Net Metering and Distributed Generation Part I: Introduction
This article is the first of three parts that discuss the states’ implementation of net energy metering (NEM) policies as part of their authority over energy utilities.
Abstract: Distributed generation promises society-wide benefits to the energy grid system. States can further the mass distribution of energy generation resources through progressive policies such as net metering. However, some states have begun to end their formerly robust net metering policies. In light of these changes, this paper will explain why existing legal principles constrain state action which adversely impacts existing net metered customers.
INTRODUCTION
A. Distributed Generation
B. Net Energy Metering
C. Different State Approaches to NEM
D. Promoting Net Energy Metering to Advance Distributed Generation
I. INTRODUCTION
The modern electric power system of the United States must fulfill the same mission it had at its founding a century and a half ago: enable the reliable transmission of useful electric energy from producer to consumer for the lowest possible price.[1] As its needs change, society will inevitably demand integration of new types of electricity generation that could take a variety of forms, such as utility-scale, small-scale, distributed, or renewable generation.[2] Irreversible climate disruption further pressures industrialized societies to transition their power sectors away from carbon-based fossil fuels and toward renewable sources.[3] Distributing the means of renewable generation among end-use consumers would significantly contribute to this transition in the necessary timeframe estimated by global climate scientists.[4]
A. Distributed Generation
Distributed generation (DG) is a term used to describe electricity that is produced at or near the location where it is consumed, or the end-use.[5] While DG systems can rely on a variety of energy sources, over 90% of the current DG capacity in the United States comes from photovoltaic solar.[6] Although residential solar systems are relatively small as individual units, they have a substantial impact in the aggregate. In 2010, ISO-NE, the private, multi-state grid operator for the Northeastern states, reported just around 40 MW of total solar capacity operated in its service territory; as of 2017 that capacity increased to 2,416 MW.[7] According to ISO-NE’s 2018 public procurement report, roughly 2,900 MW of capacity represents 8.7% of its 33,000 MW peak generating capability.[8] Proponents of DG assert that, when planned in coordination with complementary policies, DG can not only serve the transition to a carbon-free power sector, but also prevent line losses, relieve grid congestion, increase local grid resiliency, and offset investments in grid upgrades and high-cost “peaker” plants that often require fossil fuels.[9]
Although the grid- and society-wide impact from renewable DG deployment shows promise, DG has not experienced wide deployment for several reasons. The main reason DG is inaccessible is its high cost. The cost of the physical unit continues to decline, the average sized rooftop solar panels for residences in 2019 ranged from six to ten kilowatt (kW) in generating capacity and cost from $11,000 to $40,000; at this rate, potential installers may not recover this investment in the lifetime of the equipment.[10] The cost-to-benefit of DG is also influenced by the financial motivations and political participation of incumbent energy producers, the utilities. Investor-owned utilities, which serve the majority of U.S. electric customers[11], oppose the mass deployment of DG for more than economic reasons; they claim the expansion of DG increases their risk of overload[12], overvoltages[13], and line losses.[14] While the rate of DG development increases the risk of overload and loss in some cases, these risks can be addressed by certain solutions, like increasing the system’s hosting capacity.[15] Successful deployment of DG admittedly also requires complementary innovations in energy storage.[16]
B. Net Energy Metering
To lower the cost of DG and incentivize its deployment, most state legislatures passed net energy metering[17] laws (NEM). Electricity consumption is usually accounted for using a unilateral meter. To net meter, the user must be connected to a bi-directional meter that “runs forward” when the customer uses energy and “runs backward” when the customer produces excess energy. Then, users receive credit for energy they place back into the grid while paying to remain connected to and receive energy from the grid.[18] All but a few states maintain versions of NEM policies to credit customers for their power production and incentivize consumer investment in renewable DG resources.[19] Several states are in the process of examining programs to replace net metering, including New York and Utah.[20] Three states offer no form of net metering or net compensation: Alabama, South Dakota, and Tennessee.[21]
