The Role of Net Metering in the Evolving Electricity System (2023) / Chapter Skim
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4 Economic Considerations Related to Net Metering
4 Economic Considerations Related to Net Metering
Pages 58-91
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From page 58... ...
From the perspective of the DG customer, the economic implications depend on how the level of compensation through net metering, along with other benefits, compares to the costs of DG ownership. From the perspective of the utility and nonparticipating customers, the economic implications depend on how the DG customer's bill savings under the net metering tariff compare to the costs that the utility avoids by virtue of the DG systems.
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From page 59... ...
Specific topics examined in this chapter include: • The economic implications of net metering and its variants from the perspective of DG customers • The societal perspective, in which net metering and its variants can be evaluated in terms of economic efficiency • The non-participant and utility perspective, where the effects of net metering and its variants on non-participant impacts are evaluated principally in terms of changes in retail rates • A discussion of the many benefits and costs of DG that are relevant to assessing the economic efficiency and rate impacts of net metering and its variants • Findings and recommendations DG CUSTOMER PERSPECTIVE Customer adoption of DG technologies is a complex behavior, driven by a combination of economic and non-economic factors. Utility bill savings are one key consideration in that adoption decision, though other factors may also play a central role, including the ability to hedge against future increases in electricity prices, incentives (e.g., the federal investment tax credit and renewable energy certificates)
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From page 60... ...
, and may be carried over to the following billing period, in whole or in part, depending on the provisions of the net metering or DG compensation tariff. A residential solar DG system sized to generate an amount equal to the host customer's annual electricity consumption, and without battery storage, will typically export 60–70 percent of generation over the course of the year.5 Thus, the rules and pricing applied to exported generation can have a significant impact on the 2 Bollinger and Gillingham (2012)
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From page 61... ...
The compensation provided through net metering is thus inherently linked to the structure and pricing of the customer's underlying retail rates. Electricity tariffs that charge customers primarily through volumetric energy-based charges, with little or no fixed customer charges or demand charges, provide higher levels of compensation for DG production, all else being equal.6 Electricity tariffs with time-varying (e.g., time-of-use or hourly)
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From page 62... ...
Both of these methods are intended to incentivize customers to shift the timing of their solar DG production -- in the case of net billing rates, to those times when it can be used to directly serve onsite load, and in the case of time-varying rates, to those times when it has the greatest value to the electricity system. Under these types of compensation structures, partial requirement service may be most economical for customers that install battery storage along with solar DG, to store solar production to offset consumption at those times of day that maximize the customer's utility bill savings.7 • Case 3: Utilities and regulators in some jurisdictions have also considered modi fications to DG compensation structures consisting of either higher fixed charges 7 Under net billing, customers will use batteries to maximize self-supply by storing excess solar produc tion when it exceeds consumption, provided that the compensation for export is lower than the retail price for electricity.
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From page 63... ...
FIGURE 4-2 Economic cases of net metering from the customers perspective.
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From page 64... ...
One of those key objectives is to send price signals to customers so that they can make economically efficient decisions about their consumption. According to standard economics theory, economic efficiency dictates that prices should be set equal to social marginal cost: • Social Marginal Cost (SMC)
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From page 65... ...
To the extent that utility cost recovery occurs more through fixed charges, variable charges will decrease along with the resulting net metering compensation for the customer. Grid disconnection may be more attractive for customers who are willing to compromise reliability for lower costs (e.g., having less battery storage and no fossil backup) or are in isolated areas where they would be required to pay additional costs to be connected to the grid.
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From page 66... ...
However, to the extent externalities remain, pricing at the PMC will tend to induce an economically inefficient over-consumption of the good or service from a societal perspective. Within the context of electricity pricing, economic efficiency dictates that volumetric energy prices faced by consumers should reflect the SMC, that is, the incremental costs of producing and delivering electricity to the point of use, including environmental externalities.9 These marginal costs differ between the short and long-run, as certain types of costs that are fixed in the short run may be variable over longer timeframes.
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From page 67... ...
