Nothing new under the sun as FTC seeks to expand power over solar

The Federal Trade Commission (FTC) announced recently a workshop to be held on June 21, with the title “Something New Under the Sun: Competition and Consumer Protection Issues in Solar Power.” Accompanying the announcement is a discussion paper presenting a number of issues for public comment.

{mosads}The analytic quality of that paper is highly uneven, but for now it is important to note the three central questions posed by the FTC. First: What is the correct “net metering” price to be paid by electric utilities to homeowners and other utility customers selling excess photovoltaic (PV) solar power back to the utility? Second: How would changes in that price affect “competition” in the market for solar PV systems? And third: What dimensions of this market might require regulatory intervention for purposes of “consumer protection”?

Some basics first. Under a net metering system, power consumers who install solar panels — large subsidies are paid for such installations — receive a credit for the power that they produce but do not consume. The excess electricity is transferred into the power grid for sale to other consumers, and the owners of the solar systems receive a credit for the excess power, paying only for their “net” electricity consumption. Because the consumers installing solar PV systems remain connected to the grid as insurance against periods when the PV systems generate insufficient power, they pay too little of the fixed costs of the conventional grid.

Accordingly, net metering shifts a substantial part of the costs of PV solar systems onto the consumers of electricity generally, with deeply adverse implications for costs and for the future reliability of the electric grid. Moreover, in most jurisdictions, the credit paid for the excess solar power is far higher than the cost of alternative electricity sources, usually from utilities or from the spot power market. Consumers without such solar installations have to finance the net metering credit, that is, the excessively expensive electricity, so that overall power prices are forced above the level that would prevail in the absence of the net metering system.

This problem is exacerbated by the large tax and other incentives to install solar systems: The combination of the installation subsidies and the excessive prices paid for the power fed into the grid means that far more solar capacity is installed than otherwise would be the case, more expensive power is fed into the grid, and prices are forced up, in principle in a sort of upward spiral process.

Solar PV electricity is high-cost power: Producing it consumes more real resources than other power technologies per unit of output (megawatt-hours) even given the costs of transmission and distribution attendant upon conventional generation and other renewable technologies. Even that central reality abstracts from the inherent unreliability of solar PV electricity: The sun does not always shine predictably. These high costs mean, notwithstanding the widespread applause for solar power, that it should not be produced at all, because it is uncompetitive. (As discussed below, the environmental and other arguments that justify the imposition of such excess costs upon consumers are exceedingly weak, again notwithstanding conventional wisdom.)

Accordingly, the economically correct net metering price is zero, because public policies should not encourage the generation of overly expensive electricity, particularly when other policies (e.g., the investment tax credit for solar installations) yield power markets in which too much solar PV electricity is produced even in the absence of an additional net metering subsidy.

The current debate over net metering prices misses this large analytic reality, focusing instead on the narrower issue of whether it is the retail price of electricity (including transmission, distribution and other costs) or the wholesale price that should be paid as the net metering credit. Because “excess” solar PV power sold back to utilities in turn will be resold to other consumers, the correct price is not the retail price even in principle. That correct price cannot be higher than the wholesale price, and, again, even that is too high because solar PV power is inefficiently expensive in terms of the value of the resources needed to produce it.

Accordingly, the net metering system fundamentally harms consumer well-being because the excess consumption of resources used to produce solar PV electricity means by definition that the electricity sector is more costly than necessary, and therefore that the aggregate consumption basket must be smaller than otherwise would be the case. That is the reality in any world in which resources are limited. More narrowly, the net metering payments paid to power consumers installing solar PV systems have to be financed by other power consumers; no other outcome is possible in a world in which there are no free lunches. Therefore, the net metering system cannot be “pro-consumer” even in principle; it subsidizes some consumers at the expense of others.

The implicit assumption in the FTC discussion paper is that a reduction in net metering payments would harm “competition” by reducing the number of firms installing and leasing solar PV systems. That definition of “competition” as the number of competitors, perhaps counterintuitively, is incorrect analytically, and is likely to move policy analysis in the wrong direction if certain wholly plausible cost conditions (e.g., scale economies or diseconomies) are present.

