The Economics and Politics of Solar Net Metering

It’s been some time since I’ve written on the topic of solar energy and the utility industry. This area has always interested me given my background in nuclear power, energy services and Arizona politics. In recent years, my curiosity with the off-grid lifestyle and homesteading has also fueled that interest.

Originally, I wrote from the perspective that the big utility monopolies were taking advantage of ratepayers by pushing for changes in net metering that would result in hurting the rooftop solar industry. It was the classic David vs Goliath narrative.

That was incorrect.

What further economic and policy research revealed was that the solar industry was actually being heavily subsidized by ratepayers via cost shifting from solar customers to non-solar customers. In other words, the full and long-term cost of energy was being redistributed from the solar haves to the solar have-nots.

Rooftop solar is still fairly expensive to the average consumer. It can cost tens of thousands of dollars in up front cost to purchase a full system for your home. Cost is one of the main reasons why the vast majority of consumers opt for a lease arrangement

Rooftop solar companies and policy makers figured out early on that they needed to create an incentive for consumers to move toward expensive solar. Thus, net metering was established.

You’ve probably heard about selling your solar energy back to the grid or spinning your meter backwards. This is an arrangement in which a customer who is generating electricity from their solar panels is sending any excess electricity back to the grid for distribution to other energy users. This practice reduces the energy cost to the solar customer by creating a credit. Utility companies have been crediting consumers at a retail rate rather than a wholesale rate. That retail rate is above the true market value of electricity and is actually a cost to utility companies which have to operate and maintain the grid. Those costs are ultimately shifted over to non-solar users who pick up the tab for not having solar.

Here’s a video put out by a electric cooperative that helps explains the cost shifting.

As you can guess, this was driven by policy makers who wanted to create an incentive for consumers to transition to cleaner solar energy generation and away from a dependency of fossil fuels – a laudable goal.

But there’s also a political motive in driving consumers to solar. As part of the leasing arrangement, some rooftop solar companies sell the excess energy back to the utility companies at the higher retail rate and pocket the difference above the wholesale rate and why shouldn’t they?

The rooftop solar industry found a way to “rent seek” and use public policy to protect the practice – even at a cost to the broader energy market

This reminds me of another moment in Arizona history when the Arizona legislature passed a law creating a tax credit for those who purchased or converted their vehicles to run on alternative fuels. Almost overnight, an industry of alt-fuel conversion companies sprung up in Arizona. Thousands sought conversions and these companies benefited from the special law. What was supposed to cost Arizona taxpayers $10 Millions ended up costing $200 Million. It was a major public policy failure that demonstrated the law of unintended consequences at the cost of Arizona taxpayers.

Here in Arizona over the last two years, the rooftop solar industry and utility companies have been engaged in a heated battle over the economics of solar energy and net metering policy. Ultimately, the Arizona Corporation Commission decides on any changes to policy which may include an adjustment in the rate that ratepayers sell back their solar electricity to the grid.

Rooftop solar companies like SolarCity have insisted that any reduction in the net metering rate will take the incentive away from consumers to go solar therefore hurting the Arizona rooftop solar industry. APS argues that non-solar ratepayers are paying the cost to maintain the entire grid while solar-users are being subsidized.

Corporation Commissioners have tried to broker a compromise with industry leaders. Meantime, the politics of this battle continue to play out as challenger candidates threaten to replace current commissioners and special interest groups promise to engage in the 2016 election.

The problem with net metering may all be resolved by this summer as other proposals emerge. One indication of a solution may be seen over the next few weeks as one smaller Arizona utility offers an alternative to how it bills residential ratepayers. That alternative is called “demand charges” and I’ll explain in a later post how it provides a workaround to the problem of net metering.

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