NEM customers are untraditional, hybrid players in the energy system. Whether or not they net meter, installing distributed generation causes customers to become energy producers. However, since residential generation does not typically produce enough to fully self-supply, the customer must remain connected to the grid to consume the remainder of its needs. The amount the utilities must pay the customer-generators for their energy under NEM has caused intense debate and lobbying. The consumers’ push for retail rates highlights the central argument over what rate NEM users pay and receive.[22]
Utilities argue that when NEM customers unfairly receive retail credit on their bill by reversing the meter, they earn more than they contribute and become “free riders” on the grid[23] Advocates for renewable DG counter their energy corrects the system’s failure to account for pollution caused by coal and natural gas plants. For the utilities to pay customers the retail rate for merely the electricity produced and nothing more would defeat the purpose of setting the retail rate to cover the utilities’ “sunk” costs, which the utility incurred to build transmission and distribution.[24] As NEM customers consume less and sell power to the utility they become a detriment to the utilities’ recovery of its investments. The greater the proportion of NEM customers, the faster the utilities’ revenue declines, forcing the utility to recover its sunk costs by raising rates for the remaining customer base. Utilities have successfully suppressed NEM laws by blaming this “cost shift” on NEM customers for causing the poorest of its customers to “cross-subsidize” affluent users.[25] To compromise, utilities tend to support NEM where they pay less than retail for customers’ energy, the customer pays fixed charges, and the state caps the total percent of NEM participation to a single digit.[26]
C. Different State Approaches to NEM
With authorization by federal law, states adopted and amended a variety of approaches to NEM in short time. Most states’ approach represents a policy choice to compromise between the “free rider” problem and a swift expansion of affordable, renewable DG.
Alabama has not passed NEM laws. As of 2020, it ranked 28th nationally for total solar production, up from 49th.[27] Not only are residencies prohibited from selling solar energy at a retail rate, in most cases the fixed fees associated with solar ($5/kWh, approximately $20 per month for a 4-kilowatt system[28]) would cost more than fifty percent of the original cost of their equipment.[29] Recently, ratepayer advocates have petitioned to stop Alabama’s main utility from collecting “standby charges”[30] and backup fees against solar-generating customers, which the Commission approved without an evidentiary hearing or taking public comment. [31][32] An order declaring a rate just and reasonable without supporting evidence is arbitrary.[33] After ratepayers filed the initial petition in 2018, the utility responded with a proposal to raise the fees.[34]
Nevada’s history illustrates how tension between consumers and IOUs stalls DG’s progress. In 2015, the Nevada Legislature passed Senate Bill 374, directing its utility commission to examine NEM rates and eliminate any unreasonable “shifts in costs” from NEM customers to other customers in a cost of service study.[35] Nevada’s main utility immediately filed for approval of its own cost of service study and NEM rates.[36] The commission adopted a new service charge, retail, and wholesale rate for existing and future NEM customers based on the utility’s study.[37] The utility would charge all NEM customers a fixed monthly service fee to reach $38.51 by 2020.[38] NEM customers’ entire incentive to contract with third-party lessors to possess their equipment relied on the expectation that their lease payments and household power expenditures would be offset through a certain, reliable credit received for netting power or making surplus power sales to the utility.[39] The order discouraged potential solar installers and jeopardized approximately 18,000 existing solar producers.[40]
The Nevada Bureau of Consumer Protection moved to block the order.[41] The Bureau argued the Commission’s refusal to “grandfather-in” existing solar NEM contracts would violate both the state and federal Constitution’s guarantee that the state shall not pass any law “impair[ing] the obligation of contracts.”[42] The order impaired the contracts of existing NEM customers that not only had contracts to sell at a certain rate, but also had mortgage-style leases for their solar panels ranging from fifteen to thirty years.[43] The policy slowed down deployment of solar units[44] until the legislature resurrected its NEM policy by passing bill AB 405, restoring the retail rate but with plans to phase it down.[45] The law would compensate existing NEM customers beginning at 95% of retail valued from the effective date and decline until reaching a 75% retail floor.[46] Today, Nevada’s continued support of NEM contributes to its place as the sixth greatest producer of solar power in the United States.[47]
