The ongoing advance of distributed photovoltaic ("PV")
solar power generation in the U.S. continues to stoke debate
regarding how residential PV customers should be compensated for
feeding power back into the grid.
Historically, net energy metering ("NEM") was the rate
structure pursuant to which such customers have been paid. In the
43 states with NEM rate designs, the energy produced by a
customer's PV system each month, measured on a kilowatt hour
("kWh") basis, is subtracted from the energy consumed by
the customer for that month, and then the customer in turn pays the
utility for the net amount of power. If the amount of power
generated by a customer for a given month exceeds the amount of
power consumed then, depending on the jurisdiction, the customer
receives for such excess power either a volumetric bill credit for
energy use determined at the full retail rate, a cash payment
determined at the full retail rate or, less commonly, a cash
payment determined upon some lower "avoided cost"
rate.
In those states that have adopted an NEM rate structure and that
otherwise have a strong solar resource, it is indisputable that the
NEM rate design has spurred the adoption of residential distributed
PV solar systems. It is likewise the case, particularly in those
jurisdictions that either credit or pay the customer the full
retail rate for excess electricity generated, that investor-owned
electric utilities and solar developers have disputed whether the
NEM rate structure is appropriate.
Specifically, utility companies argue that while they typically
recover most of their costs through volumetric charges per kWh of
energy delivered across their networks, most distribution network
costs arise from fixed investments in wires, transformers, and
other equipment sized to meet peak demands. Utilities maintain that
because of the mismatch between the mostly variable energy charges
and mostly fixed transmission and distribution costs, an NEM rate
structure that provides full retail-rate payments to PV customers
threatens the utility's ability to recover rates for such transmission and
distribution costs. To counter that threat, utilities
contend that they must seek to raise the retail rate for all
customers which in turn effectively shifts grid system costs from customers who
can afford solar PV systems to those who cannot.
Advocates of NEM rate structures that
compensate solar customers at the full retail rate contend that
systemic retail-rate compensation already covers fixed grid
reliability costs and, additionally, that the growing number of PV
solar systems in any given service territory permit the utility to
avoid environmental, generation, and transmission and distribution
loss costs. These NEM design supporters, led by many of the
large independent residential solar installers across the country,
believe that the NEM structure is essential to the
third-party-ownership business model they have successfully
developed and implemented. In their view, the effective combination
of federal tax credits, plummeting solar installation costs,
third-party financing, and NEM rate design have supported
unprecedented U.S. solar growth over the last few years.
As state legislatures, public utility commissions, and
municipalities attempt to address this tension, a number of
potential—albeit hotly contested—alternatives to full
retail-rate NEM structures have begun to emerge.
In April 2014, Minnesota approved a value of solar tariff ("VOST")
compensation methodology. The VOST, which the Minnesota
Legislature had directed the state's department of commerce to
develop, is based in large part on an NEM rate design alternative
pioneered in 2006 by Austin Energy and Clean Power Research, a
Texas municipal utility. Pursuant to the VOST methodology,
solar PV customers in Minnesota are billed for their energy use at
the incumbent utility's full retail rate, but given a credit
against that bill for energy produced by their PV systems. The
credit is calculated at the fixed VOST rate.
In theory, the Minnesota VOST more accurately values how much
solar power is worth to the utility, its ratepayers, society, and
the environment, by taking into account certain avoided system
costs (e.g., fuel, fixed and variable operations and maintenance,
generation, reserve, transmission and distribution capacity,
environmental, etc.) afforded to the grid by a customer's
installation of a residential solar PV system. To date, the
VOST—which is being challenged in respect to its income tax
implications for PV system owners, its effect on one's
eligibility for the federal investment tax credit, and its
potential chilling effect on third-party ownership financing
alternatives—has yet to be adopted by any utility which can
choose between the VOST and NEM for its solar PV customers.
More recently, in November 2014, the Wisconsin Public Service Commission
("PSC") voted 2 to 1 to permit We Energy to charge
all residential customers in its service territory a $16.00 monthly
fixed fee (up from $9.00) plus a volumetric fee of $0.1349 per kWh
(down from only $0.139). Solar customers will also have to pay
$3.80 per kilowatt per month and will only get $0.03 per kWh for
excess energy provided to the grid each month (down from $0.14).
Additionally, the PSC's approved change in NEM design shifts
the program from annual netting to monthly netting.
The decision in Wisconsin, if unchanged, will likely eliminate any
possibility of residential solar power ever becoming economical in
the state. In light of there being only about 600 residential PV
customers in Wisconsin today, its impact on the current market is
negligible. That said, for the residential solar industry
generally, the Wisconsin decision provides utilities with an
alternative tool for fighting allocating costs in other
states.
In addition to the solar compensation models in Minnesota,
Wisconsin, and Arizona, the NEM rate structure is being revisited
in California, Massachusetts, Colorado, Hawaii, and a host of other
states. Suffice it to say that the debate about compensation for
distributed generation PV solar systems will continue in 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
