Net Metering is an electricity billing arrangement where solar panel owners are credited for the energy their panels produce and send to the grid.
What net metering is
Net Metering is an electricity billing arrangement where solar panel owners are credited for the energy their panels produce and send to the grid. For example: your solar panels generate 10 kilowatt-hours (kWh) and send them to the grid during the day while you’re at work. Then you come home and use 10 kWh of electricity at night. Your bill for that day would be $0. Essentially, net metering is what people are talking about when they say solar “makes your electric meter run backwards.” It’s a deceptively simple concept, but there are lots of rules and regulations that effect how it works. It’s the most important policy that makes solar power financially viable over the long term.
Why is net metering important?
Net metering has long been adopted by most of the country as the default billing arrangement for solar owners. Because people are usually away from their homes during the day when solar panels are producing electricity, most of the power is used by someone other than the owner. Without net metering, that electricity could be credited at wholesale rates, often about 25 of retail. Net metering makes solar economical. It allows solar owners to benefit from both sunny days and summer months, when their solar panels produce more energy than they can use. This builds up credit with the utility company that can be applied when the sun isn’t shining.
Most of the country does a good job with net metering
Currently, 37 states have decent-to-good net metering policy, and 3 states are on the cusp of making that list. Here’s what net metering in the U.S. looks like in 2016.
What are the benefits of net metering?
The benefits of net metering might seem like they only affect solar panel owners, but they affect everyone. While solar owners get paid retail prices for the electricity their panels produce, traditional power plants sell their generated electricity for wholesale rates. But rooftop (aka “distributed”) solar power tends to be consumed locally, reducing strain on generation and transmission infrastructure that would otherwise be carrying fossil-fuel-based electricity from a distant power plant.
Solar panels aren’t the same as other forms of electric generation—they replace an expensive system with a localized, modern one. To build a power plant or industrial-scale solar farm, the utility companies need to buy, rent, or take (via eminent domain) land; get public approval for huge construction projects and power line rights-of-way; and build and maintain expensive infrastructure. Additionally, sending power from far away to the point of use means losing some of that electricity due to the nature of the power transmission system.
Small solar is more efficient. Solar panels are located on top of existing structures, directly where power consumption happens. This reduces demand at peak times and prevents costly infrastructure investment and power losses in distribution. Those are huge advantages.
Net Metering Provides Other Benefits
What is the controversy over net metering?
Over the past several years, industry groups have been working with pro-business groups to write legislation that rolls back protections for solar net metering. These groups have had limited success in getting rid of popular Renewable Portfolio Standards through state legislatures, but they’re beginning to find footholds among lesser-scrutinized state public utilities commissions (PUCs). PUCs are usually appointed by the governor, and not subject to the levels of scrutiny elected officials are. They make the rules that govern how electric utilities can operate in the state, and they have the power to change net metering rules without oversight.
For example, Nevada’s PUC changed net metering rules in December 2015. They completely eliminated net metering in the state, and are phasing in new rates over the next several years under which solar owners will be paid less for each kWh of energy produced by their panels and see fixed monthly utility fees increase.
The Nevada PUC argues that because they are paid retail rates for the electricity their panels produce, solar owners are not paying their fair share of grid maintenance costs. They claim it’s a subsidy for people rich enough to be solar owners, despite evidence stating otherwise. They claim those costs have been shifted onto non-solar customers, who shouldn’t be forced to bear the burden.
But as we mentioned above, distributed (rooftop) solar has many benefits to the grid, including reducing the need for expensive energy generation and transmission infrastructure that the per-kWh fees are designed to collect money for. In fact, in 2014, Nevada’s PUC commissioned a study of the value of solar, precisely to see whether costs were being shifted to non-solar customers, or whether solar had greater-than wholesale value to the grid and the larger community. The study found that net metering for solar is actually responsible for financial benefits greater than its costs to maintain. That’s why it’s so odd that the PUC then voted to end net metering in the state.
The changes these rules brought have caused solar companies in the state to shut down operations, leading to the loss of an estimated 5,000 jobs for Nevadans. On top of that, people who just installed solar panels saw their financial future change with the stroke of a pen, and now face the prospect of losing money on the deal. The new rules affect all solar owners, even those who installed panels when net metering was the law of the land.
