The Role of Net Metering in the Evolving Electricity System (2023) / Chapter Skim
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7 Regulatory, Legal, and Market Considerations
7 Regulatory, Legal, and Market Considerations
Pages 149-177
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From page 149... ...
Chapter 4 discussed the importance of economic efficiency principles in designing utility rates generally and in establishing levels of compensation for BTM resources' exports to the grid. Chapter 5 addressed key equity considerations that need to be taken into account in designing rates for BTM resources while assuring the affordability of basic electricity services and access to DG benefits for all, including those not able to adopt such BTM resources themselves.
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From page 150... ...
• State regulation and net metering policy, including traditional electric utility ratemaking principles, power acquisition principles, and other policies pertain ing to the evolving relationships between electricity customers, their utility ser vice providers, and non-utility electricity product and service providers. • The electric utility's traditional obligation to serve and its implications for the provision of utility service to customers that adopt technologies that provide part of their power needs.2 • Issues related to rights and responsibilities of different entities (e.g., the owner of on-site equipment that feeds supply into the grid; the utility that intercon nects BTM resources onto the system; and regulators that set net metering rates)
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From page 151... ...
and transmission service in interstate commerce.6 This means that the design of rates for the purchase of electricity by customers with BTM resources is subject to pricing decisions of state regulators for investor-owned utilities and of boards of publicly owned distribution utilities. Exports of power for sale or for compensation (e.g., to the utility or an independent power supplier or other entity)
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From page 152... ...
9 where that generating capacity (e.g., rooftop solar or combined heat and power cogeneration facilities) is sized larger than the host end-use-customer's loads and thus causes that electricity customer to be a chronic, netexporter to the grid.10 Under PURPA, QFs must be paid a price set at the avoided cost of the purchasing utility.11 The PURPA avoided cost rate is determined by the state public utility regulatory authority.12 That said, a customer seeking to add on-site solar and storage equipment that exceeds the on-site loads for some period of time -- say, 2 years ahead of purchasing an electric vehicle which would then increase on-site electricity demand -- could unwittingly trigger 7 "Organized markets" is the term used to describe wholesale power markets established in and administered by Regional Transmission Organizations (RTOs)
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From page 153... ...
. To date, FERC has otherwise declined to regulate rooftop solar and some other BTM DER13 and has taken what one legal expert has characterized as a "hands-off approach to state net metering."14 FERC's hands-off policy was tested as recently as 2020 when a group asked FERC to exercise its jurisdiction over exports from BTM resources, but the agency declined to deviate from prior positions.15 Given the intensity of interest in the question of FERC jurisdiction over net metering, it would not be surprising to see this matter raised again in the future, either at FERC itself or in the courts.
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From page 154... ...
As described in Chapter 3, a handful of states started to experiment with adopting net energy metering requirements in the early 1980s. By the end of the 1990s, net metering programs were offered to some or all electricity customers in 22 states.16 By that point, 6 states had passed laws explicitly addressing net metering while another 14 states adopted net metering by regulation and thus through their pre-existing statutory authorities.17 As of 2021, 60 percent of the states and the District of Columbia had net metering policies or successor tariffs in place (see Chapter 3)
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and by boards of publicly owned and member-owned distribution utilities. With regard to overall ratemaking policy, over the last century of electric utility regulation in the states, regulators have generally adhered to a number of principles as they review utilities' rate proposals.
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. 24 The simplicity principle has long been a feature of rate design, especially for small electricity custom ers, and is one of the reasons why states have adopted net metering to compensate residential customers that adopt BTM resources.
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Rates should fairly apportion the utility's cost of Rate design should be informed by a more complete service among consumers and should not unduly understanding of the impacts (both positive and discriminate against any customer or group of negative) of distributed energy resources on the customers.
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From page 158... ...
For example, as BTM technologies with declining costs provide customers with the opportunity to better manage their electricity bills with on-site generation and those customers take advantage of net metering, the utility may not recover from that customer all of the costs to serve them under some net metering rate designs and service-territory conditions.27 In that case, the ratemaking goal of "revenue sufficiency" will mean that other customers will have to pick up some of the costs to serve the customer who has BTM generation (see Chapter 4)
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Often, such electricity services (i.e., electrical energy and capacity, RECs, and ZECs) are supplied at market-based prices or paid for at avoided cost.
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other than the local distribution utility or a power marketer. This opportunity to self-supply using BTM generation gained some prominence several decades ago as large industrial customers installed cogeneration systems that could provide power and steam to their industrial facilities, and in effect bypass the local utility for some of that customer's electricity needs.
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37 This could occur, for example, where the utility's retail rate design recovers a significant portion of the utility's fixed costs through variable energy charges, where those charges are higher than the utility's avoided cost, and where other charges are missing or not set at costs, or both. There are also circumstances in some places where the customer taking service under net metering ends up paying the full cost the utility incurs to provide it with service.
