What Is Net Metering? Breaking Down the Controversy

what is net metering?

What is net metering? We’ve all heard the term and most of us even know that there is some sort of controversy around it. We’ve heard it on the news, we’ve seen it online. In hot-bed states utilities have even put up billboards about the issue.

Net metering has been referred to as a battleground, David vs. Goliath, a fight between the huge, monopoly utility companies and the small, helpless solar companies who just want to do what’s right for the earth.

In fact, back in January of 2016, when Nevada’s largest utility (NV Energy) sought to change net metering rules, Bloomberg published an article titled Musk vs Buffett: The Millionaire Battle to Own the Sun, seemingly pitting Elon Musk against Wall Street billionaire (and owner of NV Energy) Warren Buffett.

There are strong emotions on both sides – bolstered by beliefs in fairness, freedom, independence, and rightness. So the question we all want to know is: Who’s right and who’s wrong?

It’s true that as solar expands, it eats into the profits of many utilities, as many solar advocates point out. But the reality is it’s more complicated than that. Having talked to many individuals who work in the utility industry, I can tell you that many utility folk actually want solar to flourish as much as solar advocates, but from an operational and business standpoint utilities oftentimes don’t know how to handle this huge influx of non-traditional energy generation.

Here’s a question for you: What is any utility’s number one most important goal?

Got your answer?

If you said, “providing safe, reliable, and cheap electricity 24/7”, that is correct! That simple idea is utilities’ chief goal. That’s it. Things like energy efficiency and solar are important, but they are ancillary. Keeping the lights on 24/7 is a complicated process, so when a new technology like solar bursts on the scene and grows like wildfire (which doesn’t happen too often in the utility industry), you can understand why some utilities are a little more cautious than they might need to be.

But back to net metering, we want to find out who’s right and who’s wrong.

Are utilities really trying to stamp out solar for their own financial gain? Are solar companies really the little guys who are just trying to make a difference?

To answer this question, let’s look at how utilities supply and charge for power, delve into net metering and why solar companies think it’s so important, and then look to the future to see what net metering might look like 20 or 30 years from now.

Sounds fun, right? Let’s do it!

How Utilities Traditionally Make Money

If you look at the back of your electricity bill (you know, the confusing list of charges we all ignore), you’ll see your bill can be broken down into two main categories: generation and transmission.

Generation refers to the cost of actually creating the energy you use and transmission is the cost to get that electricity to your home. Your generation costs are fairly straightforward – you pay for the energy that you consume. Simple enough.

Transmission costs are a little more difficult, as this includes all the costs incurred to maintain the distribution lines, the huge transmission lines you see from the highway, transformers, tree trimming, digging, etc.

A single homeowner isn’t the only person who uses all this equipment, which is collectively referred to as ‘the grid’, so utilities total up their entire costs to maintain this grid and divide that number by their total number of customer.

As you can imagine, all this maintenance is expensive and these transmission costs account for about 40% of your monthly electricity bill.

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How much you pay into transmission costs (and, by extension, grid maintenance) is based on how much energy you use. To make it fair for homeowners, utilities break these costs up by kilowatt-hour (kWh), which is the denomination we use to measure electricity (the national average cost per kWh is about $0.11 and the average home in the US uses about 900 kWh of electricity a month according to the US Energy Information Administration).

The more energy you use, the more you pay into the grid maintenance costs. It’s variable – there’s no set or fixed price per month. From the utility perspective, it’s this grid maintenance cost (and the fact that it is variable) that plays a key role in the net metering battle.

We’ll look at that more in depth later, but first let’s turn to net metering and see how that works.

Net Metering Basics, or, Why Does the Utility Give Me Money When I Go Solar?

So now that we know how the utility charges their customers, where does net metering fit in? Articles and blogs can sometimes give one-sided opinions on net metering, or give little tidbits of information, so we all know something about net metering, but it’s difficult to get a comprehensive, balanced view.

Having worked in both the utility and solar industries, I’m going to attempt to give that to you right now – albeit in a condensed version.