The Nevada changes led to widespread protests in the state, with many people calling for the end of Governor Brian Sandoval’s administration, and asking the PUC to reconsider rule changes for existing solar owners.
As of February 26, 2016, the outcry has caused the PUC to change the phase-in period for the new rate schedules from 4 years to 12 years, which will allow existing solar owners to reclaim some of the value of panels they’ve already paid for. But this will not help to rebuild the state’s scuttled solar industry. A ballot initiative to reinstate net metering is likely to put the issue in front of voters in November.
This is what net metering advocates across the nation are up against: a concerted push to end fair compensation for solar, even as states continue to push for higher renewable energy use. Monopoly utility companies don’t like competition because they can’t continually raise rates on energy people generate themselves. Now that we’re seeing an explosion in home solar and falling prices for solar panels, the utilities want to stop it, while building up their own industrial-scale renewable generation facilities.
As of early 2016, nearly half of all states are studying changes to net metering rules. Nevada and Hawaii have already made huge changes to net metering. Maine is next. Expect to see more changes around the country in the coming months.
What happens if net metering goes away?
If net metering is replaced by wholesale power purchasing, solar is likely to struggle to keep up with grid prices. At least until prices fall below a certain threshold, which they’ve been rocketing toward ever since the 2008 extension of popular solar tax credits. The graph below shows what falling prices does for solar installations.
Prices for solar are so cheap that, after tax credits and rebates, buying solar is far better than paying utility companies for electricity. Solar saves owners thousands of dollars over its 25 to 30-year lifespan in every state.
But that’s with net metering in place. If net metering goes away, solar will still offer a narrow financial benefit in sunny states, but solar owners will get paid very little for the electricity they send onto the grid. And if Nevada is any indication, net metering going away will kill much of the solar industry in the country, unless some alternative to net metering can be found.
What are the alternatives to net metering?
The first, and most damaging to Americans financially, would be increased fees and whole sale prices for excess energy. This would likely put solar leasing companies out of business, but it’s likely that paying up front for a solar purchase would still return a tiny profit over the long term as prices for solar panels keep falling. If the switch to higher fees and lower payments happens across the country like it did in Nevada, the utility companies will retain control of the generation and transmission infrastructure.
The most beneficial alternative would be a nationwide net metering standard. This could be brought about through legislation passing a comprehensive renewable portfolio standard and net metering bill for the whole country. It could also come through similar, non-legislative regulation like what’s happened under some state PUCs. For example, the Federal Energy Regulatory Commission (FERC) is the federal government entity that has jurisdiction over the rates, terms and conditions of wholesale electric sales by public utilities. FERC has purposefully stayed out of the fight over net metering nationwide, though some people argue that FERC should step in and provide clear guidance.
A nationwide standard for net metering would end complex state rules and effectively make the whole country good for solar, from a financial perspective at least. It would decrease the chances that changes in law could result in the kind of chaos we’ve seen in Nevada, and would set the country on a solid path to solar growth.
The Value of Solar Tariff
Like we mentioned above, Nevada, among other states, have spent a great deal of time and effort studying the value of solar. The findings of those studies have been used to propose a way to guide the establishment of fair alternatives to net metering. These suggestions recognize the collateral benefits of distributed solar power for utility companies and the customers they serve.
Generally, the proposals call to switch from net metering to a solar compensation mechanism called a “levelized Value of Solar (VoS) tariff,” which would be a fixed per-kWh payment to solar owners over a long-term contract, usually of 20 years. A study in Minnesota concluded that a levelized VoS would be about 30 higher than current retail prices for electricity, but would be paid over a 25-year contract.
The advantage of a fixed price over a long term contract is that it makes solar pay itself back now, and have a relatively smaller impact on the utility company into the future; as retail rates increase over time, either keeping pace with inflation or adjusting for other reasons, the VoS tariff stays the same. The benefits include decreased electric supply volatility, reduced need for infrastructure investment, and carbon mitigation accrue to the utility over the life of the contract.
With a smart implementation of a levelized VoS tariff, solar can grow and be a key part of our future energy mix. It is the best alternative to net metering, from a financial sustainability perspective.