The real net metering story: Not precedents, but many solutions

By K Kaufmann

Hawaii, Nevada, California, Maine — in recent months a succession of states have adopted or started to consider changes to retail-rate net metering, the per-kilowatt hour compensation solar owners receive for the excess power they feed into the grid.

The approaches have varied from keeping the status quo, for at least a few more years, in California to significant cuts in compensation rates and increases in other charges in Nevada to a menu of options in Hawaii. But in each case, the reporters and pundits covering these stories eventually raise the same questions: Will this approach to reform become a precedent for other utilities and regulators? What will its impact be on the residential solar market?

Installing solar in Hawaii, where the state’s Public Utilities Commission recently replaced retail rate net metering with a menu of three options. 

The idea of precedents seems to suggest that a single or optimal approach to reform can be found — and that residential solar market growth is the primary, if not only goal. However, the range of solutions and proposals emerging around net metering reform indicates a different, wider perspective. What’s really going on is a fundamental change in the energy value proposition, which in turn is producing a continuum of approaches to solar compensation and rate reform based on regional markets, politics and distributed resource planning.

What is significant are the drivers and trends underneath these various approaches, and the possible points of commonality between them.

Net metering reform is transitional

The main drivers of energy transition and market disruption in the United States are well known: the shift from a one-way grid based on centralized, remote power generation to the two-way power flows that rooftop solar and other distributed energy resources make possible.

Revisions to net metering policies are part of the larger changes in rates and business and planning models this transition has triggered, and the various approaches to all these issues are themselves transitional.

The California Public Utilities Commission (PUC) clearly stated that its decision to maintain retail rate net metering at least until 2019 was tied to other changes in residential rates and distributed resource planning that would be going into effect over the next few years. That and the commission was under a legislative mandate to issue a ruling by the end of 2015, as explained in its final decision:

“The work on the successor (net metering) tariff would greatly benefit from more information and improved analysis that the Commission has set in motion. Since that is not possible, given the timelines involved for the various proceedings, we must make the determinations about the (net metering) successor tariff at a transitional moment, rather than at a time when there is a wider and deeper array of information and analysis relevant to making that determination, on a more quantitatively informed basis,”

Read the new report from SEPA and Black & Veatch on how utilities are planning for distributed energy resources, here.

Similarly,the Hawaii PUC sees its reforms as the first step in the state’s efforts to meet a 100-percent renewable target by 2045. The commission’s decision offers solar customers three options, including one that provides below-retail bill credits for the excess power they feed back onto the grid.

The goal, as stated in the ruling, is “to establish a transitional market structure for distributed energy resources, one that will allow . . . sufficient time to fully examine the issues inherent in expanding (distributed energy resource) deployment statewide, such that these resources will continue to provide value to Hawaii in the future.”

In both cases, while intent on maintaining healthy residential solar markets, the commissions are looking beyond such immediate impacts to how changes to net metering can contribute to long-term growth of all distributed resources and their value to all customers and the grid.

Defining a reasonable rate of return

The solar industry’s standard argument for retail rate net metering is that it ensures solar owners a reasonable rate of return on their sizable upfront investments in their rooftop systems. But the definition of “reasonable” — the point at which electricity bill savings offset solar investment — has been a constantly moving variable, spiraling down with the cost of solar itself.

A decade ago, payback periods of 10-12 years were possible in markets with high electric bills, such as Southern California. Today, paybacks of five to seven years or lower are not unheard of, depending on local incentives and electric rates. The working assumption is that any reversal of the downward trend would disrupt market growth.

The obvious example here is Nevada, where the PUC’s decision to significantly cut solar compensation rates and increase fees on solar owners has changed the economics of residential solar in the state. Solar leasing companies such as SolarCity and SunRun abruptly closed their operations in the state.

SEPA’s 51st State Initiative, Phase II, is looking for road maps to energy system change, here.

But markets tend to be more resilient than we give them credit for. Prior to the extension of the 30-percent federal investment tax credit in December, many analysts were predicting that while potential expiration would put a temporary brake on solar growth, the market would readjust as solar prices continued to fall and electricity rates rose.

Net metering reform is being driven in part by the same dynamic. In a recent article, my colleague John Sterling, Senior Director of Research and Advisory Services at the Solar Electric Power Association, predicted a point of equilibrium would be reached within the next five years. That is, as solar costs fell, electric rates would be high enough for solar to provide “attractive benefits for all stakeholders” — even with below-retail rate net metering.

Up until now, the impacts of energy system transition in the United States have fallen mostly on utilities and regulators. As the changes take hold and impacts ripple out across the industry, might solar firms also have to adjust their business models — and their customers’ expectations on reasonable paybacks?

Building out the continuum

The range of approaches to net metering reform also includes a handful of smaller, but innovative solar compensation programs that are surfacing at electric cooperatives across the country. Unregulated, member-driven and often more open to experimentation, co-ops’ very localized approaches to net metering reform show that below-retail rate compensation and robust market growth are possible.

The Kauai Island Utility Cooperative (KIUC) has experimented with both retail and below-retail rate net metering, but the vast majority of it solar customers are compensated for their excess power under a program known as Schedule Q.

Started in 2008, Schedule Q pays solar customers for their excess power at a rate commensurate with how much the co-op would have paid to generate the power from other sources, which on Kauai tends to mean oil.

Read the article on SEPA’s 2015 fact-finding mission to Hawaii here.

The rate fluctuates monthly with oil prices and has run from 10 cents to 29 cents per kilowatt hour, according to Jim Kelly, the co-op’s member services and communications manager. Almost all of KIUC’s solar customers — more than 3,300 — are enrolled in the program.

The New Hampshire Electric Cooperative (NHEC) took another approach to recalcuating its net metering rates last year, after a sudden growth spurt in the local solar market put it in on the brink of exceeding its share of a state-mandated net metering cap.

Approaching the situation not as a problem, but as an opportunity, the co-op came up with a trade-off. It could cover its local distribution costs by cutting its solar compensation rate by approximately 3 cents per kilowatt hour and, in return, eliminate all net metering caps.

The new program only began in the second half of 2015, but according to Ken Colburn, an NHEC board member, the co-op has continued to see healthy solar market growth.

Speaking at a recent forum for utilities serving rural and remote communities, Colburn reported that as of the beginning of January, NHEC had 2.2 megawatts of solar in the application queue for its revised net metering program. He also noted that other utilities in the state, facing their own net metering caps, are beginning to look at the co-op’s model as a possible solution, as are state legislators.

As more and more solar and other distributed resources come on the grid, net metering and rate reform will be an ongoing process that will, hopefully, produce a rich, diverse array of solutions. What the most innovative and effective programs appear to share are their efforts to balance stakeholder interests.

Their goals are to build a robust, sustainable solar market, while covering utilities’ costs to maintain local distribution systems. They are also committed to providing solar customers with fair compensation for their excess power, without affecting rates for non-solar customers.

K Kaufmann is SEPA’s communications manager. She can be reached at [email protected].