Why the Net Energy Metering Debate Misses the Point

""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.

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