Net metering, in its most basic sense, is an incentive program to encourage homeowners to install solar panels on their roof. It’s nothing more than that. If a solar homeowner produces more electricity than they use, the utility provides a credit for that excess amount. Utilities often base these credits on kWh. For example, at Xcel Energy in Colorado, or San Diego Gas and Electric in California, or Rocky Mountain Power in Utah, if a homeowner uses 1,000 kilowatt-hours (kWh) of electricity, but produces 1,100 kWh, the utility will credit 100 kWh to their account for use in the next month.

At the end of the year, if they still have any credits, oftentimes they can either carry them over to the next year or get paid out at a “fair market value”, usually around $0.04 or $0.05 per kWh.

State legislators have passed laws requiring utilities working in the state to offer net metering incentives.

And like anything that the government is involved in, all these different types of net metering can be confusing, complicated, and extremely varied, which adds to the general confusion around the topic for most of the population.

So Where Does All the Contention Come in?

The utility industry is over 100 years old and not a lot has changed during that time. They’re kind of like the wise old grandfather of all the industries: predictable, safe, and wise from loads of experience and knowledge.

Utility companies are still, for the most part, vertically-integrated – they own and control everything from the beginning of the process to the end, creating electricity at their generation plants then sending it through their grid system to its final destination – your home.

This process hasn’t really changed in decades, mostly because there’s been no impetus to change. There’s been no new technology to force utilities to change… until now.

Residential solar is bringing about an energy industry that, even just 20 years ago, utilities couldn’t have fathomed. No longer are they in control of every aspect of the business. Now, thousands of homes across their territories are producing electricity and either using it in their homes or putting it back into the grid.

This is something that the 100-year-old utility industry has never had to deal with before. It’s a new model for them. And this new model makes it very hard to fulfill their one primary goal – to provide safe, reliable, and cheap electricity to everyone.

Every day, every month, every year, every 10 years, utilities have to estimate how much electricity its people will need, taking into account population changes, new technologies, greater efficiency standards, and a host of other things.

Having thousands of households adding electricity into the grid, at any time of day and for an unknown amount of time is like a nightmare for these utilities (a nightmare they’ve never dealt with either).

But homeowners aren’t really aware of this (and should we even care?) and we are constantly putting up new solar systems. And as mentioned previously, seeing the benefit to the economy and the natural world, state and federal legislators have gotten behind this movement and are providing incentives (ie net metering) to encourage homeowners to go solar.

As more people install solar on their roofs and produce their own electricity, less people are paying the utility for their services, both in generation (the actual electricity you’re using) as well as transmission (including grid maintenance that we talked about earlier).

And this, right here, is the crux of the issue. This is why utilities are all up in arms. It creates the ominous-sounding, but controversial “Utility Death Spiral”, the idea that as more customers go solar, the utility must raise costs for everyone else, thereby encouraging even more to go solar. For a more graphic view, see the chart below. For more information on this topic, see our article Utility Death Spiral: Solar Raising Electricity Costs?

what is net metering

Image credit: understandsolar.com

Solar advocates claim that solar brings more benefits to the grid than detriment. In 2016 SolarCity, the largest solar company in the US along with the National Resources Defense Council (NRDC) published a report claiming that solar customers in Nevada provide benefits worth $7 million to $14 million annually, a finding contrary to what Nevada’s Public Utility Commission (PUC) found the year before when it approved NV Energy’s controversial slashing of its net metering program, according to a 2016 article from Greentechmedia.

Utilities have tried numerous way to fix this issue, which they see as a serious problem:

  • Lower net metering rates: In early 2016, NV Energy received approval from the Nevada PUC to lower their net metering rates to cover only generation costs, as well as charge customer a fixed monthly fee to cover grid maintenance. In response, major solar companies like SolarCity and Sunrun left the state and installations of grid-tied solar systems dropped 90% in the month following the new rule.
  • Create fixed monthly fees: Other utilities, like APS in Arizona, began charging solar homeowners fixed monthly fees usually around $10 to $25 per month that cover the cost of grid maintenance. Due to this fixed fee, according to a Vice-President at SunPower, a large solar panel manufacturer, many homeowners no longer have a financial incentive to install solar.