The key question, from the perspective of the economic efficiency of net metering, is whether the volumetric energy component of the customer's retail electricity tariff is greater or less than the total of those avoided costs, including any externalities. As described in Chapter 1, a variety of options exist for utilities and regulators to better align DG compensation with SMC/avoided costs, in cases where net metering either over- or under-compensates DG production.
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From page 68... ...
Setting the net billing rate at the SMC will thus bring the effective DG compensation rate closer to, but not equal to, the economically efficient level. The asymmetric pricing structure of net billing, where one price applies to the portion of DG self-consumed by the customer and another price applies to the portion exported to the grid, may incentivize customers to install battery storage for the purpose of capturing the value differential between self-consumption and export prices.13 UTILITY AND NON-PARTICIPANT RATE IMPACTS Separate from any assessment of its economic efficiency, net metering and other DG compensation mechanisms also have distributional impacts in terms of who receives the associated benefits and who bears the costs.
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From page 69... ...
The non-participant rate impacts of net metering are thus highly dependent on the customer's underlying retail rate structure as well as the temporal profile of the utility's marginal costs. Under the predominant rate structure for residential customers consisting of flat (non-time-varying)
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From page 70... ...
However, increasing fixed charges can also mute the price signals that encourage customers to pursue energy efficiency and exacerbate equity issues for low-income customers by raising their effective rate (e.g., the less electricity a customer uses the more she pays per kWh) .18 Alternatively, non-participant rate impacts also can be mitigated by replacing traditional net metering with either net billing or buy-all and sell-all rates, setting the price for DG production to reflect the utilities' marginal costs, or by applying additional fees or charges on net-metering customers.
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From page 71... ...
Figure 4-3 presents a simple illustrative schematic showing how rate impacts depend on the interplay between distributed solar penetration levels (denominated as total distributed solar generation as a percent of total electricity consumption) , the DG FIGURE 4-3 Impacts of distributed solar average retail electricity prices: a simple model of underlying drivers.
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From page 72... ...
would result in about a 10 percent increase in average retail rates once penetration levels reach 20 percent of customer load. ESTIMATING THE ELECTRICITY SYSTEM AND BROADER SOCIETAL IMPACTS OF DG Estimating the benefits and costs of DG first requires identifying a comprehensive list of impacts, then evaluating the incremental value of each of these impacts relative to a counterfactual scenario without a particular DG resource.
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From page 73... ...
could be combined to develop a common counterfactual with careful consideration of the load each utility serves, its electricity grid needs, clean energy legislation and regulation, and other policy goals for which each utility is accountable. There may be instances where DG affects specific parts of the distribution grid (e.g., individual feeders and circuits)
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From page 74... ...
installed costs are necessary for determining the future costs of clean energy generation and capacity. Established sources of these forecasts include, but are not limited to, National Renewable Energy Laboratory's Annual Technology Baseline (ATB)
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From page 75... ...
Ideally, analysts could apply the relevant discount rate to each stream of avoided costs or benefits. When calculating the present value of a utility's future avoided wholesale electricity purchases, a utility WACC can be used.
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From page 76... ...
The electricity system impacts discussed below include the effects of DG on energy generation costs, generation capacity costs, transmission and distribution capacity costs, and line losses, among other costs. Energy generation costs: DG displaces electricity generation from other sources, thereby avoiding the costs related to the production of that electricity (primarily fuel and variable operating and maintenance costs)
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From page 77... ...
However, as renewable penetration increases, capacity may be more valuable at times other than when system peak demand occurs. For example, in California and other areas with relatively high solar penetration, peak demand may still occur in the afternoon, but capacity is often most needed in the evening when solar starts to go offline but electricity demand does not decrease commensurately.32 For this reason, the capacity value of solar generation (whether DG or utility-scale)
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From page 78... ...