California ranks first in the nation for solar, employing over 70,000 people who have installed enough to power 1.8 million homes.[48] California charted course for its future with NEM by deciding to pay NEM users the full retail rate at least until 2019.[49] Utilities cannot implement “demand charges, grid access charges, installed capacity fees, standby fees, or similar fixed charges on NEM residential customers.”[50] Residential customers pay a one-time interconnection fee and “nonbypassable charges” levied on each kW per hour (kWh) of electricity consumed, regardless of netting; this negates the full retail value of the exchange.[51] Ratepayer advocates have achieved residential time-of-use rates to assuage the utilities’ concerns about cost-shifting supporting their argument for high fixed charges.[52] California also expanded NEM participation to solar array systems over one MW and through virtual NEM and NEM aggregation.[53] California’s successor NEM rate structure follows PURPA’s requirement of nondiscriminatory treatment since NEM customers to pay for “particular services from the IOU unique to their status as customer-generators, such as interconnection services.”[54] The Commission instructed the utilities that “the costs involved for interconnecting installations of less than 1 MW are not large.”[55] Finally, utilities could collect relatively low “non-bypassable charges” as an exit fee to allow their recovery of costs “stranded” by NEM customers.[56]
D. Promoting Net Energy Metering to Advance Distributed Generation
The federal government has a well-established constitutional basis for regulating the energy market, even down to the local level. Because states do not implement NEM in a regulatory vacuum, but rather alongside their implementation of complimentary federal statutes, such as the Public Utility Regulatory Policies Act of 1978 (“PURPA”), Courts and FERC may review a state’s implementation of its NEM policy where it allegedly violates PURPA by subverting independent power production. This paper will explore how states’ attempts to change NEM policy would be prohibited by federal law. Certain changes to existing NEM policies would violate rules preventing the unilateral modification of small power producers’ contracts. Further, changes to NEM terms or rates would conflict with the terms of existing small power producers’ legally enforceable obligations (LEOs) under PURPA. Finally, PURPA’s implementation requirements impose minimum federal standards on states that preempt them from setting discriminatory rates to disadvantage NEM customers.
Footnotes
[1] Math H.J. Bollen, Integration of Distributed Generation in the Power System 1 (2011), IEEE Press Series on Power Engineering.
[2] Id.
[3] Intergovernmental Panel on Climate Change [IPCC], Special Report: Global Warming of 1.5º C: Summary for Policy Makers, (Oct. 6, 2018), https://www.ipcc.ch/sr15/chapter/spm/.
[4] Id.
[5] Distributed Solar, Solar Energy Indus. Ass’n, (Nov. 14, 2016) https://perma.cc/MA74-45JJ.
[6] Am. Pub. Power Ass’n, Distributed Generation: An Overview of Recent Policy and Market Developments, 3 (2013), https://perma.cc/62YC-P85G.
[7] ISO New England, 2017 PV Forecast, (May 2017), https://www.iso-ne.com/about/what-we-do/in-depth/solar-power-in-new-england-locations-and-impact.
[8] ISO New England, About Us: Key Grid and Market Stats: Resource Mix, (2018), https://www.iso-ne.com/about/key-stats/resource-mix.
[9] Burger, Scott P., et al., Why Distributed? A Critical Review of the Tradeoffs Between Centralized and Decentralized Resources, IEEE Power & Energy Magazine, March/April Edition, 16–24 (2019); see also U.S. Dep’t of Energy, The Potential Benefits of Distributed Generation and Rate-Related Issues that May Impede Their Expansion: a Study Pursuant to Section 1817 of the Energy Policy Act of 2005 (2007); Amory B. Lovins et al., Small is Profitable: The Hidden Economic Benefits of Making Electrical Resources the Right Size, Rocky Mountain Inst., Snowmass, CO (2003), http://books.google.com/books?as_q=Diffusion+of+Innovations&as_auth=Rogers.
[10] Energy Sage, How Much do Solar Panels Cost in the U.S. in 2019?: Solar Panel Cost by Manufacturer Brand, March 10, 2019, https://news.energysage.com/how-much-does-the-average-solar-panel-installation-cost-in-the-u-s/#comments.
