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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
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Summary

THE ROLE OF NET METERING IN THE EVOLVING ELECTRICITY SYSTEM

Net metering is one element in a broad constellation of factors affecting the electricity system, utility business models, and regulatory frameworks. The key drivers of the evolution of the electricity system include:

  • Changing economics that involve both declining costs for current and new customer technologies as well as increasing needs for investment in the grid to integrate them and capture their value for the system as a whole.
  • Technology innovations that influence the economics of distributed generation (DG), demand management, storage, information and communications, and power electronics, occurring both on the customer and utility sides of the meter.
  • Expanding policy objectives that require utilities and electricity system operators, as well as the economy as a whole, to reduce carbon emissions, improve public health outcomes, address equity, and enhance resilience in the face of more frequent extreme weather events and other electricity system disturbances.
  • Increasing customer expectations for new electricity-related products and services to help them manage their energy use and bills, as well as meet their own decarbonization goals.

These drivers are also spurring the evolution of new utility business models, along with the growth in non-utility product and service providers, including DG installers, energy service companies, competitive energy suppliers, microgrid operators, and community choice aggregators, among others, who can be utility partners, complements, or competitors. Succeeding in this increasingly complex environment will require not only new utility business approaches but also new product and service provider approaches, as well as innovation in the regulatory framework within which utilities operate.

In this context, net metering policy has been driving the deployment of behind-the-meter DG to achieve a variety of policy objectives—clean energy, resource diversity, carbon reduction, economic development, equity, and resilience—as well as customer expectations for energy choices and savings. As a result, it is receiving increasing attention

Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
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and scrutiny as greater quantities of DG and distributed energy resources (DER) are connected to the electricity grid.

Net metering is a means to compensate customers for the output of their behind-the-meter (BTM) DG (most-notably, rooftop solar), some of which they may consume themselves and some of which flows back to the electricity grid. Where implemented, net metering has been successful in supporting DG adoption, particularly solar, leading to BTM DG levels that exceed 10 percent in a handful of states and are forecasted to increase in others.1 The increasing adoption of distributed solar is one of the factors contributing to rapid and dramatic changes in the electricity system. Net metering needs to evolve because the electricity system is evolving.

Specifically, net metering is a billing mechanism based on retail electricity rates. Ideally, retail rates would reflect the underlying societal costs of electricity.2 However, many important considerations (such as fairness and simplicity) affect the structure and level of retail rates, which can cause them to deviate from costs. If retail rates cannot be readily adjusted to reflect costs, then the net metering mechanism itself can be changed to compensate BTM DG production based on its value, rather than the retail rate.

As policymakers consider changes to net metering policy to align with the evolving electricity system, it is essential to address equity as these changes present an opportunity to improve outcomes for all electricity system customers. To capture the full value of BTM DG for all customers, investments must also be made to upgrade the grid. Therefore, it will be critical for regulators to establish a framework that allows appropriate cost-recovery mechanisms for these investments. As policymakers further pursue decarbonization, resilience, equity, and other targeted objectives, they should consider looking outside of electricity rates to other sources of funding (e.g., provisions in federal legislation) to target support for solar and DG that can help to accomplish them.

The U.S. Congress directed the National Academies of Sciences, Engineering, and Medicine to appoint an ad hoc committee of experts to study the issues associated with net metering, including the medium- to long-term impacts on the electricity grid and customers.3 This report is the result of our research and analysis. The committee concludes that the evolution of net metering build on three foundational pillars:

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1 Calculated from statewide residential PV system counts (Wood Mackenzie 2022) and from the 215 total number of residential electricity customers in each state (EIA 2022c), see Figure 3-6 for more detail.

2 In economics, terms, when prices are based on costs, customers can make efficient decisions about their electricity consumption and production.

3 The full statement of task can be seen in Chapter 1.

Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
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  • Recognize that the future electricity system is and will become even more interdependent among its constituent parts, including DG at the grid edge. Therefore, net metering design should support this integration.
  • Build on the generally accepted principles of electricity system regulation: efficiency, simplicity, stability, fairness, and revenue adequacy. Therefore, net metering must balance among them.
  • Be informed by the electricity system context and policy objectives related to decarbonization, equity, and system resilience, among others, and be sensitive to the locational, temporal, and scale impacts of DG. Therefore, policymakers and regulators should design net metering for the circumstances of their systems and markets, and with input from affected stakeholders.

