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.

Has Minnesota figured out a solution to the net metering wars

Last month Minnesota became the first state to adopt a formula for calculating a “value of solar” policy. The move is a response to the net metering fights that are beginning to rage across multiple states in which utilities are pushing back against rooftop solar customers that want to be credited for excess solar power they put on the grid.
Utilities are rightfully fearful that rooftop solar and net metering is a direct threat to their business model. At the heart of the “value of solar” policy is the idea that customers would generate payments from their excess solar based on an approved value of solar, rather than bill credits, which intrinsically are linked to the retail electricity rate. Under current net metering, a bill credits policy is the standard.
Additionally the policy pegs solar power at a 25 year contract rate rather than a fluctuating solar price. Customers are capped at 120 percent of annual on site consumption with generation beyond that being forfeited to the utility.
The 25 year locked in contract rate would impact borrowing/financing costs for solar because it gives lenders long term visibility into what sort of payments solar customers can expect. It would be a modest aid in lowering financing costs for consumers.
The idea behind the “value of solar” concept is that utilities should pay a price for solar analogous to what utilities have avoided paying by having access to that power. For example, a utility avoids building additional power plants, gets fixed prices over the long term from its generator (rooftop solar customers), and potentially reduces distribution/transmission costs.
The goal of the Minnesota policy is to find some compromise that will keep utilities and customers happy. Institute For Local Self-Reliance’s John Farrell, who authored a report on the policy, writes:

The value of solar delivers a transparent, market-based price for solar. It solves problems for utilities and for utility customers around compensation for distributed renewable energy generation. But its ultimate success lies in whether electric utilities can be convinced that accommodation of customer-owned power generation is in their best interest, or whether any concession of their market share is a deadly threat to their economic livelihood.

To be fair, determining the “value of solar” is complex and in Minnesota it included 8 separate factors, ranging from avoided fuel cost to avoided distribution capacity to avoided environmental cost.
No doubt utilities will gripe about the accounting that forces them to pay for avoiding non tangible costs like carbon emissions avoidance, which were pegged to the national social cost of $37 per metric ton.  This is truly a first, forcing utilities to account for the environmental cost of carbon emissions. On the other hand, some of the cost avoidance is very tangible, given the fact that no utility can get a 25 year locked rate on natural gas, the cost of which I believe is likely to increase over time.
The ultimate value of solar has not yet been finalized in Minnesota but there’s a significant disparity between what the utilities want (7.4 cents per kilowatt-hour) and policymakers’ draft value (14.5 cents per kilowatt-hour). But even some compromise, like 10 cents per kilowatt-hour, would be a victory in the sense that solar customers would begin viewing the system as offering a locked in value of power generation and not a bill credit.
All this raises a question: What’s in it for the utility? Well, the price of retail electricity ticks up a few points every year. Under net metering, customers get credits based on power. Those credits increase in value as retail power rates go up. But under “value of solar,” remember that the solar value is locked in for 25 years so utilities will be locking in a low rate. If anything, rooftop solar customers are likely to see their bill creep up because they’re paid a fixed rate for their power, a rate that’s determined today. Also important is that under value of solar, renewable energy credits are transferred to the utility, not kept by the generator.
Unfortunately, adoption of “value of solar” is at the discretion of Minnesota utilities. It would take a bold utility with a long term outlook to adopt it. I view that as unlikely though the prospect of avoiding protracted net metering fights could spur utilities in other states into considering the new policy. Because fight as they may, utilities can’t avoid the reality that rooftop solar is here to stay. And their power’s getting more expensive while solar power is only getting cheaper.

Utilities fighting back against net metering

It’s getting clear that utilities are girding for a major fight with rooftop solar advocates and installers over net metering, the practice whereby state utility commission allow homeowners to sell excess power back to the grid. Sun rich Arizona is proving to be an early battleground.

Utility Arizona Public Service (APS) had 900 rooftop solar systems to deal with in 2009. Today that number is over 18,000 and is increasing at the rate of about 500 per month.  Specifically the utility is arguing, like many other utilities, that net metering, and rooftop solar in general, is unfair to non-solar customers with estimated costs shifts the utility pegs at $800 to $1000 per year.

APS is in the process of introducing a number of proposals to adjust the net metering formulas that apply to rooftop solar customers. Under current net metering formulas, a ratepayer would save about $133.92 per month while two proposals from APS would cut that to $75.70 and $35.00. One proposal actually doesn’t want to pay customers for power but provide a type of credit system.

The utilities have no choice but to pair back net metering programs. But even as they do so, it won’t change the fact that utilities could become distribution and transmission providers and not generators of power as more folks generate their own power. And who knows, if energy storage technology improves over the next decade, utilities’ value as distributors and transmission infrastructure players could come under threat as well.

California expands solar net metering program

California regulators on Thursday essentially increase the amount of solar power generation that could qualify for net metering, but they left unresolved a contentious issue over whether people who don’t have solar or other renewable energy systems are subsidizing those who do.

Community solar gardens are starting to bloom

There is a growing interest to bring solar generation closer to where the power is used and accessible to the masses, and the idea of so-called “solar community garden” may be the next idea to catch on.

Solar: Now for renters, too

California regulators have approved a program, called virtual net metering, for residents who until now have been underserved by the state’s popular solar incentive program.

Net Metering to Shine on in New York, California

Rooftop solar companies are breathing a sigh of relief – and are getting ready to install more projects in New York and California. That’s because legislatures in the two states have passed new rules that boost net metering, an arrangement that allows customers with small-scale solar and wind installations to get credit for the electricity they deliver back to the grid.

With net metering, as the arrangement is called, customers pay only for their net electricity usage. Their meters run forward when they are using more electricity than they are producing and run backward when they are producing more electricity than they are using. The absence of net metering could cut out much of the economic benefit of building solar systems, at least in places without other financial incentives, such as a feed-in tariff.
Read More about Net Metering to Shine on in New York, California

Droid Does an Early Software Update

Although it was expected that Motorola Droid (s mot) would see an update around December 11, there’s a new mandatory software update available today. Information from the Verizon (s vz) support site for Droid breaks out the following fixes and enhancements in software version AP:ESD56/BP:C_01.3E.01P — which just rolls off the tongue, no? 😉

  • OS stability is improved.
  • Battery life is improved.
  • Camera auto focus functionality is improved, and time between shots is reduced.
  • Enhancements for three-way calling.
  • Audio for incoming calls is improved.
  • When receiving a call on call waiting, the speakerphone now remains on.
  • Bluetooth functionality is improved; background echo is eliminated.
  • Improved Bluetooth phone book transfer of contacts to in-vehicle Bluetooth solutions.
  • After closing a GPS application, the GPS icon will now automatically be removed from the notification panel.
  • Users can now receive SMS and MMS messages after an EMS message is received.
  • SMS and MMS may now be sent to seven-digit addresses.
  • Google contact merging has been updated to accommodate seven-digit numbers.
  • Visual Voice Mail notices now arrive instantaneously.
  • The corporate calendar widget user interface is updated.

Droid owners will need at least 40% or more battery power or at least 20% power availability if connected to a power source prior to performing the upgrade. Have at it when you see the update available and let us know if you see any other fixes that might have slipped in as well.

WWD Weekend Reading List

Here are some interesting posts from around the ‘Net to catch up with over the weekend:

What are you reading this weekend?