Time to Make Net Metering a Net Positive
With a green energy stimulus bill being introduced in Congress that would extend major subsidies for several years, it’s time to review a popular green energy program that acts as a handout for the affluent. The program — net metering — allows solar panel owners to sell extra electricity they generate back to their utility provider to offset their bill. They’re only charged for the net amount of electricity they use, hence the name. As it stands, though, net metering is a costly program for an expensive technology that benefits the wealthy at everyone else’s expense.
Net metering customers are routinely overcompensated for the power they produce, as most are compensated at the retail rate for electricity. Retail prices bundle numerous costs beyond just generating electricity, including the cost of providing and maintaining the electric grid. While net metering customers do depend on a well-maintained electric grid, they don’t participate in this work. Generally, the cost of electricity generation only makes up half to a third of total retail rates. This means that utility providers buy back energy from net metering customers at a premium of two to three times its value.
Utilities then pass that extra cost onto non-net metering customers. According to research from the Brookings Institute, net metering customers who zero out their electric bill pass on an average $45 to $70 per month in costs for using the electric grid but not paying for it.
This cost shifting adds up quickly. For example, consider Arizona, where each year net metering customers shifted between $9 and $10 million of grid usage costs onto regular customers before reforms were enacted in 2016 to reduce this disparity.
Or look at the Public Utilities Commission of Nevada, which found that depending on the region, net metering customers received a subsidy of up to $623 per year under the state’s retail rate compensation laws. A botched attempt in 2017 to reduce this cost-spreading resulted in only slightly reducing net metering compensation.
More drastically, net metering in California was on track to shift $1.1 billion annually onto non-net metering customers by 2020. California implemented modest reforms by tying net metering compensation to time-of-use rates. While still crediting at the retail rate, this structure better reflects the varying costs of electricity throughout the day.
The bottom line is that while the precise amount of cost shifting is debated and varies by state, there is no doubt as to its existence.
And these subsidies primarily benefit the wealthy. A survey by the Lawrence Berkeley National Laboratory found that those who own solar panels on average earn 54% more than those who don’t. Further, in the long run, rooftop solar is far more expensive than large-scale solar energy plants.
Furthermore, subsidizing rooftop solar is of questionable environmental bona fides. A study of rooftop solar subsidies from Carnegie Mellon University concluded that “the public has not got its money’s worth in pollution reduction” as the costs “vastly exceed” the environmental benefits.
Given strong public support for solar energy growth, there must be a way to salvage this situation. A bevy of solutions are available, which some states have successfully implemented.
The most direct fix would be to adjust the compensation rate for net metering customers. Rather than compensating at the retail rate, which drives most of the cost-spreading problems, net metering customers could be compensated at the wholesale rate. Net metering customers would be paid the cost the utility saves by not generating the electricity, which would not include the other costs included in retail, such as transmission, distribution, administrative, etc. Many states already compensate some, but not all, net metering generation at the wholesale rate, so changing the rate structure is a reasonable next step.
Another option would be to charge net metering customers an additional fee to offset the overcompensation. Several states have attempted this, although it’s proving to be a contested practice. Other states regard net metering customers as a different class of customers entirely, and have separate billing structures.
More ambitiously, opening retail electricity markets for competition could reduce cost-spreading by allowing customers to choose an electricity provider right for their situation while also making room for those who want rooftop solar panels. Leading in this strategy, Texas allows customers to choose among a variety of electricity providers and as a result has seen rooftop solar grow despite no mandated net metering program.
Ultimately, most current net metering programs do more harm than good. Overcompensating solar panel owners increases costs for everyone else while providing little benefit. By changing how net metering customers are compensated, states can pursue rooftop solar growth in a fairer and more competitive way.
Jakob Puckett is an analyst at the Show-Me Institute and an associate contributor for Young Voices.