The Role of Net Metering in the Evolving Electricity System

Moving forward, to enable the integration of rooftop solar into the electricity system to maximize benefits for all customers, traditional net metering needs to be revised to align value streams, costs, and compensation.

Distributed generation should be compensated based on the value it provides to the electricity system, society, and the customers adopting it. The report recommends regulators:

Should strive to develop retail rate structures—for all customers—with usage-based energy prices that correspond as closely as possible to the social marginal cost of producing and delivering electricity (inclusive of externality costs); and

Implement changes to the net metering mechanism—either buy-all and sell-all or net billing tariffs—for rooftop solar customers, with compensation levels set at or near the social marginal cost of electricity production and delivery (in the absence of economically efficient rate structures for all customers).

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Recommendation 4-1
Regulators should strive to develop retail rate structures—for both DG and non-DG customers—with usage-based energy prices that correspond as closely as possible to the social marginal cost of producing and delivering electricity, inclusive of time- and location-specific environmental or other externality costs (insofar as they are not already internalized, while recognizing other competing rate-design objectives. Under this condition, net metering will generally result in economically efficient levels of investment in DG technologies, albeit with some rate impacts to nonparticipating customers.

Recommendation 4-2
In the absence of economically efficient rate structures for all customers, the alternative solution may be to implement changes to the net metering mechanism—either buy-all and sell-all or net billing tariffs—for DG customers, with DG compensation levels set at or near the social marginal cost of electricity production and delivery.

Recommendation 4-3
When evaluating the economic implications of current or proposed changes to net metering rules, decision makers should consider specific conditions in their jurisdiction (e.g., the generation mix and costs, DG penetration levels, clean energy policies, etc.), while also anticipating how those conditions may evolve over the lifetime of DG resources. Environmental benefits should be carefully weighed alongside any rate impacts to non-participating customers.

Recommendation 4-4
In some cases, additional compensation for DG customers may be warranted above and beyond what can be provided through net metering or other DG tariffs. In these circumstances, any additional incentives for DG customers should be provided through transparent incentives designed to achieve a specified outcome (e.g., to encourage adoption by low-income customers, to relieve constraints in specific localized regions of the grid, to meet legislative DG targets, etc.) and, if appropriate, funded from sources outside of electricity rates.

Recommendation 4-5
In determining DG compensation, policymakers should explicitly account for the environmental and other externalities that DG reduces when it displaces fossil fuel generation. To fairly compensate DG for this clean energy attribute, policymakers should consider whether to do so based on the monetary value of the environmental externalities that the DG is likely to abate or the cost to achieve the same reduction in environmental harms through alternative technologies or policies.

Recommendation 4-6
Utilities should work with regulators and stakeholders to identify the types and formats of information (such as heat maps and avoidedcost calculations) that the utility should provide publicly about their distribution systems and their provision of electricity service so that suppliers and potential customers of behind-the-meter generation can see the benefits and costs that behind-the-meter technologies can provide to the local electric system. Regulators and decision makers of publicly owned utilities should ensure that such information is provided to the public in easily understandable and accessible ways.

Recommendation 4-7
To the extent possible, BTM DG compensation rates should be location- and time-based, tied to available distribution capacity, to indicate where that DG would have the greatest value (e.g., in relieving or avoiding distribution constraints and/or displacing local generation with high emissions). Considering the locational value of solar can have particular value to low-income customers who often live in areas with emitting generation and poorer air quality.

Net metering can play a role in alleviating—or exacerbating—existing inequities associated with power supply and delivery across the United States. Low levels of solar rooftop adoption and participation in net metering have been documented in low-income households, populations of color, and renters. To remove barriers to the adoption of distributed generation by low income and other disadvantaged customers and communities, policy makers need to build equity considerations into the design of net metering, its variants, and alternatives, including companion policies such as legislative and taxpayer-funded programs. The report recommends:

Rates should be designed with particular attention to the equity impacts for customers least able to afford them; and

Decision makers on electricity rates should consider both the impacts of the distribution of benefits and costs, as well as total benefits and costs when designing net metering policies and ensure that adequate data is collected and made publicly available.

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Recommendation 5-1
Rates should be designed consistent with updated ratemaking principles, with particular attention to the equity impacts for customers least able to afford them. To help accomplish this, utilities and policymakers should ensure that information about utility rates is easily available to all customers (e.g., not just through postings on websites), and that all customers have a voice and can participate in the design of rates.

Recommendation 5-2
Decision makers on electricity rates should consider both the impacts of the distribution of benefits and costs, as well as total benefits and costs when designing net metering policies, and ensure that adequate data are collected and made publicly available to do so. These benefits and costs should include and balance among other things: public health impacts, job impacts, land use impacts, and the future options that will be enabled or precluded.

Recommendation 5-3
Fair ratemaking should allow for affected consumers to have a meaningful voice in the process (so as to ensure procedural equity) and take into consideration (among other things) the potential impacts of rates on various customer segments (from an economic efficiency and equity point of view), and on customers’ decisions about adopting BTM technologies or load or grid defection in the context of technology trends. Regulators and decision makers of publicly owned utilities should ensure that such information is provided to the public and is easily understandable and accessible.

