Utility Net Metering Caps Undermine Renewable Energy Installation Goals

Hello Readers,

As you may know, many states have set up aggressive Renewable Portfolio Standards (abbreviated RPS, and defined below) in an effort to promote clean energy job creation, foster the development of fledgling domestic energy industries, and address pollution and climate change issues. Even though policies vary widely (see map), only 12 states do not have any RPS.  Furthermore, in almost every state that has an RPS, the end-goal of the policy is to ensure that 10-33% of electricity is being generated by renewable sources within the next 5 to 15 years.

Renewables Portfolio Standards (RPS)

Renewable portfolio standards (RPSs) require utilities to use renewable energy or renewable energy credits (RECs) to account for a certain percentage of their retail electricity sales -- or a certain amount of generating capacity -- according to a specified schedule.

As defined by DSIREUSA.ORG

That is to say that: 38 states (and Washington DC) have laws mandating that by the year 2025 at the latest, 10% or more of the electricity consumed in the state must be generated from renewable energy sources (commonly solar, wind, and/or biomass). However, in many cases there are very low caps put on the state regulations that require utility companies to offer net metering to customers.

Net Metering Rules

The definition of 'net metering' varies from state to state, but in the narrowest definitions it at least allows for the owner of a distributed generation (DG) system to be credited or compensated on a 1:1 basis for electricity sent back to the utility grid (as opposed being used on-site). The credits or compensation are then applied to a customer's account to negate other electricity usage. In most definitions, credits may be saved and applied over the course of a 12 month period. In broader definitions, net metering can involve crediting multiple billing accounts for one customer and/or multiple billing accounts for multiple customers, which may or may not be limited to a specific geographic area.

In a very real sense, when electricity is generated, it is used up by the nearest possible consumer. That is to say that, the energized electrons do not care who is paying for the electricity, they just want to get rid of their energy as soon as possible. To understand the impact of this physical reality, let us consider an example, wherein your neighbor has a solar distributed generation (DG) system on their roof and they are not using up all of the energy it is producing during any particular second.

In this example, it is likely that the appliances in your house are running off of your neighbor’s solar DG system rather than the coal power plant on the other side of town. Furthermore, the utility company is benefitting from your neighbor’s solar DG system, because the coal plant does not have to run as hard (using less fuel) and because the power lines running across town are under less stress (requiring less maintenance in the long term). However, during the times when your neighbor’s system is producing less than they are using, your neighbor is drawing electricity from the other sources on the grid just like everyone else.

To ensure that utility companies are fairly compensating DG system owners for the benefits they provide, basic net metering regulations typically require that a kWh of electricity sent back onto the grid from a DG owner negate the financial burden of a kWh equivalently being consumed by the same DG owner.

Unfortunately, not every property is ideally suited for installing solar and wind DG systems, so for many businesses and homeowners it is less financially viable to install a DG system to cover their own energy needs on-site. However, many other properties are perfectly capable of supporting a renewable DG system that can produce more energy than is used on-site. As a result, property owners (and/or electricity users) often prefer to come together to co-finance larger projects on more suitable properties and share the resulting electricity, allowing for a quicker return on investment (i.e. lower electricity costs for participants). Also banks and other financial institutions are often more willing to provide up-front financing when the financial payback (and the related risk of default) is spread over many participants. But how can electricity be shared?

Because of the nature of electricity (as described above), it is often impractical for multiple businesses or homeowners to physically transfer the electricity produced by a shared DG system over long distances. Even in cases where it is feasible to physically transfer the electricity, running the necessary wires would typically create a redundant set of equipment in parallel with the existing utility lines. Instead, arrangements can easily be made to virtually connect the utility billing accounts of the physical host of the DG system and the other participants or co-owners. This is a common form of net metering.

Unfortunately, the net metering rules are often capped at a threshold equal to a very small percentage of the utility's annual peak energy demand. This means that once the total installed capacity of distributed generation systems reaches the cap, no more DG system owners are able to take advantage of the financial benefit of net metering rules (or in some cases even legally interconnect DG systems), which fundamentally limits the ability of businesses and homeowners to afford or finance the installation of new DG systems. But why is net metering important with regard to utility companies meeting their RPS targets?

Superficially, the cap on DG systems does not directly interfere with the ability of utility companies to meet their RPS targets. In fact in most cases, it is entirely possible for utility companies to finance and maintain their own commercial-scale (non-DG) renewable generation systems; however, this would require utility companies to purchase or lease large tracts of land and roof-space and hire workers to develop, construct, and maintain the equipment.

Thus, as a general practice, most utility companies have not been installing and maintaining their own renewable energy generation facilities. Instead, they rely on the purchase of RECs and SRECs from businesses, homeowners, and independent developers who finance, construct, and maintain renewable DG systems on their own property. In turn, the wide of adoption of renewable DG systems, which is hindered by restrictive net metering caps, is the de facto means of meeting RPS targets.

Rather than considering the restrictiveness of these caps on net metering in the abstract only, in the rest of this Net Metering series, I shall consider the specific example of Massachusetts, a state that has recently been gaining a lot of attention from the solar and wind industries.

Sincerely,

Sean Diamond

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