Why net energy metering is unfair and inefficient.
Charles E. Bayless is a board member at Pike Electric, Recycled Energy Development, and West Virginia American Water. Previously he has serviced as chairman, president, and CEO of Illinova Corp., of its subsidiary Illinois Power, and of Tucson Electric Power (UniSource Energy), and as President of the West Virginia University Institute of Technology.
Ideas that create an entirely new business model rarely come along. Think Henry Ford's perfection of mass production. The Internet, perhaps, is another.
So must we now add rooftop solar to this short list? But I warn you. Take care before answering. The answer is not as simple as it seems.
Consider a mythical company that I'll call Piggyback Air, a brand new startup passenger airline with boundless ambition. Yet Piggyback Air has a problem. Its airplane engines aren't very reliable. They run only about 40 percent of the time, and are known to quit even in mid-flight. What to do. Replace those engines?
No, Piggyback's CEO had a better idea. He would attach and bolt his planes atop those of a competitor, Sitting Duck Air, which flies planes with much more reliable engines. The Piggyback plan would then just go along for the ride, just as NASA years ago would perch the space shuttle atop a Boeing 747. Piggyback's piggybacking planes would help supply engine power for this awkward gangly looking flying machine, but if the Piggyback plane saw its engines cut out, as they always did, its passengers would still be OK. The more reliable engines on the Sitting Duck plane would keep them aloft.
At first the competitor didn't notice anything wrong. Sitting Duck was too busy adding up and collecting revenues: baggage fees, meal fees, ticket-change fees, cocktail fees, extra legroom fees, etc. In fact, Piggyback was even willing to pay compensation to cover a part of the cost of the full ticket price that Sitting Duck would charge to its own customers, but only a percentage. Piggyback would contribute a 60-percent share of that cost - a share proportionate to the fraction of time that its engines were down, forcing the Piggyback plane to rely on "The Duck" for motive power. But as travelers soon discovered, they could now buy a ticket on Piggyback Air and pay only that same amount - just 60 percent of the cost of the full-price ticket charged by the competition. So they flocked to Piggyback, boosting its market share.
Piggyback's CEO then dreamed up and even better idea. In addition to paying compensation for the fraction of time that Sitting Duck's engines covered Piggyback's bacon, Piggyback now would exact a surcharge of its own. In other words, Piggyback now would bill Sitting Duck for the extra lift that Piggyback's engines provided for the two conjoined twins, attributable to the 40 percent of elapsed flight time during which Piggyback's engines actually functioned.
And Piggyback would do more than just sell a service. It would sell this extra lift not for the cost of providing it, but for the full retail price (a 40-percent share thereof) charged by Sitting Duck for a bona fide business-class ticket.
With his newfound wealth, Piggyback's CEO could invest a little more money in his engines, boosting their reliability from 40 to 50 percent. Now Piggyback found that the money it earned selling "lift" during the 50 percent of time that its own engines could be kept running had increased. Now those revenues for sales of lift could exactly offset the cost that Piggyback paid Sitting Duck for the other half of the time that Piggyback's engines failed to work.
Piggyback's net operating cost fell to zero - "net zero," if you will - allowing Piggyback to carry passengers for free.
Soon the national association of air carriers had named Piggyback's chief as CEO of the year. He had his picture plastered on billboards across America with the slogan, "We'll take you for free, so fly with me."
But soon enough, Piggyback encountered another problem. It did so well in piggybacking for free that eventually it forced Sitting Duck into bankruptcy - and every other competing air carrier to boot. And with engines that ran only half the time, but no host plane to serve as a sitting duck, Piggyback could operate no longer as an air carrier. Its customers deserted.
With every air carrier kaput, including Piggyback, Congress convened a special session. It passed a bipartisan bill requiring that any new air carrier attempting to enter the market must now employ engines with near-100-percent reliability. Moreover, any such carrier must either provide for all of its own lift, or purchase such lift at full cost from a third party.
The Piggyback Air business plan just described is obviously ridiculous and even comical. But it's basically indistinguishable from the plan that is advocated by those who propose net energy metering at the full retail rate.
