Competitive Market Will Take Care of Next Burning Issue
Dr. Cicchetti is a Managing Director at Berkeley Research Group. He was Chair of the Public Service Commission of Wisconsin. He taught energy and environmental economics at the University of Wisconsin, Harvard's John F. Kennedy School of Government, and the University of Southern California. His most recent book is "Going Green and Getting Regulation Right."
I do not understand why we are still distracted by Net Energy Metering (NEM). It worked well when we had not-so-smart meters and were trying to encourage rooftop solar penetration. The idea was simple. It focused on the customers who spent the money and signed the leases to install solar on their homes and small businesses.
The first approaches were based on the proposition that when self-generation exceeded real-time use, the electricity meter literally spun backwards. As meters became smarter, the customers could read both cumulative electricity use and excess solar generation.
To some, a legislative or regulatory solution was needed. The question was how to value the excess kilowatt-hours generated but not immediately used by rooftop solar customers.
NEM mostly allowed rooftop solar customers to credit these excess kilowatt-hours against the kilowatt-hours that the utility continued to supply to them. These customers had no incentives to shift the time of appliance use, or to spend money to store the excess kilowatt-hours on their premises for future use.
In effect, the utility banked or stored the excess kilowatt-hours for virtually nothing. This allowed the rooftop solar customers to recall and use the banked kilowatt-hours to offset the cost of electricity they had purchased when their rooftop solar installations were not producing enough to satisfy customers' needs.
Utility advocates and others were quick to call this an unjust subsidy to allegedly wealthy residential customers that installed rooftop solar. They pointed out that the value of solar (VOS) treated in this manner was equivalent to paying rooftop solar customers the full retail electricity price for their excess generation. That price included distribution, transmission, customer service, utility rates of return, and more.
These NEM critics observed the utility could purchase wholesale electricity for much less than the prevailing retail rates paid to rooftop solar customers for their excess electricity.
The rooftop solar advocates countered this argument by pointing to the significant benefits that all customers and society enjoyed because customers installed rooftop solar on their premises. The array of benefits included increased renewable energy use, less pollution, less dependence on fossil fuels, more security, and creation of local jobs.
Remarkably, the battles continue. They now include utility proposals for more efficient large-scale renewable generation and community solar. The NEM debate is often used to obfuscate and to replace customer-owned distributed energy with utility-sponsored renewable energy proposals.
People in general and students of regulation in particular are left confused and can easily find some support for both sides. This results in conflicts and proposed compromises that keep the debate going at full tilt.
Two things are missing or mostly overlooked in all this regulatory discourse.
First, battery technology spurred by the surprising penetration of electric vehicles has pulled down battery costs. The electric cars themselves can even serve as a residential battery that a rooftop solar customer's excess generation can re-charge.
If NEM did not exist or utility tariffs were as anti-rooftop solar as they may be, the rooftop solar industry would have likely included batteries from the start. There should be no doubt that the rooftop solar industry understands this interdependence. In fact, new rooftop solar is integrating photovoltaic and battery systems that make the customer's economics virtually indifferent to either NEM or VOS tariffs.
Second, when rooftop solar was first introduced, most retail customers purchased electricity from utilities under regulated tariffs that eschewed time-of-use pricing.
Smart meters can readily foster regulated tariffs that signal to consumers the marginal cost of electricity at different times. This is particularly important for rooftop solar customers who add self-generation. The customer-owned renewable distributed energy investment is mostly intended to reduce the customers' utility use when electricity demand is peaking, marginal costs are high, and pollution from inefficient fossil generation is most problematic.
Smart meters, rooftop solar and time-of-use tariffs are inherently complementary. If retail customer storage increases and time-of-use utility tariffs are offered, there would be essentially no need for continued NEM or VOS debates.
Storage on a customer's premises replaces the utility banking service with customer-owned storage. Time-of-use price signals further encourage distributed energy.
The customers will generate and store electricity on their premises and become less reliant on the utility, because the electricity generated on the consumer's rooftop when the sun is shining will allow the customer to avoid electricity prices that are higher than average. The customer will also call on stored electricity to reduce utility purchases.
And, the customer's use during off-peak night periods when the customer is not generating electricity will be less expensive. These changes will increase rooftop customer savings and be used to offset any new utility charges related to utility operating and reliability concerns.
I am not overly optimistic. This dual fix could be a sensible repeal-and-replace solution that could truncate the NEM rate debate. So could grandparenting the early first movers to rooftop solar who depended on NEM when they made their decision to self-generate.
There will be countless references to shifting and elusive peak, or the so-called California duck curve. The utilities will claim all sorts of operational and reliability problems that rooftop solar customers allegedly cause and will exaggerate the costs, while ignoring the associated societal benefits. Regulators should view these claims and counter-claims in a manner that neither undermines nor subsidizes rooftop solar.
The regulatory and legislative focus should shift to questions some states are addressing regarding the role of utilities in the twenty-first century: New York and California in particular. Determining the utility's future role could become the central focus of the utility industry, consumer advocates, and regulators.
It is time to truncate or eliminate the NEM debate for new customers, providing states approve replacement tariffs that require time-of-use tariffs for all rooftop solar customers. I am confident the competitive market will add sensible storage for new rooftop solar. Let's stop fiddling with details related to external benefits and utility reliability and quench the burning debate seeking for the perfect rather than for the good. These regulatory hearings are distractions that slow customer-owned renewable investments.
Regulators should give little weight to self-serving anti-competitive arguments from all quarters. States should make the regulatory changes to require time-of-use tariffs for rooftop solar customers. The competitive market will take care of the next burning issue, and provide batteries and storage to new rooftop installations.
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