. Although natural gas combustion turbines have traditionally been the lowest net cost capacity resource in most of the country, decreasing battery storage costs combined with clean energy laws in many jurisdictions (which may make it unlikely for new gas peaker plants to be built)
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From page 79... ...
recent value of solar and storage study simplified this by estimating the transmission upgrade costs necessary to bring more supply side solar projects online and then allocated this avoided cost to distributed solar.38 Distribution and sub-transmission capacity and other costs: Like transmission upgrade and buildout, distribution system upgrades primarily are necessitated by either peak demand growth39 or because equipment is at the end of its useful life. DG can avoid distribution costs in two ways.
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From page 80... ...
2022. "2022 Distributed Energy Resources Avoided Cost Calculator Documentation: For the California Public Utilities Commission." https://www.cpuc.ca.gov/-/media/cpuc-website/divisions/energy-division/ documents/demand-side-management/acc-models-latest-version/2022-acc-documentation-v1a.pdf, pp.
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From page 81... ...
Transmission capacity losses should be included as a benefit for distributed resources"; however, transmission losses are described as difficult to value, and no methodology is prescribed. 47 For example, the Sacramento Municipal Utilities Department Value of Solar study found that avoided costs for all ancillary services are at most $0.65 per MWh (which is a fraction of a percent of retail rates)
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From page 82... ...
The price of electricity generally does not account for this societal cost or externality of greenhouse gas emissions or other pollutants from fossil-fuel power plants. Some states, like California, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Oregon, Rhode Island, Vermont, Virginia, and Washington have clean energy goals and/or carbon cap-and-trade programs that directly or indirectly internalize some of the cost of carbon emissions.48 Whether and to what extent to include externalities in utility avoided costs is a policy decision based on the laws and policy priorities of the jurisdiction in question.
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From page 83... ...
. The total carbon emissions abated by DG is a product of the load shape of the DG times the marginal carbon emissions of the electricity grid through the useful lifetime of the DG.51 The marginal carbon dioxide (CO2)
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From page 84... ...
2022. "2022 Distributed Energy Resources Avoided Cost Calculator Documentation: For the California Public Utilities Commission." https://www.cpuc.ca.gov/-/media/cpuc-website/divisions/energy-division/documents/demand-sidemanagement/acc-models-latest-version/2022-acc-documentation-v1a.pdf.
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From page 85... ...
Accordingly, regulators and/or utilities should internalize the MAC into avoided costs.60 For regions without binding targets, the value of carbon included in utility avoided costs is a policy choice. The SCC, which is a global measure of carbon damage, and estimates of MAC from different levels of carbon reduction, can help inform this decision.
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From page 86... ...
64 If a utility takes a SCC approach to monetizing carbon, then taking a damage cost approach to avoided health impacts and including them as an avoided cost for DG would be appropriate as long as these externalities are consistently included in payments for all clean energy resources that beget the same benefits. MAC estimates also account for the costs of abating pollutants of fossil power plant operation.
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From page 87... ...
The first of these broader economy-wide implications is the potential for helping to drive down the costs of certain DG resources by accelerating their deployment. This effect is sometimes described as the "learning curve," and has been a key rationale for net metering and other policies aimed at supporting the deployment of clean energy technologies in the early stages of market development, before the technologies and their associated value chain businesses have reached some threshold scale.65 For rooftop solar, a portion of the overall cost of an installed system is associated with hardware components that are procured in global markets, and their cost trajectories reflect growth in both global supply and demand.
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From page 88... ...
Finding 4-5: The major components of social marginal costs of generating and delivering electricity are the avoided costs of electric generation, capacity, deferred transmission and distribution infrastructure, avoided line losses, and decreases in greenhouse gases and air pollution resulting from reduced fossil plant operation. Finding 4-6: Utilities and regulators can develop more economically efficient DG compensation, either by modifying the retail rate structures so that volumetric energy charges better align with social marginal costs or by modifying the net metering mechanism to transition to net billing or buy-all and sell-all tariffs with compensation levels reflective of social marginal costs.
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From page 89... ...
Finding 4-9: The rate impacts of net metering on non-participating customers depend on how the cost impacts to the utility compare to the revenue impacts. When net metering is coupled with retail rate structures that recover fixed utility costs via the volumetric energy (cents/kWh)
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From page 90... ...
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 or 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.)
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From page 91... ...
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)
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