The Solar Net Metering Controversy: Who Pays for Energy Subsidies?

By Earl J. Ritchie, Lecturer, Department of Construction Management, College of Technology

A huge controversy has arisen in California and other states over the way solar electrical generation is subsidized by net metering, or the way in which people who produce solar energy – usually through rooftop panels – are reimbursed for the energy they generate and send back to the electric grid. Proposed or already approved reductions have been greeted by public protests, lawsuits and even a proposed amendment to the national Energy Policy Modernization Act, which would limit the ability of states to reduce subsidies.

The fight pits solar rooftop owners and the solar industry against utility companies and free marketers.

The issue

Forty-three states have mandatory net metering plans. Most net metering plans in the United States require utility companies to buy back excess electricity generated from distributed (residential and business) solar installations at the retail cost of electricity.

With the slightest bit of thought you will recognize that this is not a valid business model. No business can cover the cost of operation and profit necessary while buying their product at the same price that they sell it. In the case of utility companies, they must provide billing, support services, grid maintenance and other operational functions. For the amount of electricity provided by net metering, these costs are not covered. Typically, unrecovered costs are transferred to customers who do not have solar installations by raising electricity rates.

This is not a problem as long as the fraction of feed-in energy is small. Once solar capacity becomes a significant portion of electricity generated, as has happened in California, Nevada, Arizona and Hawaii, there is a free-for-all over who will pay these unrecovered costs.

The California example

California has by far the largest amount of solar generating capacity in the United States, representing over half of total U.S. installed solar capacity. The combination of government incentives and the decreasing costs of solar photovoltaic panels has made solar installations highly profitable, resulting in explosive growth of solar installations and the industry that markets, finances and installs the equipment.

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U.S. solar photovoltaic installations (Solar Energy Industries Association 2014)

Since solar electricity now represents 7.5% of California supply and is expected to continue to grow, the subsidy is no longer a trivial issue. A heated controversy began as a result of requests in 2015 by the major publicly traded utilities, Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric, to be compensated for unrecovered costs of net metering by additional fees and lowering the price they pay for net metered electricity. The solar industry and green power advocates responded with vociferous objections, with one spokesman calling it a “war on solar.”

In a 2016 decision generally regarded as a victory for the solar industry, the California Public Utilities Commission retained net metering at retail cost but imposed certain fees on residential solar installations. To some extent, the Commission kicked the can down the road by indicating that they will reconsider net metering in 2019.

The bigger picture

Net metering applies to rooftop solar, which represents about one third of U.S. solar capacity. The issue of subsidizing renewable energy is much broader: utility scale generation is roughly twice the size of rooftop solar, and subsidy considerations also apply to wind power and other renewables. In addition, it is a worldwide issue. The U.S. only represents about 10% of installed solar photovoltaic capacity; the largest capacities are in Europe and the Asia-Pacific region.

Public discussion often focuses on economic analyses, which are typically slanted to the viewpoints of the authors. Analyses by utility companies tend to focus on the cost of providing generation; analyses by solar advocates often include imputed environmental benefit and avoided cost of transmission and other generation facilities. Although pro-solar analyses may conclude that solar is currently economic, the IEA reports that only 4% of solar installations in 2014 were economic without subsidy. This means continued growth of solar in at least the near-term will be dependent upon subsidies.

How much should the subsidy be?

There is no reason net metering credits need necessarily be at full retail cost. Some international jurisdictions value credits below retail cost. A recent “value of solar” calculation by the Minnesota Public Utility Commission places the value above retail cost, largely on the basis on the value of avoided carbon emissions. Ideally, subsidies should be no higher than is necessary to achieve the desired utilization. As solar costs decrease, subsidies should also decrease.

The drafters of net metering legislation recognized the limitations discussed here and often included reductions when caps on the amount generated are reached. This has not prevented the beneficiaries of subsidies from complaining when they are reduced.

Who pays?

There is strong public support for alternative energy development and renewable energy incentives. This does not answer the question as to what the form and amount of incentives should be. Net metering at full retail cost transfers the cost to utility customers who do not install solar. Other forms of incentive, such as tax credits, are paid by state or local governments out of general tax revenue.

Even if the imputed environmental benefits and avoided costs of future fossil fuel power plants are taken at face value, someone has to pay the up-front cost of new solar installations if solar capacity is to grow at the rate that solar advocates desire. It has been well demonstrated that the number of homeowners and businesses willing to install solar drops dramatically if subsidies are reduced. For example, when the Nevada Public Utilities Commission voted to reduce net metering credits, the solar installation companies SolarCity, Vivant and SunRun announced they would pull out of the state. Plaintiffs in a lawsuit filed against the changes were quoted as saying they would never have invested in their PV systems had they known Nevada’s net metering program would be scaled back.

So, who is to pay? Will you and I pay through general taxes? Will utility customers pay through higher rates? At present, the utility companies would have solar users pay through lower credits. The solar companies would have utility customers and the general public pay. Free marketers would eliminate subsidies and have no one pay. As the late Sen. Russell B. Long said, ”Don’t tax you, don’t tax me, tax that man behind the tree.”

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