New rules for new grid technologies

An astonishing array of innovative energy technologies – distributed generation, energy storage, microgrids, rooftop solar, and smart grids – is transforming America’s electricity future.

These technologies, collectively known as distributed energy resources, could deliver significant environmental and reliability benefits to the electric grid while diversifying sources of generation. Given the promise of DER, state regulators and Members of Congress have cheered this ongoing energy revolution.

{mosads}But hold the applause. Success ultimately depends on the grid’s ability to accommodate these technologies without endangering affordable electricity for all or threatening system reliability.

We must decide who pays for integrating these technologies into the grid. Remember, DER increases –not decreases – grid costs. More investment, not less, will be needed. Billions of dollars must be spent on the remote monitoring and control systems, meters, power inverters, and sensors needed to accommodate two-way power flows on distribution lines before extensive amounts of DER can be accommodated. Existing power plants must be retained and new plants built as standby for intermittent supplies of wind and solar energy.

Unfortunately, a hidden regulatory subsidy has bankrolled development of distributed energy resources. Net metering, for example, subsidizes rooftop solar by requiring a local utility to pay more for the excess electricity generated by the customer’s solar panels than the utility would pay in the marketplace.

Forty-three states and the District of Columbia have established net metering requirements. Unfortunately, the 600,000 solar American households with net metering contribute little to the grid’s fixed costs. Nevertheless, they plug into the grid if the sun doesn’t shine or the wind stops blowing and to sell their excess electricity to the local utility.

Net metering is a double whammy for the majority of ratepayers. First, it enables often wealthy homeowners to install solar panels and thereby avoid paying their fair share of the costs of maintaining the electric grid. But as more of the privileged homeowners go solar the more utility rates increase for everyone else – the middle class and the poor – many of whom rent their residences and can’t install solar on their rooftops. Second, utilities must invest more in the grid to accommodate distributed resources. These costs have to be picked up by non-privileged customers unable or uninterested in rooftop solar. It’s Robin Hood in reverse.

Under the existing regulatory system, utilities face a troubling future with solar subsidies both unworkable and unfair. Either utilities will lose revenues and thus the capital needed for investment in the grid or they must continually raise rates for a diminishing number of their middle class and economically disadvantaged consumers, a politically unpalatable solution.

Advocates of net metering – especially solar developers – claim the benefits, or “value” of solar, far outweigh these hidden subsidies. It is true that rooftop solar provides environmental benefits. And in certain locations DER may obviate the need for costly new power lines. But that may be the exception, rather than the rule.

Nonetheless, even if subsidies are appropriate to reflect the benefits of DER, net metering is the wrong way to provide them. It allows some customers not bearing their fair share of the costs necessary to realize the benefits that rooftop solar provides, and results in unfair cross-subsidies from some customers to others. The proper way to subsidize solar, if it’s warranted, is transparently, directly and in a way that does not skew choices made by customers. Subsidies or incentives should be imposed in a way that ensures that all customers continue to fairly contribute to the cost burdens that their decisions impose on their local utility. Net metering provides the opposite result.

There are multiple solutions but no silver bullet that would solve the net metering problem and ensure customers get credit for the benefits they provide. One simple yet elegant solution is to plug in two meters, one to measure how much electricity the homeowner is using and another to measure how much the homeowner is selling to the grid. Charge the homeowner the same as anyone else for the power it buys from the grid and price the homeowner’s sales to the grid at a level based on the purchasing utility’s savings.

Then, if subsidies – beyond those already available at the federal, state, and local level are deemed to be desirable and necessary – they should be provided in a direct and transparent manner and included in electric rates charged to everyone. In this manner, regulators can ensure that all customers benefitting from DER pay their fair share of the costs.

Other problems arising with the rapid market penetration of DER besides net metering demand a more concerted effort. Utility regulations must be modernized to protect consumers and keep the lights on. This new regulatory framework must reflect the changes in the supply and delivery of electricity as well as the new competitive realities. Regardless of the specifics, changes must be made to end hidden subsidies for DER that will endanger the grid and the fairness of electricity rates. 

Edelston is the president of the Electric Markets Research Foundation, which was formed to fund studies by academics and other experts on electric market issues of critical importance.