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Sep 25, 2014

Why the Net Energy Metering Debate Misses the Point

Bundled, Block, Volumetric Rates are the Barrier to Unleashing DER Innovation


It’s no secret that net energy metering (NEM) is a controversial topic in the electricity world these days. Customers love the way it helps solar PV offset their utility bill and adds clean energy to their home or business. Some solar advocates argue it is foundational to the continued growth of rooftop solar (as an early-market mechanism, it’s been tremendously successful). And many utilities loathe it, seeing NEM as a “free ride” for solar customers (since a rooftop solar customer could, for instance, net to zero over the course of a month and have a $0 utility bill, thereby avoiding paying for the value of being grid-connected), while also arguing that they can add more renewables to the grid at a lower cost through utility-scale projects than can customers through individual distributed systems on residential rooftops. Then there’s the issue of the benefits that distributed solar brings to the grid, which is a whole other can of worms.

But the debate around the continuation, expansion, reform, or abolishment of NEM distracts from a much bigger opportunity to unleash innovation and investment in distributed energy resources (DERs) in ways that are better for everyone: customers, DER providers, and utilities alike.

Retail Electricity Pricing, Not Net Metering, the Real Issue

The real lever for unleashing innovation in DERs, including rooftop solar, is the widely held utility rate structure of bundled, block, volumetric pricing. The per-kWh price customers pay for electricity service bundles many components—energy, capacity, frequency regulation, reliability, environmental attributes, and much more. When we net meter with bundled, block, volumetric pricing, perverse incentives and cross-subsidies emerge that encourage customers to install DERs that maximize benefits on one side of the meter (theirs), which often leaves significant value on the table (or can even discourage customers from installing DERs), including value that can cross over the meter to benefit the grid.

NEM conflates two issues. 1) There’s the two-way flow of electrons and the value (net of benefits and costs) across a meter. 2) And there’s the price at which the electrons and value are bought and sold. They’re two separate issues. But with bundled, block, volumetric pricing we’re forced, in a sense, to treat them as inseparable. That’s a mistake.

It’s the latter issue—the rate of compensation, and the fact that myriad specific benefits and costs are lumped together in one average bundled compensation rate with net energy metering layered on top—where the problems arise.

For example, when we walk the golf courses of Colorado’s Front Range, we see lots of east-facing solar systems. Sure, some homes have unsuitable south- and west-facing roofs that would better align PV output with peak grid demand, but one reason that so many rooftop systems face east is to maximize production under net metering with bundled, block pricing. Along the Front Range, the sun starts to set behind the Rockies earlier than it does over the Flint Hills of Kansas, and we also frequently have afternoon clouds and thunderstorms that can reduce solar generation on many days for south- or west-facing systems. Under net-energy metering with block, volumetric pricing, customers are perversely incented to maximize their own generation without regard for grid needs. The result can be east-facing systems that generate when customer and grid-wide system load is typically low (before air conditioning really kicks in during the heat of the afternoon), allowing the customer to bank kWh credits to be applied against grid use later in the day or month. Benefit is still provided to the grid, but much less than if the PV generation better aligned with actual use, whether instantaneously or when paired with a battery.

Unleashing Innovation Through More Sophisticated Pricing

If net energy metering is paired with unbundled electricity pricing, we could take a big step forward in terms of unleashing DER innovation. More sophisticated price signals create incentives to pair solar with smart inverters, storage, demand response, and other DERs. DER combinations instantly improve the value proposition for both customers and utilities by enabling the capture of specific attributes necessary for a clean, reliable grid. That sophistication can come along one or more of three major continuums as laid out in Rate Design for the Distribution Edge: temporal, locational, and attribute (the degree of bundling or unbundling of services such as energy, capacity, etc.).