[11] U.S. Energy Information Administration, Investor-owned utilities served 72% of U.S. electricity customers in 2017, August 15, 2019. https://www.eia.gov/todayinenergy/detail.php?id=40913
[12] National Renewable Energy Laboratory, High Penetration PV Handbook for Distribution Engineers, Jan. 2016, 4, 25–26, https://www.nrel.gov/docs/fy16osti/63114.pdf (High penetrations of DG, especially those closely located, can cause too great amount of energy generation that the circuit can accept, which causes overloading).
[13] Id. at 6, 10 (feeders connecting the bi-directional flow of energy can only function with a certain amount of voltage, which can be overwhelmed by the wide fluctuation in generation caused by solar panels which in turn disturbs the quality of power).
[14] Bollen, supra at note 1, at 4 (line losses are the electrons lost in the transmission process because of physical inefficiency, or inertia along the transmission lines).
[15] Id. at 102 (hosting capacity is the capacity of voltage the DG system can produce, host, and feed energy into the grid before disruption of quality power).
[16] Bollen, supra at note 1, at 221–222.
[17] Various sources use phrases including “net billing,” “net energy billing,” “net energy metering,” and “reverse direction metering,” but since the phrase “net metering” is the most widely accepted term for this concept, for purposes of this paper the phrase “net energy metering” (NEM) will include these different references to the same concept.
[18] Steven Ferrey, Nothing but Net: Renewable Energy and the Environment, MidAmerican Legal Fictions, and Supremacy Doctrine, 14 Duke Envtl. L. & Pol’y F. 1, 3 (2003).
[19] Net Metering, DSIRE (Sept. 2012), http://www.dsireusa.org/documents/summarymaps/net_metering_map.pdf (indicating that as of September 2012, 43 states had some type of net metering policy in place).
[20] Catherine Morehouse, Secretive Group’s Petition to FERC Could ‘End Net Metering as We Know It,’ Lawyers Say, Utility Dive, (Apr. 21, 2020), https://www.utilitydive.com/news/secretive-groups-petition-to-ferc-could-end-net-metering-as-we-know-it/576400/.
[21] Kelly Pickerel, Solar Power World, Which States Offer Net Metering?, (Mar. 27, 2020) https://www.solarpowerworldonline.com/2020/03/which-states-offer-net-metering/.
[22] Alexander D. White, Compromise in Colorado: Solar Net Metering and the Case for “Renewable Avoided Cost”, 86 U. Colo. L. Rev. 1095, 1096 (2015).
[23] Malm, An Actions-Based Estimate of the Free Rider Fraction in Electric Utility DSM Programs, 17 The Energy Journal №3, 41 (1996) (defining free riders as those who impose costs without providing benefits like payment).
[24] Id.
[25] Id.
[26] Peter Kind, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, Edison Elec. Inst. (2013).
[27] Solar Energy Industries Association, State Solar Policy: Alabama Solar, https://www.seia.org/state-solar-policy/alabama-solar (2020).
[28] Julia Simon, National Public Radio, To Some Solar Users, Power Company Fees Are an Unfair Charge, (June 2, 2019) https://www.npr.org/2019/06/02/728761703/to-some-solar-users-power-company-fees-are-an-unfair-charge.
[29] Emma Foehringer Merchant, Green Tech Media, In Alabama, You Could Pay the Utility $9,000 for Having Solar on Your Roof, (Jan. 10, 2018) https://www.greentechmedia.com/articles/read/alabama-is-the-worst-solar-market-in-america#:~:text=Alabama%20doesn't%20have%20net,two%2Dthirds%20of%20the%20state.&text=Alabama%20Power%2C%20the%20state's%20largest,fee%20makes%20the%20economics%20worse.
[30] GASP Group, Alabama PSC to Hold Hearing on Solar Fee, gaspgroup.org, Nov. 12, 2019. https://gaspgroup.org/alabama-psc-to-hold-hearing-on-solar-fee/
[31] Amended Complaint and Petition for Declaratory Judgement, James Bankston, et al. v. Alabama Power Company, (№. 32767), Alabama Public Service Comm’n.
