Tom Burton, Chair of Mintz Levin’s Energy Technology Practice, will publish a weekly installment providing insight into the challenges and possible solutions that, if implemented, promise a bright future as clean energy moves America forward. In this series, Tom will include one challenge per week and the potential solution(s). This is the fifth installment of the series. Click to read Part I, Part II, Part III, and Part IV.
The Problem: To DG or Not to DG – That’s The Question
The rapid growth of distributed generation (DG) over the past two years is expected to continue: as of 2013, the U.S. installed one PV solar system every four minutes – in 2016, this is expected to drop to every minute and twenty seconds.
However, as DG customers take advantage of net metering and similar policies that reduce and even zero out their bills, utilities argue that these programs cause them to buy electricity at retail prices even when they don’t need it. Further, utilities say, customers on DG are not paying their share of the costs for lines and transmission. This causes revenue erosion, reduced shareholder returns, and a cost shift to non-DG customers who subsidize their neighbor’s use of electricity when their solar systems don’t provide enough power.
- According to The Boston Globe, Massachusetts pays more per kWh of solar energy than anywhere else in the nation because projects are reimbursed at a rate that far exceeds the value they provide to the electricity system.
- In California, without changes to current practices, by 2020 $1.1 billion in costs would shift from DG to non-DG.
There must be a balance between encouraging DG and keeping utilities functioning.
Solution: Policy and Regulation Reform
Policymakers and regulators could increase utility cost protections or modify subsidies. For example, several states are considering changes to their net metering rules:
- Arizona: Both Tucson Electric Power (TEP) and Arizona Public Service (APS) have proposed new ways to reimburse net metered customers, which would see them collect more in fees from solar owners to compensate for grid expenses. In August, the state’s Corporation Commission ruled the utilities must wait until its next rate case in 2016 to change their net metering remuneration.
- California: On August 3, Pacific Gas & Electric and Southern California Edison filed proposals with the California Public Utilities Commission that would significantly reduce the economic value of DG solar systems through net-metering reform. This “NEM 2.0″ tariff will only apply to future installers of solar. Utilities are proposing a maximum charge of $3 per kW/month to help pay for the fixed costs of grid infrastructure otherwise bundled into “volumetric” charges. PG&E’s proposal is structured as a demand charge, while SCE’s is an access charge.
- Massachusetts: On July 24, the Massachusetts Senate voted to raise net metering caps to 1,600 MW. The bill now moves to the House, where advocates say the prospects for the bill are unclear. On August 7, Governor Baker filed his own a bill that would raise public and private net metering caps 2% each, resulting in a 50% increase on the private side and 40% increase on the public side. The governor’s legislation is aimed at getting the state to 1,600 MW of solar power by 2020 and transitioning to a “more balanced solar incentive program.”
- Minnesota: After a special legislative session in June, Minnesota is allowing utilities except Xcel Energy to begin charging new net metering customers a “reasonable and appropriate” fee for being part of their electric grid system.
Solution: Utilities Leveraging DG
As solar continues to grow (worldwide revenue is expected to reach $112 billion by 2018), utilities have an opportunity to get in on the action. Utilities can own and control solar PV inverters as a distribution grid asset, offer community solar programs to customers who live in apartments or homes that aren’t well suited for rooftop solar, or create on-bill financing for customer DG. NRG has entered the DG solar market and boasts that by the end of this year it will overtake Vivint Solar’s position as the 2nd largest residential solar company in the U.S. However, independent solar companies, namely SolarCity and SunRun, as well as regulators are concerned that letting utilities into the market will unfairly squeeze out competition, hurt innovation, and cause higher costs. They argue that fewer households will choose solar power.
Solution: Adjusting Traditional Business Models
Utilities can also adjust business models on their own. One concept gaining popularity among utilities is an access charge, where DG customers pay for future access to the grid and electricity in case their system needs a backup. These fees are similar to capacity markets in that consumers pay for future access to the grid and electricity when their DG system needs a backup.
- In December, PNM, New Mexico’s largest electricity provider, proposed a distributed solar generation fee that could cost new solar installers $30 a month to connect to the grid. PNM considers the fee part of a greater “fairness issue” in which customers with rooftop solar are not paying their share of the fixed costs needed to maintain power lines and other elements of the grid. However, the state’s Attorney General and the solar lobby are opposed to the idea.
- Westar, which serves about 600,000 customers in eastern Kansas, has crafted two billing options for solar customers: a fixed monthly fee of $50 plus an energy charge, or a $15 fixed fee plus a per-kilowatt rate plus a demand charge based on the previous month’s maximum usage. Existing solar systems would be grandfathered in.