved a request to allow Dominion Energy to adda standby charge estimated to be about $30 a monthor a 10 kilowatt solar system, which is roughly threetimes larger than the average size o solar systems

(three kilowatts) on residential homes in the state.23Representatives rom the utility Southern Cali-

ornia Edison have suggested Caliornias existingtiered electricity rate structure, which was intendedto charge customers more based on total consump-tion to help reduce energy demand, is awed whenaccounting or growing customer use o rootop solarThe utility contends that the largest consumers oenergy also have installed rootop solar panels. Thus,when taking into account the credits they can accruerom net metering, these large consumers are notpaying the top-tier prices envisioned by state regula-tors. Instead, the utility believes the commission

should expand the existing at ee o roughly 80 centsper month on existing net metering customers to en-sure that standby inrastructure is being maintained.2

In Arizona, the states largest utility has proposedgrandathering in existing customers under the cur-rent incentives program, but has proposed that theCorporation Commission create a separate structureor new metering customers that would includeservice charges based on the times standby poweris used during peak usage. This and other increasedusage ees have been strongly rejected by solaradvocates as a punitive step that hurts consumersbottom line and provides a disincentive rom usingsolar panels at all.

One potential option that has generated at leastpartial acceptance by many solar and net meteringorganizations is the voluntary option to use a ratestructure similar Austin Energys value o solar tari,or VOST. In 2012, the Texas utility became the frstin the country to adopt this hybrid approach, whichseparately meters a residential customers energyconsumption rom the power a homeowners solarsystem may generate. A solar customer in its serviceterritory is automatically signed up or the programand receives monthly bills or the power the homeconsumes. Customers receive a credit o 12.8 centsor every kilowatt hour their systems may gener-ate; that credit is subtracted rom the monthly bill,instead o the customers energy meter rolling backwhen it generates power or the grid like conven-tional net metering program. The credits valuationmethodology was developed in conjunction with aCaliornia alternative energy consulting frm calledClean Energy Research by utilizing an algorithm thataccounts or the value and benefts o distributed so-lar. The algorithm is updated annually and examinesthe ollowing benefts to the utility: Avoided uel costs, which is valued at the mar-

ginal costs o the displaced energy; Avoided capital cost o installing new power gen-

eration due to the added power capacity;


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Avoided transmission and distribution expenses; Line loss savings; Fuel price hedging values; and Environmental benefts.26

The solution developed by Austin Energy and itsvaluation o distributed solar in many ways reectlocal conditions in its service territory. Its supportersnote that, in theory, there should be no revenue lossor the utility nor an undue burden placed on other

customers lacking rootop solar systems becausethe utility would only pay or the value it receives.Solar advocates have examined the VOST tari andhave generally viewed it as a complementary policyor alternative that should not be used to replace netmetering, which has an established and measurabletrack record in dozens o states as well as enthusiasticcustomer interest.

The answers or state policymakers will not besimple or easy. The growing implementation o smartgrid technology and grid modernization eorts, aswell as customer interest in distributed energy op-tions, likely will increase over time. What is certain

is that rate methodologies and incentive programscreated in the 20th century must keep pace with anever-changing technological world.

1Solar Installations: Caliornias 1,000+ Megawatts Lead Record Year. Dana Hull, Mercury News.

March 14, 2013. http://www.mercurynews.com/business/ci_22786972/another-record-year-solar-installations2Smart Grid 101.Smart Grid Inormation Clearinghouse, Virginia Tech Advanced Research Institute.

http://www.sgiclearinghouse.org/LearnMore 3Distributed Energy Basics.National Renewable Energy Laboratory, December 2012.

http://www.nrel.gov/learning/eds_distributed_energy.html4How NYU Stayed (Partly) Warm and Lighted.Matthew Wald, New York Times. November 5, 2012.

http://green.blogs.nytimes.com/2012/11/05/how-n-y-u-stayed-partly-warm-and-lighted/5Database o State Incentives or Renewables and Eciency, US Department o Energy. (March 2013)

http://www.dsireusa.org/documents/summarymaps/net_metering_map.pd6Massachusetts Department o Energy and Environmental Aairs. Net Metering Frequently Asked

Questions and Answers. http://www.mass.gov/eea/grants-and-tech-assistance/guidance-technical-

assistance/agencies-and-divisions/dpu/net-metering-aqs.html#twentytwo7Solar Net Metering by State Fact Sheet, Solar Energy Industries Association. November 16, 2012.

http://www.seia.org/sites/deault/les/resources/Net-Metering-by-State_0.pd 8Lighting the Way: What We Can Learn rom Americas Top 12 States.Tony Dutzik, Rob Sargent.

