Guest Juice: Guidelines For Better Net Metering; Protecting All Electricity Customers And The Climate

By Guest Authors Ahmad Faruqui, Richard McCann, Fereidoon Sioshansi

Authors Ahmad Faruqui, Richard McCann and Fereidoon Sioshansi[1] respond to Professor Severin Borenstein’s much-debated proposal to reform California’s net energy metering, which was first published as a blog and later in a Los Angeles Times op-ed

Severin Borenstein, University of California, Berkeley, Energy Institute at Haas Director, asserts in a March 28 op-ed published in the Los Angeles Times that because the marginal or incremental cost of electricity is much lower than the average cost, customers who install rooftop solar create a revenue deficiency for electric utilities. That requires utilities to raise rates for all customers, creating an inequitable cost shift. Thus, Borenstein suggests that if the state is keen on promoting solar adoption, it should find some other mechanism for subsidizing rooftop solar.

California has a very strong commitment to clean energy. It has mandated solar panels on new roofs, and an increase in the sales of electric cars. It spends $1.5 billion a year on energy efficiency, a large portion of which goes to low-income customers, offers struggling ratepayers a 30% discount on their electric bills, and levies a progressive state income tax that minimizes the tax burden on low-income customers.

California also has among the highest electric rates in the country and power outages are becoming more prevalent.

Just about everyone agrees that California needs to reform its net energy metering (NEM) policies that determine the rates that rooftop solar customers pay. But before we provide preferable approaches, let’s better understand how we got here. Borenstein, however, poses the wrong questions.

The first question should be, given that rooftop solar customers constitute about 10% of all customers, how can we account for the fact that utility rates are 30% to 50% or more above the current direct costs of serving customers?

And the second question should be, given that most of these excessive costs result from past decisions by the utilities, their regulators, and state policymakers, how should utilities recover the costs? This is particularly relevant for groups of customers, such as those with rooftop solar, who previously created savings for the system, and those who will be electrifying cars and appliances to help reduce greenhouse gas emissions.

To answer the first question, we need to look more closely at how NEM works.

NEM customers pay for their net usage from the grid since they are prosumers. They essentially trade energy output during one period (summer and daytime) for importing during a different period (winter and nighttime). Currently, they pay for their imports at rates set out in a retail tariff and they are compensated for their exports based on the same tariff. Customers who installed panels after 2016 pay and are compensated based on time-differentiated rates, with those in the early evening the highest. In the future under NEM 3.0, the price for imports will be higher than the price for exports.

This math behind the true rate burden for other customers is quite straightforward—if 10% of the customers are paying essentially zero (though in fact they pay on average $55 per month because of other charges), the costs for the remaining 90% of the customers cannot go up more than 11% [100%/(100%-10%) = 11% ]. Even then, this calculation ignores that they have delivered significant benefits by reducing system generation costs by as much as 20% since 2006.

If low-income customers pay only 70% of this—the 11%-- then their bills might go up about 8%--hardly a “substantial burden.” (70% x 11% = 7.7%)

Source of rate burden

So where is the real substantial rate burden on non-solar owners, and all customers, coming from?

We can use Southern California Edison’s own numbers to illustrate the point. (Unlike Borenstein who refers to studies by his own team who have never participated in a regulatory proceeding, SCE’s calculations are vetted by a panel of experts in proceedings at the California Public Utilities Commission.)

The total bundled marginal costs are 10.50 cents per kWh for the system and 13.64 cents per kWh for residential customers. In comparison, the average system rate is 17.62 cents per kWh or 68% higher than the bundled marginal cost, and the average residential rate of 22.44 cents per kWh is 65% higher.

These cost increases come from four sources. First, 10% goes towards various public purpose programs that fund a variety of state-initiated policies such as energy efficiency and research.

Next, another 10% comes from costs created two decades ago in the wake of the restructuring debacle. The state has now decreed that this revenue stream will instead be used to pay for the damages that utilities have caused with wildfires.

Another 15% is from higher distribution costs, some of which have been created by SCE over-forecasting load growth over the last 15 years. Loads have remained stagnant since 2006.

And finally, 33% is excessive generation costs caused by SCE paying too much for purchased power agreements signed a decade ago.

So, we turn to the second question—how do we recover past costs while encouraging environmentally-beneficial electricity use?

Unfortunately, Borenstein wants to charge an after-the-fact exit fee on customers who took a risk that electricity rates might rise in the future and started to self-generate power for their own use.

Instead, we should focus on what policies best attain our goals without undermining the progress we have made so far. These solutions are going to require identifying the true responsibilities for the excess costs that have sent SCE, SDG&E and PG&E rates skyward.

Eventually the cost of those past foibles will have to be borne by someone, but it shouldn’t be done in a way that will slow our progress toward mitigating climate change and create incentives for the more affluent to depart the system and leave those costs to the less well off. We need to think more creatively and proactively about how to design rates that truly encourage electrification while covering going forward costs.

Encourage new technologies

Rates going forward for new electrical uses such as heat pumps and electric vehicles should reflect the added costs of serving those loads without adding legacy costs from past mistakes. Those rates should be based on the utilities’ marginal costs vetted in their rate proceedings.

Similarly, new customer-owned solar (and storage) projects should be compensated at those new rates. Customers who own existing projects should be treated the same as the contracts for power purchases—as investments taken at some risk and now delivering rewards. We don’t go back to those who invested in energy efficiency and try to claim that they now owe for “unused” system capacity; we should treat similarly situated customers equitably. We will need these types of assurances to encourage purchases of other new technologies by consumers.

We also need to look for more creative ways to recover past costs. There are two important principles to acknowledge: (1) The large renewable purchases a decade ago created large global technological benefits by accelerating “learning by doing” savings for solar and wind power, and (2) The utilities now have a substantial amount of unused distribution capacity that should be paid for over a much longer period of time.

All customers, not just the wealthy, are exploring options for lowering their bills, either by enhancing the energy efficiency of their house or by installing solar panels and, increasingly, pairing them with batteries.

Our focus should be on enhancing the affordability of these options so that everyone, including low- and moderate-income households, can install them. We should not seek to implement a solution such as that put forward by Borenstein, since that would make rooftop solar unaffordable for everyone. It would be directly at odds with California's commitment to clean energy. Rather than trying to blame our dilemma on a small segment of customers who were trying to do the right thing, let’s look for real solutions that won’t make the situation worse.

[1] The authors are energy economists. Each has more than three decades of experience working with several organizations and firms, and has testified in utility regulatory cases around the nation and the world.