IEI-Edison Foundation Case Study on Net Metering

The Edison Foundation’s Institute for Electric Innovation, with the help of Robert Borlick has generated another paper seeking to justify the nation-wide utility attacks on customer-owned distributed solar, operating under net metering tariffs (“net energy metering” or NEM). The Institute does research for the Edison Electric Institute pretty much like reporters do research for Fox News. You can save time reading “Net Metering: Subsidy Issues and Regulatory Solutions”--the title pretty much tells the story.

But if you would like a bit more information, read on.

The paper starts by assuming the subsidy that they want to address. The “subsidy” they claim happens when a NEM customer does not use as much electricity as the average customer in the rate class. Or as much energy as the utility expects them to use.

Residential rates are designed so that if every single customer used exactly as much energy as the average customer in the class, the utility will fully recover its required revenues. Residential rates, for many good reasons, put some of the demand and customer charges, typically labeled as “fixed costs” in utility cost-of-service studies, into the variable charge for electricity. This has the effect of keeping electricity bills affordable and manageable for residential customers, and of encouraging energy efficiency.

Troubles arise for the utility if the actual average use of electricity in the class varies from the expected average level of use. If the average is lower, the utility might under-recover on those fixed costs. It is also true that the customer who uses less than the average amount of electricity pays less in fixed costs than customers who use more. The inverse is also true.

None of this is any kind of problem when the utility correctly forecasts consumption. But usage levels, and therefore, profitability in the utility industry is a function of weather, general economic conditions, and commodity fuel prices. Increasingly, it is also a function of customers using less energy through efficiency and conservation, and to a small extent, through self-generation with solar.

Utilities can’t really do anything about the big three causes of revenue volatility, but they think they can and must do something about customers who voluntarily choose to use less energy. Step one in that campaign is claiming that NEM customers are subsidized by other customers when they voluntarily reduce their consumption of the utility energy below the level of the average customer in the class, or below the level of consumption the utility thinks they should have had. (Spoiler alert - the majority of the paper is just several rate design ideas for imposing charges on self-generators to make them pay everything the utility wants from them.)

Ironically, utilities are claiming they see subsidies from customers failure to participate fully in paying socialized electricity costs. Think about that for a minute.

The second step in the NEM attack is deciding how much subsidy the utilities see. They see the subsidy arising when a net metering customer gets bill credit at the full retail rate for producing energy that offsets their utility consumption.

The utility claim, assumed by the authors without discussion or analysis, is that even though the properly allocated cost of service is the retail rate, energy from the solar system on the roof is worth only the wholesale energy value. Some utilities agree with very small adjustments. The solar energy does the same amount of work as the generic “brown power” from the utility, travels a few feet from rooftop to load, is climate-proof and drought-proof, and never varies in price due to fuel costs. The customer bears the financing, operating, and insurance risk and cost. If the customer ordered equivalent power from the utility under a green pricing program, they would be required to pay a premium. But the authors assume customer-generated electricity is only “worth” half or less as much as the utility stuff.

Because the utility neither owns nor controls the solar system, the utility argument is that the energy is only worth the wholesale price. That argument is assumed as fact in the paper, and so the authors set out to fix the problem of customers doing things for themselves.

The rest and majority of the paper takes the assumptions as fact and then designs remedies for the problem that the assumptions confirm. In logic, this is called “begging the question.” I call it “bootstrapping.”

The paper then calculates the impacts of the assumptions using a hypothetical California customer, with some simplifying assumptions. And the paper proposes some fixes for the problem the author’s assumed by never proved.

Surprise! The paper says everything will be A-OK if the utilities dramatically increase their fixed customer charges, dramatically decrease energy prices, and dramatically decrease the credit that customers receive for solar generation.

Don’t get me wrong - solar customers use the grid. And they are fully charged for that use, even if some of the bill is ultimately offset by their own generation. They mostly use the grid at night--when electricity costs are lowest--and they produce energy and excess energy when prices are very, very high. The utility uses its grid to take any excess energy and sell it to nearby customers at the full retail rate, so they lose nothing on the transaction.

There is also some interesting analysis in the paper about just how profitable the solar lease business appears to be. One conclusion is that if you can afford to buy or finance your own solar system, you really should.

What is missing in the paper?

* The authors never acknowledge the need for actual cost of service analysis to verify the existence of a subsidy and which direction it flows, if any.

* The authors never acknowledge the regressive impacts on poor customers that arise from the high fixed customer charges.

* The authors never discuss the adverse impact on efficiency and conservation from their efforts to reduce energy charges.

I didn’t expect to find these issues addressed - but regulators and customers should. Utilities across the country are trying to make the paper’s theoretical fixes into real rates.

This paper isn’t adequate to support that result.