Net Metering, Distributed Generation and the Utility Companies

a guest post by Ken Whiteside, Director of Business Development at ONTILITY, LLC.

Net Metering, Distributed Generation and Utility

For those of us inside the solar power energy industry, the news about net metering and the impact of distributed generation on utility company revenue and business practices has been relentless for the past couple of months. Even the mainstream press has picked up the story as evidenced by a New York Times article a few weeks ago. So what is net metering and distributed generation (DG) and what’s all the fuss about?

Distributed generation is pretty simple, but has far reaching impact because it breaks the traditional one-way, centralized model for electricity production and distribution -- a model that’s been in place for more than a century. That model is familiar to all of us: Large power plants produce a steady stream of electrons that are sent through a company-owned system. While the power plant, transmission lines and local distribution infrastructure may be owned by different entities, they are all owned by someone other than the customer. In this model, electricity is a commodity and we buy the amount we need.

Distributed generation is when there are multiple producers feeding power into a common electric grid which becomes a two-way system. That steady stream of power is still flowing through the grid, but now there are additional sources: Solar power systems, for example are producing electricity that is being used at the point of production and sending excess power back into the grid. Thus the impetus for net metering.

To encourage property owners to invest in and install solar power systems (and other renewable sources of electricity production), all parties agreed that the investors should be compensated for any power they produced that they didn’t immediately use on-site. After all, the thinking goes, those are kilowatts the utility doesn’t have to produce. Each solar power system is a small power plant and when that plant produces more than its immediate demand, then the owner should be paid.

In its simplest form, net metering consisted of a mechanical electric meter turning on when the power was flowing from the grid to the loads and turning backwards when power was flowing the other way. Simple, straightforward and not a problem for anyone when there were only a dozen solar power systems in a utility company’s area and the excess power generated amounted to only a few hundred kWh per month. The distributed energy system owners were paid a fair price (full retail in some cases) and those payments were nothing more than a rounding error for the utility. Over time though, the incentive worked.

Soon there were hundreds if not thousands of solar power producers on the system. Payments through net metering programs grew. Utility company executives noticed. And as the market continues to grow rapidly, the future prospects are more alarming.

Those net metering deals under which distributed generation customers are paid full retail for power they produced and pushed back to the grid are being revisited. Utility companies are pushing back. They are reminding us that even though distributed generation customers aren’t using as many kWh’s as non-DG customers, solar power system owners are still using a company-built and maintained distribution and transmission system. And those customers still, in most cases, rely on the grid for that steady stream of electrons when the sun isn’t shining.

One logical way to address the issue is to pay distributed generation customers only the utility company’s avoided costs. But what exactly are the avoided costs? In some places, distributed generation has grown to the point where new power plant construction is being postponed. So is that an avoided cost? It certainly looks like it on the surface, but there are hugely complicating factors including that fact that utility companies make a substantial return on money invested in new infrastructure so they aren’t necessarily thrilled about not having to build a new power plant.

And those of us who sell equipment used in those plants and whose jobs depend on power plant construction are also not overjoyed. Another avoided cost is maintenance of the distribution system. Is there a portion of grid maintenance that is avoided if distributed generation grows to the point where peak loads are substantially offset? If so, how much? And how are those and a myriad of other factors valued and priced so a net metering scheme can be implemented? And what does all this mean to the fundamental electric utility business model? Then there’s the issue of equity among customers?

The less that distributed generation customers pay to support the grid, the more non-distributed generation customers will have to pay. Is that fair? When you consider that those non-distributed generation customers very likely include those who are least able to afford the resulting higher rates, the issue becomes especially sensitive. This scenario also has the potential to turn into a “rich get richer” scenario. As rates go up to compensate for the fact that fewer customers are sharing the cost of maintaining a distribution system, the return for distributed generation becomes more attractive. More people who can afford to invest do and the pool becomes even smaller forcing rates up.

The conversation among utility companies, regulatory boards, solar power advocates and customers has begun. These are complex issues that require careful deliberation, open minds and creative thinking. There won’t be quick resolution and there will be bumps along the way, but at least the conversation is underway. Stay tuned.

Ken Whiteside photo Ken Whiteside has been a fan of solar energy for decades. His first hands-on experience was installing solar on off-grid houses around Telluride, Colorado in the 1990’s (summer in the San Juan Mtns. - somebody had to do it). From his home in Austin, Ken writes and works for widespread adoption of solar electricity, smart energy production and use, and sustainability.

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