To illustrate the problem as seen by a utility, consider the case of a large, solar-generating and net-metered utility customer whose annual generation exactly equals its annual load. This customer, like any other customer, has peaks and valleys of usage. Sometimes those rooftop solar panels stop generating power, forcing customers to buy power from the grid. Other times the customer feeds energy into the grid, but due to the large amount of solar installed, its total consumption during the year is a net zero, so its total payment to the utility is zero. Yet, while paying nothing, this customer in effect has bootstrapped the reliability of its rooftop solar panels from 40-50 percent to one day in ten years. And, by taking energy from the grid at night and then selling power back to the grid during the day, our customers have avoided the cost of having to install backup generation or batteries to achieve reliability - all the while claiming it isn't using the grid. You could truthfully say that our customer has adopted Piggyback Air's business plan; our customer has begun with a cheap and unreliable system and has transformed it magically into a reliable system by bolting it to the grid, while paying nothing for the extra reliability or sales potential.
Compare a remote house with rooftop solar located out in the desert, 50 miles from the grid, to a house with an identical rooftop solar installation connected to the grid under a net metering program. Hasn't the net metering customer gained something in reliability vis-à-vis our remote dessert dweller? Our grid-connected homeowner doesn't have to install batteries. She can sell power to the grid and manage her peak usage without having to install enough capacity on-site to meet her own needs. Shouldn't she pay for it?
The Grid and Its Products
In the example just cited, our grid-connected, solar-generating and net-metered homeowner is actually using the grid for two different products at two different times.
First, she is time-shifting. She is purchasing reliable electricity at one time and selling spot market electricity (at a price much higher than the market price) at another. Claiming to be "net zero" is about like someone who drives an identical route to-and-from work saying they are a net zero highway user.
I always have a simple answer for net metering advocates who argue that they aren't using the grid because they are a "net zero" customer: if you are not using it, disconnect. So far I have had no takers. At the same time these customers have added to the costs of the gird due to the need to compensate for the variability of the customer's generation - costs that others now must bear.
Customers may claim that since their net power flow is zero that they are not using the grid but the grid provides much more than power flows. When one looks at grid services such as reliability, reserves, frequency control, voltage control, and redundancy as physical quantities flowing through the grid, the picture then becomes quite different. Customers may have net zero power flows but reliability is flowing into the customer while none is flowing out: not a net zero. Voltage control is flowing into the customer but none is flowing out: not a net zero. Frequency control is consumed by the customer but none is provided by the customer: not a net zero. Unit dispatchability is consumed by the customer but not provided: again, not a net zero. In short, while customers may have reached a "net zero" threshold on energy, they are a large net negative on very expensive grid services.
The grid services provided are not apparent, they are shrouded in obscurity behind differential equations and technical jargon: hidden behind technical concepts such as frequency bias, headroom, generator inertia, symmetrical components, redundancy, single failure criteria, primary and secondary reserves and a host of others that are understood by a precious few - even in the industry. They are manifested as slight changes in voltage or current or phase shifts, they are changes in unseen magnetic or electric fields or in plants automatically varying their output to provide balancing or frequency control. But these services and their effects are real, measurable and their cost is very significant. In fact, a great deal of the cost of the grid is not incurred in generating electricity; it is incurred in achieving reliability and stability and yet we are supplying these for free to net metering customers. Unfortunately economics dictates that if we don't pay for reliability now we won't have reliability in the future.
It is often said "History repeats itself," but to fully understand the impact of this principle in today's world it is necessary also to look at a fundamental corollary:
"History repeats itself, and every time it does so the price goes up."
Our industry has suffered through bouts of incorrect supplier pricing several times before: in 1978, for example, under PURPA, the Public Utility Regulatory Policies Act. Under the original PURPA rules utilities purchasing power from qualifying facilities ("QFs") had to pay them for "avoided costs" - the costs the utility presumably avoided in buying power from a third party, rather than generating that power itself.