[32] Id. at *8
[33] See Ala. Power Co. v. Ala. Pub. Serv. Comm’n, 390 So.2d 1017, 1025 (Ala. 1980) (holding that the Supreme Court must set aside a PSC decision “as being arbitrary as a matter of law, and a denial of due process, when such order is based upon findings without evidence to support them”).
[34] GASP Group, Alabama PSC to Hold Hearing on Solar Fee, gaspgroup.org, Nov. 12, 2019. https://gaspgroup.org/alabama-psc-to-hold-hearing-on-solar-fee/
[35] The P.U.C. of Nevada, Net Metering Rates and Rules, March 2016, http://puc.nv.gov/uploadedFiles/pucnvgov/Content/Consumers/Be_Informed/Fact_Sheet_Net_Metering.pdf
[36] Docket №15–07041; Michael G. Richard, Sunny Nevada Is Killing the Solar Industry in the State with New Net-metering Rules, Treehugger, (Jan. 4, 2016) http://www.innotap.com/2016/01/sunny-nevada-is-killing-the-solar-industry-in-the-state-with-new-net-metering-rules/.
[37] Id.
[38] Id.
[39] Julia Pyper, Does Nevada’s Controversial Net Metering Decision Set a Precedent for the Nation?, Green Tech Media, Feb. 4, 2016, https://www.greentechmedia.com/articles/read/nevada-net-metering-decision#gs.3gebwj.
[40] Id.
[41] The P.U.C. of Nevada, Bureau of Consumer Protection’s Motion for Stay and Request for Order Shortening Time for Responses, Docket №15–07041 (Dec. 24, 2015), available at http://pucweb1.state.nv.us/PDF/AxImages/DOCKETS_2015_THRU_PRESENT/2015–7/8429.pdf.
[42] Id. at 6; U.S. Const. art. I, § 10, cl. 1; Nev. Const., art. 1 § 15 (“No bill of attainder, ex-post-facto law, or law impairing the obligations of contracts shall ever be passed”).
[43] Michelle Rindels, Regulators to Consider Pausing New Rooftop Solar Rates, Associated Press, January 4, 2016, https://lasvegassun.com/news/2016/jan/04/regulators-to-consider-pausing-new-rooftop-solar-r/.
[44] Nevada Solar, Solar Energy Industries Association (2020), https://www.seia.org/state-solar-policy/nevada-solar
[45] Robert Walton, Nevada Governor Signs Net Metering Bill, Utility Dive, (June 16, 2017), https://www.utilitydive.com/news/nevada-governor-signs-net-metering-bill/445177/.
[46] Id.
[47] Nevada Solar, Solar Energy Industries Association (2020), https://www.seia.org/state-solar-policy/nevada-solar.
[48] California Solar, Solar Energy Industries Association (2020), https://www.seia.org/state-solar-policy/california-solar.
[49] Herman K. Trabish, Inside the Decision: California Regulators Preserve Retail Rate Net Metering Until 2019, Utility Dive, Feb. 1, 2016, https://www.utilitydive.com/news/inside-the-decision-california-regulators-preserve-retail-rate-net-meterin/413019/.
[50] California P.U.C., Decision Adopting Successor to Net Energy Metering Tariff, Decision 16–01–044, at 2 (Jan. 28, 2016), http://docs.cpuc.ca.gov/PublishedDocs/Published/G000/M158/K181/158181678.pdf (emphasis added) (“CPUC Successor NEM Tariff”).
[51] Id. at 2–3.
[52] California Solar, supra at note 48.
[53] CPUC Successor NEM Tariff at 3–4. Basically, virtual net metering allows community generation projects, mainly solar, to credit “subscribers” to the program for power produced off-site from their residences. Net metering aggregation allows a single customer with multiple meters on the same property, or on contiguous properties, to aggregate the renewable generation to net power on each meter by aggregating the load, or power demand.
[54] Id. at 87.
[55] Id.
[56] Id. at 89–90.
