Today’s guest blog comes from Ashley Brown, Executive Director of the Harvard Electricity Policy Group (HEPG), a program of the Mossavar-Rahmani Center for Business and Government at Harvard University’s John F. Kennedy School of Government. All opinions expressed here are solely those of the author.
Retail net metering is hopelessly out of date and counterproductive. The practice of paying the full retail price for distributed generation in excess of on premises demand, and of excusing distributed solar hosts from paying fixed charges when they do generate, was put in place when solar technology was embryonic and its costs were 100 times what they are today, when smart meters and technology were not available, and when transparent energy market prices did not yet exist. Beyond the narrow self interest of some solar vendors, there is no compelling interest in perpetuating it, and there are significant public interests in making the pricing of distributed energy market based. Those interests fall into four broad categories: 1. consumer interests; 2. strengthening markets; 3. Cost effectiveness in reducing carbon emissions; and 4. Long term viability of solar energy.
The consequences of net metering are highly averse to customers who do not, or, as often is the case, cannot install solar panels. Those customers are required to cross-subsidize solar hosts’ non-energy costs, pay solar hosts for service which they do not, in fact, cannot deliver. Those services include all retail services other than generally off peak , intermittent energy supply, such as demand services, delivery services, back office operations, and fixed, non-variable services, among others. In effect, consumers are required to pay a retail price for a wholesale product, and because distributed solar is the only energy compensated at the retail level, are required to pay a premium price for the least efficient mainstream energy source. In fact, that premium price /cross-subsidy is in addition to the very heavy taxpayer funded subsidy provided for rooftop solar. To make matters worse, for a variety of reasons, the cross subsidy inherent in net metering constitutes, in the aggregate, a socially regressive regime in which lower income customers pay more for the benefit of more affluent consumers. It is a Robin Hood in reverse tariff.
Net metering is an outlier in energy pricing, one that seriously distorts market principle. Historically, consumers paid cost-based rates. In recent decades, however, electricity markets have become far more competitive and cost-based prices, at least, for energy, has been supplanted by market-based pricing. In both cases, however, prices are constrained and disciplined by either regulation or by competition. Net metering, however, is constrained by neither. Rather, its proponents have tried to rationalize above market prices by notions of “value.” Almost all of the value claims asserted, however, are based on a variety of highly subjective, heavily biased, factually challenged, and easily refuted assertions. They are usually accompanied by notorious and unreliable projections of energy prices into the distant future. Thus, consumers are faced with the prospect of having to pay prices untested by either regulation or competition and inflated by unreliable and dubious claims of value. That pricing scheme seriously distorts not only markets, but also fundamental market principles. Functional markets provide a platform in which efficiency in performance determines outcomes for market participants. IN the case of retail net metering, however, rooftop solar, an undispatchable resource with a lower capacity factor than any other mainstream energy sources (including other renewables), is paid a higher price than that paid to more efficient resources. Thus, net metering has the perverse result of rewarding less efficient producers while penalizing the more efficient.
One of the primary justifications of net metering is that it encourages more generation that does not emit carbon. While that may or may not be true, it is largely irrelevant. By almost any measure, reliance on deploying distributed solar to reduce carbon emissions is perhaps the costliest and least efficient way to reduce carbon. Climate change is a very serious problem, but undue reliance on rooftop solar to reduce greenhouse gas emissions is, to understate the point, not a serious response to the problem. Most economists regard, carbon taxes or cap and trade as more efficient, cost effective responses to the climate crisis. Even if one were to take the less efficient and more expensive route of mandating non-emitting resources, rooftop solar is perhaps the least efficient and most expensive resource to deploy. Undue reliance on it to reduce carbon emissions would not only test the tolerance of consumers to pay ever escalating prices and reduce the political will to reduce emissions but would also make the actual reduction of emissions less certain. Indeed, were we to deploy resource mandates to address climate problems, perhaps the resource least likely to achieve the desired result is the resource net metering is designed to encourage. In effect, consumers would be asked to pay the highest price for the least effective energy source in reducing carbon emissions.
Perhaps the biggest irony of net metering is that it is harmful to the long-term viability of solar energy. Indeed, it is very important to distinguish between the private interests of rooftop solar vendors, which is to sell as many units as possible, and the long-term interest of solar energy, which envisions increased reliability, efficiency, and economic viability. Those two interests are, to a large degree irreconcilable. The irreconcilability plays out in two notable aspects. The first is that the cost of solar panels has declined dramatically in recent years. That cost reduction should stimulate the sales of solar systems, but the prices paid for solar units by consumers have not declined as rapidly as the decline in costs. In other words, the vendors of panels are not passing on the full benefit of declining costs, and feel no pressure to do so, because net metering insulates those vendors from the pressures of the marketplace or regulatory oversight. In effect, as the costs of solar are becoming more competitive, net metering effectively moves solar into a less competitive position, not a promising scenario for solar energy. The second aspect is that the insulation from marketplace pressures that net metering provides, creates a business model for solar vendors, to simply sell or lease panels and then walk away, as opposed to providing systems that are more efficient and economically viable in the long term. It means that there is no incentive to invest in smart inverters or storage or demand response services that would greatly enhance the value of solar and make it more of a long-term benefit to both customers and to the overall network. Net metering, as opposed to cost based or market-based pricing, removes most, if not all, incentives to increase productivity and efficiency.
The evidence is clear. Net metering hurts all consumers, solar and non-solar alike, distorts markets, is a most expensive and ineffective response to climate change, and even hurts the long-term prospects for distributed solar. It is time to move on to a more meaningful pricing regime that reflect marketplace economics.