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BTM technologies and the local distribution system, (2) the customer's ability to determine whether they maintain the ability to control exports to the system at different times and levels of output, and (3)
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Most end-use and retail electricity customers in the United States are served by an investor-owned utility (IOU) whose rates are subject to regulation by state public utility commissions even though most local utilities are actually publicly owned -- because they are either part of a local municipal government or a member-owned cooperative electric utility, or even a special-purpose utility district (e.g., an irrigation district)
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, but even that utility could face financial tensions with lost sales and lost revenues resulting from net-metered BTM generation: All else equal,43 that utility must eventually collect sufficient revenues to cover its costs, and must adjust rates to all of its customers over time to assure revenue adequacy.44 A second dimension which might affect utilities' appetite for customers' adoption of BTM DG through the design of net metering policies and their potential impact on cost recovery is the structure of the electric industry combined with rate design in a particular place. Using the prior example, an IOU that is vertically integrated -- owning generation, transmission, and distribution facilities -- and has rates that are not subject to revenue decoupling and recovers fixed costs substantially through variable energy charges, will experience revenue erosion for its entire bundled rate.
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Shortfalls in revenues must then be spread over a smaller customer base, raising average retail rates, thus creating both distributional impacts, but also additional incentives for more customers to adopt BTM DG or otherwise reduce their electricity consumption from the utility. At the extreme, this feedback loop has been referred to, somewhat dramatically, as the "utility death spiral." This dynamic is the basis for the general observation that growth of net-metered BTM DG is misaligned with the traditional utility business model, which in turn has led to the consideration of a number of potential adjustments to net metering policies as well as changes to the utility business models to address this underlying misalignment.
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2020. "Benefits and Costs of a Utility-Ownership Business Model for Residen tial Rooftop Solar Photovoltaics." Nature Energy 5(10)
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Not all IOUs earn profits through energy sales due to the wide adoption of revenue decoupling which is a policy mechanism through which IOU earnings are made independent of (or decoupled from) the amount of electricity they sell.47 IOUs that do not have decoupled rates48 are more likely to view net metering-enabled exports from BTM generation negatively because they directly impact electricity sales from utility-owned generation assets.
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, the distribution utility would need to make investment on which it would be able to earn a return. In other circumstances, net meteringenabled BTM generation could trigger the need for distribution-system or infrastructure upgrades with the IOU having the opportunity to invest in and earn a regulated rate of return on that new infrastructure.49 Estimating whether and to what extent net metering-enabled BTM generation impacts the need for infrastructure upgrades is location -- and time-dependent, such that one cannot conclude a priori that it will create tensions with an IOU's own financial incentives.
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Because financial considerations may create disincentives for utilities in collecting data and conducting analyses, regulators should make sure that the utility conducts the analyses necessary to determine reasonable estimates of both avoided costs and delivered benefits or make the utility's data available to the public so that others can provide such reasonable estimates. Additionally, policymakers, utility regulators, and boards of publicly owned utilities that seek to promote BTM generation should also recognize the importance of the distribution utility's investment in grid technology and other enhancements to provide visibility of DG output and other communications and control technologies (as explained further in Chapter 6)
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Box 7-2 gives an example of one state's net metering journey. PRINCIPLES FOR THE DESIGN OF POLICIES THAT AIM TO LAUNCH AND INVIGORATE MARKETS FOR NEW TECHNOLOGIES The history of net metering indicates the important role that it has played in helping to support customers' adoption of BTM technologies and to build a market for rooftop solar, in particular, where it had previously not existed.
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Citing the purpose of providing net metering to "encourage private investment in renewable energy resources, stimulate in-state economic growth, enhance the continued diversification of California's energy resource mix, and reduce utility interconnection and administrative costs," the program (eventually known as "net metering 1.0") required every electric utility in the state to establish a tariff or contract to enable net metering for relevant residential customers and to make it available on a first-come, first-serve basis up to the point when customer-sited generators equaled 0.1 percent of the utility's peak electricity demand forecast for 1996.a In 2013, California's Assembly Bill (AB)
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systems. Thus, some of the original rationales for the adoption of traditional net metering -- such as animating customer demand to help increase private investment in BTM technologies, help drive down the costs of rooftop solar, and help build the supply-side of the marketplace -- have been demonstrably successful in some parts of the country.
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might take into account conditions in the market and the appropriateness of temporary versus permanent incentives to encourage demand for and adoption of a technology over time.57 Technology learning curves are relevant for aligning policy design with the accomplishment of policy objectives over time, and for identifying appropriate policy instruments -- such as net metering versus net metering successor tariffs versus alternative funding mechanisms (e.g., programs supported by public budgets rather than electricity rates) -- to accomplish the policy goals.58 The National Academies' Committee on the Future of Electric Power in the United States made this point in discussing the importance of designing policy so that it evolves over time as conditions change: Policy makers and stakeholders should be ready to modify policies as conditions evolve, including through the use of sun-setting mechanisms in policy to phase them out over time.
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rather than electricity rates as a means to advance policy objectives relating to economic and market development, such as incentives to leverage private investment and climate-friendly energy supplies with no greenhouse gas emissions. Ultimately, such goals are societal goals rather than electricity system goals, which merit support by a broad-based funding source -- and one with fewer inequitable impacts on low-income electricity customers.
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Such investments may take place on the utility's, customers', or non-utility entities' assets. Finding 7-7: Some of the original rationales for the adoption of net metering -- such as animating customer demand to help increase private investment in BTM technologies, to help drive down the costs of rooftop solar, and to help build the supply-side of the 175
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may provide more equitable outcomes than using electricity rates to accomplish and pay for these programs. RECOMMENDATIONS Recommendation 7-1: Decision makers about electric utility rates -- including state legislators and 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.
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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.
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