Recommendation 5-4
Investments to reverse historic structural inequities, such as grid upgrades in historically disinvested communities to increase hosting capacity, should be considered to enable broader adoption of BTM DG and participation in net metering.

Recommendation 5-5
Policymakers should consider expanding community and government-funded programs, such as low- or no-interest financing, to expand access to BTM DG by low- and medium-income customers and their participation in net metering. In addition, incentives that focus on income-qualified customers and renters can help reduce inequities due to lack of access.

A steady increase in distributed generation has accompanied exponential advances in technologies related to metering, communication, computation, and power electronics. This has implications on the larger electricity system. Modernizing the grid will require better integrating sources of renewable energy; incorporating advances in power electronics, storage, communications, and control technologies; and confronting issues surrounding cybersecurity and resilience. Moving forward, the report recommends:

Direct investments in the distribution system to integrate increasing amounts of generation such as rooftop solar to ensure the continued safe and reliable operation of the grid and provision of grid services.

Utilities must make investments to integrate, increase the visibility of, manage, and reduce barriers to customer and DG provider management of these technologies.

Investments in distribution system technologies aimed towards integration of DG and distributed energy resources must be accompanied by revisions in policies and state and federal utility regulations to facilitate recovery of these investments.

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Recommendation 6-1
There need to be direct investments in the distribution system to integrate increasing amounts of BTM DG such as rooftop solar, as well as other DER including smart buildings management systems, electric vehicles, and charging infrastructure, to ensure the continued safe and reliable operation of the grid and provision of grid services. Investments will also be required to improve grid visibility to suitably site and operate BTM DG, as well provide efficient price signals, such that the DG can provide system benefits, particularly local and grid resilience when normal service is disrupted. These investments in the distribution grid have to occur simultaneously with BTM DG deployment.

Recommendation 6-2
In order to make the best use of DG and DER, utilities must make investments to integrate these technologies, increase their visibility, manage them (either directly or indirectly through price signals), and reduce barriers to their management by customers and DG providers. With either utility or nonutility control, or intelligent management, DG can provide greater value. The corresponding compensation through net metering and its variants could reflect this higher value. Overall, the democratization of the grid, with increased publicand private partnerships, can be very valuable.

Recommendation 6-3
Investments in distribution system technologies aimed toward integration of DG and DER must be accompanied by revisions in policies and state and federal utility regulations to facilitate cost recovery of these investments.

Mechanisms for compensating solar customers vary widely across the country with differences between state legislation, regulatory decisions, and policies. Net metering is one way to encourage the deployment of distributed clean generation. Other policies and mechanisms, which go beyond compensation through utility rates, include:

• Renewable portfolio standards or clean energy standards,
• Rebates or financial incentives funded outside of utility rates,
• Tax credits (state and/or federal) for use by households or businesses, or
• Building codes

Moving forward, the report recommends that decision makers about electric utility rates, including state legislators, utility regulators, and governing boards of publicly owned electric utilities:

Assess and revisit traditional net metering policies to support the deployment of rooftop solar;

Rely on 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; and

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.

Policies and regulations must also support the creation of a framework and market conditions that enable utilities and non-utility participants to invest in the distribution system for integrating BTM DG into the grid, with an opportunity to earn a reasonable rate of return on their investment.

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Recommendation 7-1
Decision makers about electric utility rates—including state legislators, utility regulators, and governing boards of publicly owned electric utilities—should take into account that DG technology costs and market maturity are at a stage both technically and economically, where traditional net metering policies to support the deployment of DGs need to be assessed and revisited. This recommendation applies both to instances where a utility operates in a state that previously adopted net metering and regulators are considering variants to it, as well as in parts of the country that have not yet adopted net metering, and seek to advance BTM technologies, and have the option to leapfrog beyond net metering and adopt other ratemaking variants.

Recommendation 7-2
Decision makers should rely on important, traditional ratemaking principles as updated to reflect the application of new technologies and service offerings. These updated principles include cost-causation, rate simplicity, fairness, revenue adequacy, a simple customer experience even if underlying rate structures become significantly more sophisticated, and compensating resources based on their value.

Recommendation 7-3
Decision makers should design compensation approaches for the export of power from BTM generation according to principles that are consistent with how the utility values other sources of power that offer comparable energy, capacity, and other grid services to the system (which may vary by time and location). External impacts (such as pollution) from some sources of power are unpriced, and in many jurisdictions, there are constraints on the ability of regulators to reflect externalities in utility planning and/or ratemaking. Sound economic principles would support the consideration of such externalities in utility regulation; policymakers should consider how to address such impacts in utility and other energy policies.

Recommendation 7-4
Given the economic and equity challenges associated with using net metering—and with financial incentives and programs recovered in electricity rates more generally—to promote investment in and deployment of DG technologies, policymakers should also consider and where appropriate use other policy instruments, such as tax incentives, building codes, attractively priced loans (or even grants) to low-income households, and other complementary policies.