THE REPORT

The committee recognizes that coordinating the evolution of net metering with broader electricity system changes will lead to a vastly superior outcome than addressing net metering without due consideration of its context. Therefore, the committee began its exploration by establishing a common understanding of net metering terms and its relationship to rates, how BTM DG with net metering works, and past and recent policy trends. With this background, the committee analyzed the economic, equity, technology, and regulatory considerations that policymakers should take into account as they develop and modify net metering and other policies to enable customer adoption of BTM DG and other DER. The committee then summarizes its findings and recommendations for the evolution of net metering to advance a decarbonizing, equitable, and resilient electricity system.

To begin, the committee identifies net metering as a billing mechanism used to compensate customers for the output of their BTM DG. “Traditional” net metering offsets customer electricity consumption on a volumetric (kilowatt-hour) basis with production from BTM DG, effectively crediting production at the retail rate of electricity. In recent years, policymakers have adopted several net metering “variants” that credit BTM DG production at a different rate from BTM consumption: “buy-all/sell-all” rates,4 where consumption is charged at the retail rate paid by other customers and production is credited at what may be a different rate; use of “value of solar” approaches to calculating the credits for production; and the adoption of “feed-in-tariffs”that set credits for exports into the grid based on the costs of production or to achieve a certain level of deployment. The chapter also explains virtual net metering—where customers who cannot

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4 While the report uses the term “buy all/sell all” because it is the most common, a more accurate term may be “buy all/credit all” as customers are not generally viewed as “selling” electricity.

Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×

install BTM DG can participate in net metering by receiving credits from either off-site DG (or DG not behind their own meter), including from community solar projects, or in the context of multifamily residential buildings. Because of the integral relationship between net metering and rates, Chapter 1 offers a short primer on ratemaking to set a foundation for the discussion that follows. In addition to net metering variants (defined as rate-related modifications to net metering), the committee uses the term net metering “alternatives” that refer to DG support policies outside of ratemaking, such as tax credits.

It is also critical, from the outset, to understand how BTM DG works technically. The committee explains the basic technology by providing an example of a typical configuration for a BTM rooftop solar system. Chapter 2 provides an overview of relevant metering technologies, and concludes by describing how these systems may look when integrated with storage or other DER elements.

Having established an understanding of definitions and basic technology, the committee provides an overview of net metering in the United States, from the 1980s to the present (Chapter 3). It presents information on trends in the adoption of net metering and related policies; variants and alternatives to net metering; and deployment and costs for DG and storage. The chapter also discusses trends and tensions in the relationship between electricity market structures, net metering policy adoption, and the introduction of other DG support mechanisms, as well as related developments in energy and electricity system policy objectives.

Net metering policies raise economic, equity, technology, and regulatory, legal, and policy considerations (Chapters 4, 5, 6, and 7). The committee’s recommendations recognize the importance of the availability of and access to information regarding the electricity system and BTM DG across all of these areas to enable DG to provide the greatest value to customers who adopt it, other customers, and the grid or electricity system itself. The committee also highlights the importance of taking into account the locational and temporal conditions and considerations affecting the impacts (benefits and costs) of DG on the electricity system.

More specifically, the economics of net metering and its variants are discussed from the vantage point of the customer with BTM DG participating in net metering; other nonparticipating electricity customers; the electricity system and the utility that serves all customers; and society as a whole, including environmental and other impacts external to the electricity system (Chapter 4).

These economics findings and recommendations recognize the importance of basing electricity prices on social marginal costs to achieve economic efficiency, while noting that other ratemaking considerations related to cost-causation, simplicity, fairness, and revenue adequacy (which includes covering the cost of the distribution system relied

Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×

on even in a high DER future) may make this challenging. An alternative to changing the retail rates that underlie traditional net metering may be implementing changes to the net metering mechanism, such as net billing tariffs or buy-all/sell-all rates, with DG compensation levels set at, or near, the social marginal cost of electricity production and delivery. Where additional incentives to support BTM DG may be needed to achieve specific deployment and policy goals, the committee recommends that they be transparent and designed to achieve a specified outcome, such as encouraging BTM DG adoption by low-income customers or deployment in certain locations on the grid. The committee also notes that DG compensation should account for environmental externalities, insofar as these externalities are not otherwise internalized or accounted for.

The committee viewed examining equity considerations related to net metering as an essential part of its task (Chapter 5). Low-income households, populations of color, and renters are more likely to face barriers to DG adoption and therefore are more likely to be non-participants in net metering. As a result, economic transfers and any differential net metering benefits and costs between participating and non-participating customers have equity implications. This chapter assesses equity along multiple dimensions (distributional, procedural, intergenerational, and structural) and types (direct, indirect, and societal) in the context of access to electricity access, products and services, net metering, and DG. It discusses the interaction of net metering with inequities associated with the electricity and energy systems more broadly, including environmental, health, and resilience. The committee’s findings and recommendations here emphasize the importance of attention to the equity impacts of any rate changes due to net metering for those customers least able to afford electricity. The committee further recommends that utilities make investments to increase DG hosting capacity to address any historic structural inequities in low-income communities; and the need to consider the distribution of benefits and costs (who bears what), as well as the magnitude of overall benefits and costs, associated with net metering. Beyond net metering, the committee recommends that policymakers consider and implement complementary community- and government-funded programs to expand access to BTM DG by low- and moderate-income customers. Finally, fair ratemaking should support the participation of affected customers and other stakeholders in the regulatory process so that they can have a meaningful voice.

