Is deregulation the answer to the net metering wars?

California utility PG&E announced in April that among its customer base, a whopping 115,000 homes or buildings are now rooftop solar. The utility is adding 2,500 rooftop solar customers a month, and has doubled its number of rooftop solar customers in the last two and a half years.

PG&E is an outlier, the utility with the most rooftop solar customers in America, but it foreshadows an issue which all utilities will face—how to handle declining revenue that rooftop solar creates as well as the net metering programs that further impact revenue. Net metering programs allow rooftop solar customers to receive credits on their bill for excess solar power they produce and sell back to the grid.

The decline in the cost of solar has been unexpectedly fast, and with the aggressiveness of companies like SolarCity in play, the situation is moving a bit more quickly than even those in industry expected. You can look to the fight in Arizona, and the millions utilities spent lobbying regulators to get a fee charged on net metering customers, for a sense of how concerned utilities are. They worry that rooftop solar customers utilizing net metering will impact their bottom line and make it difficult for them to shoulder the costs of maintaining the distribution and transmission portion of the grid (they also argue that rooftop solar shifts transmission costs to other customers).

It’s a complicated question because rooftop solar customers arguably are responsible for less wear and tear on the grid since they draw less power from it. Additionally, it’s not inconceivable that improvements in energy storage and batteries won’t make it possible within a decade for a reasonably priced, large volume battery backup system to be attached to solar systems to handle evening power supply or outages, raising the prospect of complete grid independence.

Tim Worstall, a fellow at the London based libertarian think tank the Adam Smith Institute, offered his free market council recently from across the pond. Describing the economic problem the grid is facing, he writes:

This sort of problem isn’t all that unusual. Bundled goods cross subsidising each other: and the solution when a technological change comes along isn’t all that unusual either. Simply remove that cross subsidy from the bundled goods. In this case that means divorcing the delivery of electricity from its generation. Which is very much what my native UK did during the privatisation of the electricity system.

The grid, the series of wires that carry the power around, is a natural monopoly. It is thus in one separate company and is tightly regulated. It must agree to carry the power of all comers, at non-discriminatory rates too. And it can charge a fee sufficient to cover the overhead of running said grid.

Then you’ve two other parts of the system: those who own the power stations that feed electricity into the grid and those who run marketing organisations to bill for what consumers pull from the grid. And within such a system it’s simple enough to make sure that everyone who has a grid connection is charged for the use (even if that use is only insurance against cloudy days) of the grid in the appropriate manner and amount. Without having to worry about how much electricity they’re actually using.

Not shockingly, Worstall wants deregulation of the utility industry, which would break generation, from distribution, from the retail marketing of power. With the exceptions of some markets like Texas, the U.S. utility industry is largely regulated and vertically integrated.

There are benefits to deregulation. On the retail end we see that with competition, retailers work harder to serve their customers and do interesting things like offering Nest thermostats to their customers, as Reliant has done in Texas. And what rooftop solar is doing is forcing competition into the regulated, monopolistic section of the supply chain—generation. And there’s a benefit to this competition—customers can choose often cheaper and cleaner power.

In some respects, deregulation would leave utilities where they are now—lobbying public utilities commissions for higher connection charges to maintain the grid. But even Worstall acknowledges that since the distribution and transmission part of the grid is a natural monopoly, the prices it charges must be regulated. It’s equally reasonable to expect solar customers to pay some fee if those customers want to rely on the grid to provide them with backup power.

What’s interesting about solar, and really all major technological disruptors, is that through competition, they force monopolies to compete. There’s now increasing competition in generation because of rooftop solar and for that reason even regulated utilities are rethinking their retailing arms to become more service oriented.

So whether deregulation occurs and generation, distribution, and retailing are broken up, the current wars over net metering are proof of the need to quantify the value of certain parts of the value chain while introducing competition in other parts. Which is its own form of de facto deregulation.