Avoided cost was a rather nebulous term. In truth, it was a really nebulous term. State public utility commissions were tasked with setting avoided cost; not surprisingly, the result was 50 different rates for purchased power. Among the highest were New York and Maine, with Maine having the highest overall avoided-cost rate. As a result suppliers flocked to New York and Maine and came close to bankrupting at least one utility by charging rates as high as 6 cents per kWh for energy they could have purchased elsewhere for 1-2 cents per kWh. Today the full retail net metering rate is far higher than New York's one-time six-cent rate for QFs. For regulators to run the New York PURPA play again and think the results will be different is folly.
As with any other good or service, if we pay too much for rooftop solar we will get too much of it, leading to a non-optimum solution and very costly societal burden.
It is interesting to note that no other generator receives the full retail rate, even though some, such as cogeneration facilities are, like rooftop solar, located contiguous to and serving loads. I see no need to treat a net metering customer different from other suppliers. If an IPP (independent power producer) ramps up a unit from "black-start" mode, it must take power from the grid and will pay the local utility the full cost of the power necessary for the startup, which includes transmission, reliability, and other charges. And when an IPP sells power back to the utility, it gets the wholesale rate and nothing more - even though the IPP may be selling firm, dispatchable power.
Where is the regulatory and economic fairness in allowing one set of suppliers to get 4¢ /kWh for firm, dispatchable power, while allowing another supplier - one that provides much less reliability (requiring material system modifications and operational procedures) - to get 10 cents per kWh?
A good judge of the actual value to a utility of intermittent, net-metered power is the price for interruptible short-term energy traded in the economy energy market. That price usually runs about 1-2 cents per kWh.
The Right Price
There's another long-term economic problem is embedded in the full-retail net metering program, and that problem is on the supply side.
Just as prices that are too high encourage too much supply (witness the frenzy seen today to install rooftop solar), prices that are too low do not incent new entrants and innovation to enter the market. Giving away reliability for free deprives the market of the pricing signals necessary to develop the processes and mechanisms absolutely necessary to provide the reliability necessary for the future of renewables.
For instance, assume that someone invents a much cheaper high-capacity battery. Today a battery for a Tesla S model can supply storage for about two to three days' usage for the average U.S. household. And Tesla's new battery also will provide a few hours of outage "ride-through," which is enough for some to disconnect from the grid. But fewer will want to pay for and install these batteries when they are getting reliability and backup services for free.
Absent price signals and incentives to install backup we will lose valuable time and experience gained by the innovation, trial and error, and cost reduction that can be achieved by sliding down the learning curve. If customers had to pay for reliability and if accurate price signals prevailed, then I have no doubt that thousands more scientists, engineers, and companies would turn their attention to developing cheaper methods of delivering reliability and more advances would be made in battery technology, in load control through demand-side management, and so forth. But no one can compete with free.
Companies like Solar Reserve, which is solving the intermittency problem by paying for and providing its own centralized and hence cheaper reliability services, would get a much higher market share and have an easier time attracting capital if it didn't have to compete against market players getting these same services for free.
Twenty years ago the airline industry changed the electric utility industry in a fundamental way with the invention of the high-bypass gas turbine, which led to a huge shift towards gas-fired electric generation. Today the search for electric car batteries offers the same promise of fundamental change. Batteries are already far cheaper at providing backup in situations requiring only a few hours per year. At some point, as the number of hours increase, gas turbines become cheaper. Wouldn't we be better off from a carbon point of view if we could install more batteries and drive their price down? Wouldn't it be better if our industry spent as much searching for better batteries as the automobile industry does? Are we likely to do either with no pricing signals? As a public policy, high feed-in-tariffs are not a bad idea. They have helped jump-start the renewables industry. But shouldn't some of the proceeds go to battery research and grid modernization and flexibility - both of which will be necessary to achieve a high market penetration of renewable energy resources - rather than 100 percent to net metering customers?
Many proponents of renewables argue that utilities must take their chances in the market and I agree. Utilities that are proactive and embrace the renewable future will do just fine, those that are not will fail (and probably should think about getting some new management.) But when it comes to reliability services these same proponents who constantly advocate the free market for utilities do a Jekyll-and-Hyde-type switch. They approach (gasp) regulators and demand a costly service for free. Why are they afraid of applying their professed faith in the market to themselves and paying for reliability services? This approach doesn't sound like someone who is interested in market efficiency, but more like someone trying to maximize profits and game the system.