The technology implications of increasing amounts of BTM DG for the larger electricity system underscore the need for grid modernization investments to provide visibility, integrate, manage, and/or control such DG. These investments are essential to ensure continued safe and reliable operation of the grid and provision of the grid, and to capture DG value for all customers (Chapter 6). Current and emerging advances in power electronics, storage, communications, and control technologies can enable this integration

Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×

and address cybersecurity and resilience considerations resulting from BTM DG and net metering. These investments (and regulatory approval of them) need to occur simultaneously with (or even in advance of) BTM DG deployment.

The economic efficiency, equity, and technology considerations are then brought together under the umbrella of the legal and regulatory considerations that affect the pace and character of the adoption and evolution of net metering policies across states and utilities (Chapter 7). The committee describes how regulatory and legal considerations interact with net metering policy related to technology innovation and deployment that can provide support for a decarbonizing, equitable, economically efficient, and resilient electricity system. The discussion includes the jurisdictional split between wholesale (federal) and retail (state) regulation of electricity and the status of federal regulation of net metering, the intersection of net metering policy with traditional electric utility ratemaking, the utility’s obligation to serve, and other policies pertaining to the evolving relationships between utilities and their customers including those who adopt technologies that provide part of their power needs.

The committee emphasizes the importance of examining net metering policies, taking into account the current technology costs and market maturity of DG, both for states that have previously adopted net metering and are considering variants, as well as for parts of the country that have not yet adopted net metering. Policymakers and regulators should recognize traditional ratemaking principles as updated to reflect the application of new technologies and service offerings, including cost-causation, rate simplicity, fairness, revenue adequacy, and compensating resources based on their value. Decision makers should design compensation approaches for the export of power from BTM DG consistently with how the utility values other sources of power that offer comparable services to the system. Finally, given the economic and equity challenges associated with using net metering and other incentives and programs where costs are recovered in electricity rates, policymakers should consider net metering alternatives such as tax incentives, building codes, and financing assistance to low-income households.

The report concludes by highlighting the success of net metering to enable and support the deployment of BTM DG, advancing policies to reduce climate impacts, meeting customer expectations for better products and services, and encouraging technological innovation (Chapter 8). Thanks to rapid technological advancements, cost reductions, net metering, and other policies, DER generally, and BTM DG (especially distributed solar) more specifically, are playing a more central and active role in the electricity system than was thought possible a couple of decades ago. Moving forward, to enable the integration of BTM DG into the electricity system to maximize benefits for all customers, traditional net metering needs to be revised to align value streams, costs, and compensation.

Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×

It is critical to ensure that revisions to net metering also improve equity, an outcome that must be achieved through a continual, intentional approach. Fully integrating BTM DG into the electricity system portends a more resilient electricity system, and achieving this goal entails systematic, coordinated, and sustained investments across distribution systems. Policies and regulations must support the creation of a framework and market conditions that enable utility and, as applicable, non-utility participants to make these investments in the distribution. Finally, broader societal goals may be best pursued through approaches and mechanisms that go beyond ratemaking to achieve key objectives, especially equity. With a more open, transparent, deliberate, and intentional approach that leverages the locational, temporal, and contextual value streams of BTM DG, an evolved net metering policy could enable an electricity system that is more sustainable, equitable, and resilient. The report ends with a full listing of all of the recommendations from the chapters.

Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×

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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×
Page 5
Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×
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Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×
Page 7
Suggested Citation:"Summary." National Academies of Sciences, Engineering, and Medicine. 2023. The Role of Net Metering in the Evolving Electricity System. Washington, DC: The National Academies Press. doi: 10.17226/26704.
×
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Over the last three decades, there have been fundamental shifts in the electricity system, including the growing adoption of clean distributed generation energy technologies such as rooftop solar. Net metering, which compensates customers for excess energy they contribute to the grid, has been instrumental in supporting the integration of these systems into the grid, but these policies may need to change to better address future needs.

The Role of Net Metering in the Evolving Electricity System explores the medium-to-long term impacts of net metering on the electricity grid and customers. This report evaluates how net metering guidelines should evolve to support a decarbonized, equitable, and resilient electricity system.

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