Distributed generation refers to generating electricity at the point of consumption, such as solar panels on the roof of a building. Net metering refers to the rate solar customers are paid for power that is returned to the electricity grid. They are reimbursed by their utility for power generated by their solar panels beyond what they use.
Solar panels have become more popular for homeowners in recent years because of price decreases and new financing models. Solar panel customers generally use only a portion of the energy they generate during the sunniest time of the day. Unused energy is returned to the electricity grid, and they are compensated. A key consumer issue is how much they receive for the returned energy.
Many states allow customers to be reimbursed at the full retail rate. This is called full retail net metering. However, utility companies and some consumer advocates believe the full retail rate is too high. It includes costs beyond the generation of the energy. For example, it adds the costs of maintaining poles, wires, and meters.
If solar customers get back more than their energy is worth, customers without solar panels must subsidize them. When this happens, non-solar customers pay higher rates. Some states and municipal utilities try to estimate the value that solar brings into the system. They use this estimate to determine the rate of reimbursement. The resulting rate is lower than the full retail rate. This is known as a value of solar rate (VOS). The VOS payment is based on an analysis of the value that the solar energy brings to the utility system. Under VOS, solar customers continue to pay appropriate costs for transmission, distribution, and customer functions. This reduces the risk of cross-subsidy by non-solar customers.
Customers who receive the full retail rate for energy returned to the grid may feel entitled to the higher payments. Their investment in solar may have been premised in part on the promise of full-retail rate payments or credits from their utility. “Free electricity” and “no more electric bills” are among the claims made in some solar panel marketing materials. These payments or credits often factored into the customer’s decision to finance or lease rooftop solar panels. Thus, proposals to eliminate net metering have been met with strong opposition from current solar customers. They have demanded their current rates be grandfathered or frozen.
RESIDENTIAL POWER GENERATION AND METERING: Policy
Policymakers should ensure that solar customers pay their fair share of costs and nonbypassable fees. They should also be fairly compensated for the value of the energy they return to the grid. If changes are made to the compensation or charges for solar customers, a fair and reasonable transition period should be included before current solar customers are charged the new rate.
Policymakers should ensure:
- optimal use of distributed generation systems results in minimal cost to integrate these resources into the electric system;
- strong consumer protections are in place for participants in distributed generation;
- any cost-benefit study of distributed generation policies assesses whether the policies fairly identify and allocate costs and benefits among ratepayers;
- mandatory rate-design charges for all residential customers, such as high fixed monthly charges, demand rates, and time-varying rates, are not used to address lost revenues associated with solar distributed generation (see also this chapter’s section Cost Allocation and Rate Design);
- regulators are provided the flexibility to make changes to distributed generation policy that would address inequities in the current rates; and
- utilities conduct customer education and outreach on any new rates and allow for a transition period.