Press Room

CRES BLOGGERS

By Mona Newton, Sun Electric Systems, CRES Board Member

April 2007

As the cost of photovoltaic (PV) systems stabilize and the economics improve every year for grid-tied installations at homes, ranches, and businesses throughout the state are buying and installing more PV systems. These homeowners and small businesses make decisions to invest based on costs, financing, and other issues such as hedging against rising electricity prices, etc.

Unfortunately, there is one factor ─ interconnection with the local utility ─ that can hinder or help the market economics and can have as much or more impact on the buyers’ decision than the market. That factor is the local utility’s policy toward interconnecting distributed solar and small wind systems to the grid. Small, distributed generators must have the utility’s cooperation or they are dead in the water. This situation exists because the utility is the sole supplier of electricity and, for local electricity generators, the sole buyer. In economic terms, the utility is both a monopoly and a monopsony, with which a solitary customer has no leverage or alternative.

As a result, interconnection rules for utilities are almost always decided in political venues such as state legislatures where agreements can emerge that are fair to both buyers and sellers. This is true for net metering as it was for similar rules before solar and distributed generation came on the scene.

Benefits of Net Metering

One method for interconnecting small wind and solar systems has emerged that seems to work better for all the rest: net metering. This is where a homeowner or rancher connects a small PV or wind generating system through the utility meter without installing extra hardware to measure output. The owner gets credit for extra generation against the bill at the same rate the utility charges for use.

There are benefits that accrue to the utility, the customer, and the community from net metering.

For the utility, a well-designed net metering policy provides a simple, low-cost, and easily administered way to deal with distributed generators. Utilities without net metering often have to deal with new distributed generators on a case-by-case basis. This hodge-podge approach can be difficult to manage and can easily lead to misunderstandings.

What about the traditional utility concern of cost and reliability? First, utilities obtain electricity and capacity from small, distributed solar installations. This is electricity they don't have to generate themselves or purchase on the market. For solar systems, this generation takes place every day of the year with a very high correlation with utility peak loads. Utilities call this a high load carrying capability. Of course, small wind systems have a capability value that is much smaller; the wind is variable while sunshine is relatively easy to predict. For both types of systems, utilities obtain the benefit of additional capacity in their service territory paid for by their customers, not by ratepayers.

Distributed generation also can strengthen the distribution grid, especially in rural areas. This is because voltage tends to drop at the end of long distribution lines when loads are high, and if it drops below a threshold level, the breakers will trip and a temporary blackout occurs. Grid-tied solar systems connected to the distribution grid strengthen voltage and improve overall service. And this grid support can defer maintenance and upgrades in the power distribution system, which is a tangible benefit to utilities.

Customers benefit from net metering small wind and solar systems because they obtain a long-term guarantee of low utility bills.

Communities benefit from the investment in local generation. This investment not only increases local property values but increases local business opportunities as well. It is the difference between paying rent and paying a mortgage. Local investment lifts all boats.

Myths about Net Metering

1. Net metering hurts the utility bottom line by reducing revenues.

This argument is similar to the one against energy efficiency that customers reducing their purchases of electricity hurt utility revenues. This would be true if everybody bought a PV system and put it on their roofs.

Unfortunately, there is little risk of this happening quickly in the current Colorado economy. PV is a developing technology that will become cost competitive with conventional generation over a period of many years. The current market is small and does not affect even a fraction of a percentage point on a bottom line of any utility that reports these figures publicly. I cannot find any example of a U.S. utility having been harmed or even claims to be harmed by net metering. In Colorado, solar doesn’t yet register on the pie chart of fuel-types contributing to electricity generation.

Nevertheless, any net metering policy should receive regular review to monitor progress of the technology and development of the market. The service provided by electric utilities is extremely valuable, and no one that I know wants to hurt that industry. If solar (and especially energy efficiency, which has a much larger potential for impacting rates than solar) gets to the point where it actually reduces utility revenues, I believe rates should be restructured to guarantee that service. After all, solar needs a grid to connect to!

2. Net metering represents a subsidy from one group of customers to another.

This argument has to do with the "rate base plus" formula that utilities use to charge customers. The argument is that utilities charge all customers in the same class a single rate, which represents an average cost of doing business plus profit. Under this time-honored formula, all of the differential costs of providing service to individual customers are lumped into a single average cost per kilowatt-hour (kWh). So the person who uses a lot of electricity during the day when the cost of obtaining electricity is higher pays the same as the person who uses all of their electricity at night during off-peak hours. One could argue that one type of consumer “subsidizes” another based on patterns of consumption, etc.

Utilities and their customers have supported this averaging formula for years in the name of economic development. For example, building a new home represents a cost for a utility because it must invest in new generating capacity in order to supply this electricity. Therefore, ratepayers subsidize solar systems through net metering no more than they subsidize construction of new homes. Both represent expanding business opportunities, and electric utilities have figured out a way to accommodate this economic growth through existing rate structures for more than a century.

3. Net metering represents a burden for small utilities.

The opposite is actually true because large organizations are better equipped to handle more complicated arrangements. Net metering is as simple as it gets to administer because it requires no special equipment, no new rates to establish, no new procedures. All that is required is that the utility add a line in the ledger for each net metering customer to carry forward credits until the end of the year.

Compare this with the existing alternative for non-utility generators, which requires installation of another meter. Then the utility must make special trips to read this meter and readjust its accounting procedures to keep track of another meter for a single account. All this for measuring small amounts of electricity (in utility terms) from distributed generators. A study by the Pacific Gas & Electric Company in California in 1996 found that the cost of reading the extra meters for distributed PV systems alone outweighed the cost of net metering.

A well designed net metering system is a win-win for Colorado utilities and their customers.