Competition (or the process of competing) itself is not costless, a reality made obvious by the fact that we have accepted regulated “monopoly” in the electric utility sector as a means of capturing the scale economies characterizing an industry with very large fixed costs. (Whether the system of rate regulation yields net improvement in resource allocation is an interesting question outside the scope of the discussion here.) Fewer competitors rather than more may advance the interests of consumers if that condition yields resource savings, a reality that the FTC discussion paper simply ignores. The issue relevant for policy analysis is the extent to which public policies and other parameters tend to foster allocational outcomes consistent with the aggregate goal of maximizing the value of the consumption basket, which is very different from a narrow focus on “competition” in a single economic sector, or in the context of the FTC discussion paper, the solar PV subsector of the electric power industry.

As just noted, the net metering system engenders a cross-subsidy to solar PV customers from other power consumers. It is obvious that traditional rate-of-return regulation of electric utilities inexorably must yield many cross-subsidies among numerous consumer classes. The definition and measurement of those cross-subsidies are difficult; an effort to adjust regulated power rates so as to reduce most of them would be unworkable. That is why the implicit stance in the FTC discussion paper is as follows: Regulation of the electric utility sector tends to ignore all these other cross-subsidies. Why should we worry more about those created by the net metering system?

Answer: There is no good reason to impose yet another large cross-subsidy upon this market, in particular given that no reasonable policy goals are furthered by the net metering system of credits for solar PV systems.

The purported environmental advantages of solar PV (and other renewables) are an illusion. The (regulated) costs of conventional power in the U.S. include the costs of effluent controls and other environmental policies. Such environmental effects therefore are internalized at an efficient level, unless one argues that the allowed levels of such pollutants (whether per megawatt-hour or in total) are too high, in which case the appropriate policy would be to reduce the allowed levels of emissions. Subsidies for “clean” power are an inefficient response, and in any event the argument that solar PV electricity and other such renewables as wind power are “clean” is deeply problematic, as the production of solar PV cells carries its own set of adverse environmental effects, whether publicized or not and whether domestic or foreign.

Even in terms of conventional (“criteria”) pollutants and greenhouse gas emissions (if we assume that latter to be “pollutants,” a deeply problematic assumption), it is far from clear that such renewable generation as solar PV is beneficial on net. This is because of the fundamental unreliability of such generation, which means that conventional backup capacity must be cycled up and down, depending upon whether the renewable power is available at a given moment, so as to preserve system reliability. This necessarily reduces the operating efficiency of the conventional units, and increases their emissions per unit of output. A recent engineering study of Colorado and Texas found that aggregate emissions increased as the market shares of renewables rose.

The FTC reference to “carbon-based sources of electricity” as an environmental justification for net metering payments is incorrect for an additional reason. Whatever one believes about the underlying climate science or evidence, the effect on temperatures in the year 2100 of a large-scale shift of power production from conventional generation to renewables generally, or a fortiori to solar PV in particular, would be too small to measure. The entire Climate Action Plan of the Obama administration, under assumptions highly favorable to the regulatory actions, will reduce those temperatures by fifteen one-thousandths of a degree, as estimated by the the Environment Protection Agency’s (EPA) own climate model. Artificially high electricity costs imposed so as to achieve environmental benefits approximating zero cannot be justified in terms of standard benefit/cost analysis.

With respect to consumer protection, the discussion in the FTC discussion paper on consumer information and related issues is incorrect. In order to achieve efficient outcomes, not all or even many consumers have to be well-informed. It is necessary only that some consumers on the margin be well-informed so as to engender efficiency in pricing and other parameters. This is true even for an unregulated “monopolist.” Note that this is not a “wisdom of crowds” argument; instead, it summarizes the reality that it is behavior on the margin that drives investment, production and price decisions.

The FTC discussion paper fails to note also the obvious problem of an underutilization of existing capital investment (“stranded assets”), and over time a reduction in the size of the lower-cost regulated sector potentially to be yielded by the net metering price system. It might be the case that the PV solar market is too small to have either or both of those effects, but that is an empirical question that should be addressed rather than assumed away.

Back to first principles: The efficient net metering price is zero because solar PV electricity is too costly to be competitive; it survives only because it is subsidized heavily in ways both explicit and implicit. Consumers as a class should not be forced to pay for inefficiently expensive electricity; the discussion of the efficient net metering price in the FTC discussion paper is incorrect because it fails to recognize this larger economic parameter.

The FTC has no direct jurisdiction over power rates. And so why has it decided to address the net metering question, one that state regulators are fully capable of confronting? It is not difficult to surmise that the political forces demanding an expansion of subsidies for inefficient electricity are on a roll, and the FTC would like a piece of the action in terms of policy authority. Anyone who believes that the federal bureaucracy is not an interest group should take note.

Zycher is the John G. Searle Scholar at the American Enterprise Institute.