Distributed Generation and Net Metering


Rooftop solar has become more popular for homeowners in recent years, with the price of solar having dropped more than 70 percent since 2006. At the same time leasing-and- power purchase agreements have become more popular and by some estimates are now more common than purchase agreements. (Under a power purchase agreement, the solar company retains ownership of the solar energy system, and the homeowner buys all of the electricity produced by the system at an agreed-upon price per kWh.) With a lease the homeowner enters into a lease agreement and makes pre-established monthly payments to the solar company, which retains ownership of the system for the contract term, while the homeowner has the right to use all the power produced by it. In addition to the drop in price, many state and federal subsidies and incentives offset the initial cost for a homeowner.

Solar panels generate electricity during the sunniest times of the day and often generate more electricity than the homeowner needs for their own usage during those periods. Typically state policy requires the utility to purchase this excess capacity. This arrangement can be beneficial for the utility, as it provides an additional source of power during peak usage periods.

The rate at which the solar customer is reimbursed has become a topic of controversy. In order to encourage the development of rooftop solar many states adopted “net metering,” in which the solar customer is credited with the full retail rate, or nearly the full retail rate, for excess generation. This credit then offsets the utility’s billing for that customer’s usage for the current month, and the credits usually can be carried forward. Utilities and many consumer advocates argue that payment at the full retail rate overcompensates the solar customer and thus requires nonsolar customers to subsidize solar customers. This is because the full retail rate includes both the cost of generation and the costs of distribution and delivery, such as poles, wires, and meters. Utilities do incur these distribution costs to serve solar customers, but they are not fully compensated for these costs by solar customers under full retail rate net metering.

On the flip side customers who invested in solar or entered into long-term solar lease agreements were often enticed in part through the promise of payments or credits from their utility under the full retail rate. “Free electricity” and “no more electric bills” are among the claims made in some solar panel marketing materials. These payments or credits are 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, who demand their current rates be grandfathered or frozen.

About half of the states are considering changes to net metering or related rate design to address utility lost revenue and cross-subsidy concerns. Some states are considering or have already opted to move away from their current net metering policy. Alternatives to net metering include charging a non-bypassable monthly fee to solar customers to support distribution and delivery services and putting in place residential rate designs that would apply to all residential customers, both solar and nonsolar. Rate-design options include increased fixed charges, demand charges, and time-of-use rates (see this chapter’s section Cost Allocation and Rate Design). Rate designs that shift cost recovery from variable rates to fixed monthly charges most severely affect the lowest-usage customers and discourage conservation.

Some states and municipal utilities have adopted an alternative to net metering known as a value of solar tariff (VOS). The value of solar determination is similar to the calculation of the value of any new generation resource, looking at avoided costs and creating a payment based on an analysis of the value of the rooftop solar exports to the system as a whole. Under VOS, solar customers continue to pay appropriate costs for transmission, distribution, and customer functions, reducing the risk of cross subsidy by nonsolar customers.

Distributed Generation and Net Metering: Policy

Consumer Protections

In this policy: State

Policymakers should ensure that:

  • 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;
  • solar customers pay their fair share of costs and nonbypassable fees and are fairly compensated for the value of the energy they provide;
  • mandatory rate-design charges for all residential customers, such as high fixed monthly charges, demand rates, and time-varying rates, are not adopted to address concerns with lost revenues associated with solar distributed generation (see 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;
  • if changes are made to the compensation or charges for solar customers, a fair and reasonable transition period is added before current solar customers are charged the new rate; and
  • utilities conduct customer education and outreach on any new rates and allow for a transition period.