It can work both ways. We can either have the free market or regulation (the free market is better), but one group shouldn't get to cherry pick which parts of the free market and regulated system apply to them and which apply to their competitors.
I find it amusing that by insisting that utilities should give reliability away for free, the proponents of net metering are driving customers to continue to use utilities (but without paying for it). If customers had to pay for reliability and the correct pricing signals were present, we would move much more quickly to microgrids, energy efficiency, demand-side management, and efficient energy storage devices, etc. The market then would decide whether to bank on the interconnected grid or instead on battery storage to reliability at the cheapest cost. Net metering customers and providers certainly must believe that the interconnected grid is the winner, or else they would be quickly moving off the grid and installing their own reliability. And yet, as customers enjoy free reliability without charge the incumbent utilities will disappear, like the incumbents in the Piggyback Air analogy, and we will end up with no incumbents and no market-developed system for cheap, efficient reliability, as the pricing signals did not indicate any need for such a market until it was too late.
Our Carbon-Free Future
I absolutely believe that we must achieve a carbon-free future. I believe also that when all externality costs are included, such those that must be incurred as to fight climate change, ocean acidification, and so forth are included in rates, that solar and wind will prove vastly cheaper than fossil fuels. But that is no excuse for installing any renewables at any cost, instead of installing the cheapest renewables.
To argue that renewables are cheaper than fossil fuels because of externalities is correct. But to turn around and argue that renewable customers should not pay for the externalities they impose on the total grid is not logical. You can't have it both ways.
For the good of society (which isn't the same thing as maximizing profitability of rooftop solar companies or net metering customers) we must charge the correct rates that accurately reflect the cost of the service provided so that the optimum solution is reached.
Unfortunately these unpaid charges and increased costs from net metering do not disappear. Rather, under utility rate regulation they are simply spread to other customers or shareholders. Society as a whole ends up the loser. Failure to select the cheapest path to a carbon-free future will mean less money available for cheaper renewables and may lead to an anti-renewable cost backlash among customers.
Net metering rates (and anything else for that matter) that do not reflect true system economics, including externalities, can lead only to suboptimal decisions and higher costs for our economy. The fastest path to a renewable future lies in achieving the lowest overall cost. And I believe that path runs through an interconnected grid with renewables. The cost of the grid will be repaid many times in savings from not having to build reserves or batteries at every single site, but by sharing reserves through the grid. It will be repaid also by the ability to use wind at night and solar during the day - by utilizing the grid, through diversity interchange, such as with Utah selling wind power to Arizona during the summer peak and Arizona selling solar power to Utah in winter. Large-scale, central-station wind and solar may prove cheaper in the end than PV on homeowner rooftops, but it can't function without the grid. If we aren't willing to pay for the grid we will lose these large benefits.
As we begin to view the grid as a means to optimize our overall system it becomes clear that everyone connected to the grid should pay for it. I have no doubt that rooftop solar customers, manufacturers, and installers are better off with a full-retail net metering rate - just as would the IPPs who own and operate combined-cycle gas units. But the goal of public policy should not be to optimize or favor one over another.
We face many difficult questions on our way to a sustainable system. What is the equivalent capacity of renewables? Is their generation coincident with peak? Some customers may contribute greatly to reductions in distribution system loading and prevent new lines from being built: how much should each of these customers be compensated? Who do we charge for the capacity we must install to follow the increasingly variable load? Net-metered customers can cause severe stability and voltage problems. All these factors need to be taken into account.
As someone who has taken and understood freshman physics and chemistry I am an absolute believer that climate change and ocean acidification are human-caused, and are the greatest threats we face. We must move to a carbon-free future.
And rooftop solar and net metering at the correct rate certainly have a place in our future. But by paying too much for net metering, we will get too much of it. In fact, most utility concerns over net-metered rooftop solar have nothing to do with a bias against renewables, but with the basic unfairness of the Piggyback Air business plan.
There is an optimum mix of solar, wind, battery storage, energy efficiency, and grid backup. And we will not reach that optimum mix without the right prices to provide the necessary incentives for innovation.
Lead image © Can Stock Photo Inc. / tomz