Environment America. July 2013, p.6.

http://www.environmentamericacenter.org/sites/environment/les/reports/Lighting_the_way_EnvAM_scrn.pd9Who Owns Solar?Her man Trabish, GreentechSola r. June 19, 2012.

http://www.greentechmedia.com/articles/read/who-owns-solar/101603 Treasury Program.Solar Energy Industries Association.

http://www.seia.org/policy/nance-tax/1603-treasury-program11Trabish, GreentechSolar, June 19, 2012.12Utilities Facing a Mortal ThreatFrom Solar.Yuliya Chernova, Wall Street Journal. March 22, 2013.

http://blogs.wsj.com/corporate-intelligence/2013/03/22/utility-boss-aces-mortal-threat-rom-solar/13Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric

Business.Edison Electric Institute. January 2013, p. 1.

http://www.eei.org/ourissues/nance/Documents/disruptivechallenges.pd14Utilities and Solar Advocates Square O Over the Future.Lenny Bernstein, Washington Post. June

9, 2013.http://articles.washingtonpost.com/2013-06-09/national/39856630_1_solar-panels-solar-advocates-distribution 15Electric Power Politics: Net-Metering Gets Nasty.William Pentland, Forbes. May 30, 2013.

http://www.orbes.com/sites/williampentland/2013/05/30/electric-power-politics-net-metering-gets-nasty/16Bernstein, Washington Post. June 9, 2013.17Evaluating the Benefts and Costs o Net Energy Metering in Caliornia.R. Thomas Beach and

Patrick G. McGuire, Crossborder Energy. January 2013, p. 6, 1. http://votesolar.org/wp-content/up-

loads/2013/01/Crossborder-Energy-CA-Net-Metering-Cost-Benet-Jan-2013-nal.pd18Solar Groups Seek Tea-Party Support.Russell Gold, Wall Street Journal. July 3, 2013.

http://online.wsj.com/article/SB10001424127887323689204578573720128231396.html 19Assembly Bill 2514, Chapter 609. September 27, 2012. http://legino.legislature.ca.gov/aces/billNav-

Client.xhtml?bill_id=201120120AB2514 20Utilities Challenge Net Metering as Solar Power Expands in Caliornia.Anne Mulkern, ClimateWire.

April 2, 2013. http://www.eenews.net/climatewire/stories/105997873121Utilities Dealt Blow on Solar Power Systems.Ryan Tracy, Wall Street Journal. July 8, 2013.

http://online.wsj.com/article/SB10001424127887324507404578594122250075566.html22Regulators Shoot Down Idaho Power Rootop Solar Plan.Rocky Barker, Idaho Statesman. July 3,

2013. http://blogs.idahostatesman.com/regulators-shoot-down-idaho-power-rootop-solar-plan/ 23Regulators Approve Dominion Standby Charge.Todd Allen Wilson, Daily Press. December

2, 2011.http://articles.dailypress.com/2011-12-02/news/dp-nws-scc--approves-dominion-

charge-20111128_1_solar-advocates-solar-power-net-metering 24Mulkern, ClimateWire. April 2, 2013.25Arizona Utility Proposes Net Metering Change; Industry Calls It Death Knell.Anne Mulkern,

ClimateWire. July 12, 2013. http://www.eenews.net/climatewire/2013/07/12/stories/1059984298 26Austin Energys Value o Solar Tari: Could It Work Anywhere Else?Annie Lappe, GreentechSolar.

March 8, 2013.http://www.greentechmedia.com/articles/read/austin-energys-value-o-solar-tarif-

could-it-work-anywhere-else

RESOURCES

Brydon Ross, CSG Director o Energy & Environmental Policy | [email protected]
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