Op-ed: The problem with metering solar energy customers

New HampshireArizonaMaine, and several other states are making changes to their net metering policies for solar energy. New Hampshire recently upheld the governor’s veto of a net metering expansion bill and Arizona is fleshing out a replacement for net metering. Net metering policies determine what rooftop solar owners are paid for the electricity they feed onto the electrical grid.

Generally, it requires that utilities pay the retail rate for electricity that rooftop solar panels produce rather than the lower rates that they pay other electricity generators. That means that a solar customer who consumes about 900 kWh in a month but produces 1,000 kWh from their panels will be paid the retail rate for the excess 100 kWh. If the figures were reversed, then they would be charged for the 100 kWh difference.

Net metering is meant to promote rooftop solar adoption and green electricity supplies, yet it does so at high cost. Net metering moves the share of grid maintenance costs rooftop solar owners would normally be paying onto average utility customers — including lower-income households.

Net metering’s cost-shift starts with how utilities charge customers for their electricity and services. Even though the costs a utility faces come from multiple sources, they largely collect their revenues from total sales.

Costs, in turn, come largely from maintaining capacity — things like having powerlines that can carry enough electricity for periods of peak demand and keeping generators on-call for when more generation is needed. There are also several fixed costs, like customer support and billing, which must be met no matter how much electricity a customer consumes that month.

This mismatch between revenues and costs makes net metering a threat to the business models of utilities across the nation. When a customer installs rooftop solar panels, they can dramatically reduce the costs the utility can charge them for since they consume significantly less electricity. That means that even if a utility spends $45 to 70 on ensuring that a consumer has power whenever they flip a light switch or plug into an outlet, the utility recoups none of those costs if the consumer’s production equals their consumption.

This $45 to 70, as estimated by Brookings Institution utility expert Lisa Wood, is the cost-shift from a single rooftop solar customer to non-solar customers when the rooftop solar customer pays a bill of zero. This doesn’t happen all of the time, but one summary of 11 different estimates of this cost-shift ranged from about $440 a year to around $1,600 a year. An estimate for the California Public Utilities Commission found that $1.1 billion of costs would be shifted each year by 2020.

The size of the cost-shift is debated amongst researchers, but no one seriously debates its existence. Studies have found strong evidence of the cost-shift under a variety of conditions and rules. For example, one 2015 paper by five engineers and electricity policy experts found that the cost-shift existed under each of the eight different policies they examined in simulations of 12 different electrical grid systems.

The cost-shift also creates regressive effects. It moves costs from the wealthy to middle-class and poor consumers. A 2018 Berkeley National Laboratory report of solar adoption and incomes in 13 states estimated that the median income of solar adopters was 54 percent higher than the median incomes of non-solar adopters. In dollar terms, that is a difference of more than $30 thousand a year.

Since the cost-shift is largely driven by poorly designed electricity rates, a straightforward policy change is to more closely associate costs and utility charges. Utilities should introduce charges for capacity, costs related to making sure the lights come on whenever consumers want them to, and fixed charges for things like billing and other customer services, alongside the existing charges for total electricity consumption.

Indeed, the authors of the 2015 study suggest just that, utilities should make their electricity rates reflect sources of costs instead of relying on total sales alone to cover everything. Adding demand charges and fixed charges would go a long ways towards ending the regressive cost-shift that current net metering policies create.

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.