For example, unbundling along the temporal spectrum with more granular time-of-use pricing that valued customer or grid peak-coincident PV production could yield many more solar systems that produce when the value is highest on both sides of the meter. Those systems may generate fewer total kWh for customers, but they’d be better compensated for that generation, so customers could actually still see a net-positive financial impact (by either consuming all rooftop solar generation on site, which reduces impact to the grid, or by delivering kilowatt-hours to the grid when that generation is more highly valued, such as when offsetting expensive, inefficient peaking plants). Similarly, unbundling energy and capacity along the attribute spectrum can result in the pairing of solar with demand response or energy storage, reducing distribution system congestion when it is needed most. The point is that net energy metering with unbundled pricing can more accurately and equitably compensate DER customers and utilities for benefits and costs delivered and received.

Thus bundled, volumetric block pricing—more so than NEM—is where we should be focused. If we want to truly unleash DER innovation to provide more and better value to both customers and the grid, we need to shift toward more sophisticated retail electricity pricing.

Taking steps in that direction can unleash innovation in all manner of DERs—from battery storage to demand response to smart thermostats to electric vehicle charging and discharging, among others. Without more granular price signals, there’s little incentive to deploy these solutions—singularly or in synergistic combination—in ways that can deliver needed value to the grid, and for customers to get appropriately compensated.

More sophisticated electricity pricing can better unlock a world of value and opportunity with EVs as well. As of August 2014, the U.S. surpassed 250,000 electric vehicles on the road, with one study reporting that one in three EV customers own rooftop solar as well. All those EVs constitute added electricity sales demand for utilities—and more than 5,400 megawatt-hours of lithium-ion energy storage. But without evolved pricing, there’s little incentive for EV owners to charge at better times of day (such as when their PV system would otherwise be exporting excess energy to the grid) or night (when grid demand is low). Worse, there is little or no ability for all those grid-connected EV batteries to provide peak management and grid support services such as frequency regulation because the price signals do not exist to make it feasible to do so.

It is easy to get sidetracked in the net-energy metering debate. But it is clear that the underlying bundled, block, volumetric rate structure is the real source of friction and opportunity. More sophisticated electricity pricing—by unbundling the bundle and moving beyond the block—can unleash waves of innovation. Let’s shift the conversation away from debating net-energy metering, and start debating the electricity rate structures of the future that hold much more promise to deliver price signals that can create a more efficient, resilient, and clean electricity system.

Image courtesy of Shutterstock.


Showing 1-8 of 8 comments

September 29, 2014

I've always thought power companies could easily encourage solar innovation while remaining profitable by charging a flat fee just for being connected to the grid, which would be for infrastructure, and then metering electricity usage based on the cost of generation alone.

October 2, 2014

The solar industry is indeed deeply divided on this issue. Precious few industry pros I speak with have come to the conclusion that rate design is "the new NEM" and, therefore, few resources in the industry are engaging with PUCs and similar entities to shape or weigh in on rate design. Some forward looking companies are making policy analysts available for these issues or recruiting for talent with backgrounds in utilities rate design, but those are outliers. Most are joining fights to keep the status quo in place. NEM cannot scale indefinitely. The business of solar is continuing to become more and more complex. How will even more granular rate design impact the sales, design, and operations of small to mid size solar installers? It's hard enough to acquire customers, let alone have to balance system design/output with even more granular rate structures. I'm interested in seeing the opportunities that would come to light if this avenue is pursued further.

October 2, 2014

Rate restructuring (de-coupling) is the key to the expansion of all distributed forms of energy and energy efficiency. The current system of rate structure will always force utilities into an adversarial relationship with both energy efficiency and renewable distributed energy development. De-coupling will allow for utilities to work together with the emerging industries to develop the grid of the future, however the big problem is that they have identified themselves with having the monopoly on selling electrons and as such their overall business identity will be threatened including their financial standing.

It will be up to the courts and ultimately the supreme court to make sure that they are serving in the interest of our communities and our collective will if they are to be afforded ANY type of monopoly on Any aspect of the electric grid. At present these utilities have significant political power and unfortunately control the various state institutions who are supposed to regulate them to the best interests of the people. These regulatory body's are most of the time an extension of the utilities themselves and rely exclusively on the utilities for their information. This will need to be addressed before any real change can occur.