These rates and fees are just band-aids created by utilities to continue their traditional business model while still accommodating for a small percentage of their customers installing solar on their roof. But as more and more homeowners go solar, this business model will break down and something new, something more fluid and dynamic, will likely take it’s place.

This is already happening in some forward-thinking communities. New York recently started a program called Reforming the Energy Vision (REV). This wide-ranging program is meant to prepare the state and its inhabitants for the utility industry of the future. An industry where rooftop solar abounds and no one company (ie utility) controls generation. Instead, electricity generation comes from all around us – rooftop solar, community solar, generation plants, etc. In addition, REV is meant to encourage new energy-efficiency technologies, help new energy and tech companies grow, and make the industry (and the grid) resilient and reliable for years to come.

As this project continues moving forward, analysts across the country are watching to see how it works – keeping an eye on its failures, trials, and successes to see if and how they can be implemented elsewhere.

We’re Not All from New York, What’s Going to Happen to the Rest of Us?

Okay, so we can’t all live in an ultra forward-thinking state like New York. What’s going to happen to us in all the other states? As we’ve seen above, net metering is complicated, confusing, and generally difficult to get a handle on.

Now, throw in all the money that is to be made (or lost) by utilities and solar companies depending on how situations play out. Now throw in all the emotive ideas that solar brings to mind in the public (ideas of freedom of choice, independence, and fairness).

You can see why this is a hot-button issue. Until both sides can sit down and rationally discuss net metering- without fighting, without screaming, without hollering, and without pointing fingers as we’ve done for so long – we don’t have a chance to progress forward.

As long as the issue is a tug-of-war with both sides pulling in opposite directions just looking out for number one, we’re just going to be stuck in one place and never move forward.

State legislatures will continue to call the shots, forcing utilities to offer net metering incentives or agreeing to cut out incentives, making it difficult for homeowners to save any real money by going solar.

The Future of Solar + Utility

States, utilities, and energy-related businesses alike need to study and analyze the current situation – looking at utilities as well as the new energy technologies coming out on a daily basis – so we can build a reliable, safe, and cost-effective energy grid for the future.

Many states, like New York, already think that the utility’s monopoly on electricity generation is waning. The salad days of utility profit, expansion, and the continual increase in energy use is over. The idea of putting solar on every home (or at least, most homes) is not just a pipe dream anymore, it could be reality.

And with thousands of people constantly putting electricity back into a shared grid, it makes sense for a single entity to be in charge to make sure we all have enough energy to meet our needs, at the right time and at the right price.

This entity could be a reorganized utility company, an independent operator (as already exist in California and Ontario), or even new branches of municipalities. In the end, the monopoly on generation is over.

That wall has been destroyed by the solar industry. It’s just a matter of how long it will take utilities, and state governments, to accept it and move forward.

How Does This Affect Me, the Homeowner?

If you’re thinking about installing solar, you most likely live in a state with net metering incentives. For most of us, net metering isn’t going anywhere. Even if a utility does enact new net metering rules, if you’ve already installed your system typically you’ll be grandfathered in and are generally safe from any negative consequences from the new system.

However, the rules are constantly shifting and one utility receiving approval to lower net metering incentives can set a precedent that other utilities (even in other states) will try to follow.

So, when going solar, it’s important to know your state and utility incentive programs, as well as the general mood towards net metering. Ask friends who have solar or even call up the utility itself to get the word on the current climate.

Installing solar on your roof can be one of the most exciting things you do with your house and it is rewarding to watch your electrical meter slowly stop and start moving backward as you pump electricity back into the grid.

However, it needs to be coupled with knowledge on your available incentives, so you can make informed decisions on the best way to get you creating your own energy from the sun!

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