From the Land of Duke Power.....Dave

October 2, 2014

Don't just put the residential solar industry on hold while the parties involved work things out, which could take decades. Install a system with batteries that doesn't net meter, but consumes everything on site. Use the grid for any extra energy you require. This arrangement also supplies power to critical loads like water pumps, lights, and refrigerators when the power goes out. Bloggers on this subject seem to assume there's no way but net metering to use solar. They should tell people there's a great, more funcrtional way to use solar, regardless of utility policy. Unleash this DEG technology, and let the utilities do what they will.

October 3, 2014

It would be nice if you are going to post a blog, that you actually had something to say. Suggesting unbundling the" volumetric rate structure" is sheer nonsense, and only uses big words to pretend that you actually have something to say. Yes we need net metering, and yes we want consumers to orient the solar panels so that they generate the most electricity, not half as much but at a time when the local electric company wants it most. When you have a north south gable, with a roof facing east, and a roof facing west, you can install 4 kW of solar panels in one of three ways - all on the east roof, all on the west roof, or half on each, and your electric company will thank you if you install all of them on the west roof, but they are not going to pay you to do that, and they are going to pay you if you install them where they will generate the most electricity. Due to the fact that there are weeks on end where the electric company is going to need to import all of the electricity you are using from wind, generated in North Dakota, or from CSP solar, generated in the Southwest, it does not mean diddly how you orient your panels. What does matter is that you can roll over your kWh credits forever. And no you do not "for instance, net to zero over the course of a month and have a $0 utility bill, thereby avoiding paying for the value of being grid-connected", you net meter over the course of a year, and you still pay your monthly connection fee just like everyone else. What we need to insure, though, is that net metering pay the SAME connection fee as everyone else, and not more just because they are getting more services. So what we need is MORE bundling, not less bundling. Net metering needs to be expected for everyone, and not something that anyone needs to apply for, and simply learned about by discovery, just like when you install an air conditioner. If your meter is low or runs backwards, you are using net metering. Just keep track of it and enter the credit on the bill.

October 4, 2014

FIT Feed in Tariff seems the best. You get the value at the time you send the extra power back. During Summer and daily Peak hours it's worth more and should be paid that way. Then if you can add batteries and sell during Peaks you can make even more and use the extra for yourself. It all needs to work together.

V2G Vehicle To GRID also need a tariff so it can take it's place and help the GRID more.

FERC already started making Distributed generation pay off and needs to set rate nationally and get things working together like they have done in Germany.

October 10, 2014

It is not always the utilities that have it wrong on net metering. Some advocates want to ignore the entire installed infrastructure. They want to be subsidized, even by low income seniors and small businesses that cannot afford or have no place to put solar or wind. On the other end, some utility commission staff and even commissioners see no need to change from traditional pricing. As ISO pricing becomes more sophisticated, e.g. ISO-NE, a retail rate structure which ignores what is being paid wholesale harms both the ratepayers and the shareholders. There is opposition, even to changing from non-coincident peak demand meters to current smart meters.

There is need for a national coalition of forward thinking engineers, economists, accountants and lawyers to come up with alternative models. The RMI paper on rate design has some interesting ideas but seems to ignore the reality of poor urban and rural areas. Using the model of IEEE standards panels, using modern communications technologies, a group of perhaps twenty people, with sub=specialities, could come up with models based on those utilities that already have smart meters. Another model is the Commissioners of Uniform State Laws, which comes up with model laws, with suggested alternatives for local differences. We really need cross-cultural discussion. Maybe RMI could get somebody to fund it.

November 20, 2014

This article points out many important points of which I would like to comment on two; Evaluating the benefits of solar PV is always accounted from the POV of benefit to the IOUs and disregards the not only the community benefit, i.e. every excess electron from a PV array going back onto the grid provides green energy to the nearest demand load. The second point is that there are huge benefits to unbundling the rate and CCA customers in California are now seeing that the premium value of green energy is providing an investment engine for more green power in their domains as the default energy providers. This also exposes the bloat of charges on the other side of the energy bundle normally classified as transmission and distribution. There will also be reaction to this from the customer side in time in the form of microgrids.

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