Net Energy Metering Provides a Regulatory Dilemma

September 30, 2014 by Jeff Shepard

The combination of federal subsidies and net energy metering (NEM) policies, in addition to declining system costs, are having the intended effect of increasing distributed generation (DG), according to Fitch Ratings. This is particularly true with rooftop solar. Although solar generating capacity accounts for only about 1% of total U.S. electric generation, the growth rate has been dramatic, particularly since the Energy Policy Act directed utilities to make NEM programs available to customers in 2005.

NEM is a billing mechanism that allows DG customers to not only offset electric energy purchases from the utility, but also to receive bill credits for any excess power generated, often at the full retail rate. It is a significant driver of the increase in rooftop solar and a primary concern for utilities. The electricity produced by NEM customers results in lost sales and revenue for the utility, and because residential rates are designed to recover much of a utility's fixed costs through volumetric charges, DG customers effectively pay less of the fixed costs.

The success of these programs, particularly NEM, is a dilemma for both regulators and utilities. Regulators must balance the public policy goal of reducing greenhouse gas emissions against the cost shift that occurs as more DG customers are created. High-income households tend to be the beneficiaries of NEM policies, further complicating the issue. Meanwhile, utilities absorb lost revenue and cost of energy returned to the grid between rate cases when these costs are reallocated to non-DG customers.

Since the Energy Policy Act directed utilities to make NEM programs available to customers in 2005, installed solar capacity has increased at a compound annual rate of 67%, including annual increases of 41% in 2013 and 75% in 2012. The growth is primarily driven by utility-scale solar, but installations of residential rooftop solar have also experienced strong growth, which is driving the debate about NEM.

Recent analyses of DG and NEM policies conducted in Arizona and California concluded that increased levels of DG penetration shifts fixed costs to non-DG ratepayers. Arizona imposed a modest charge for DG customers, and both states and a number of other jurisdictions continue to review the costs and benefits of DG and NEM policies.

The impact of NEM from a rating perspective has been negligible to date, due to the low penetration levels. But it is worrisome, primarily due to rapid growth of solar. The dampening sales impact of DG and NEM policies is compounding the effect of energy-efficiency programs that are also reducing electricity consumption and increasing the upward pressure on rates during a period of relatively high capex and generally rising costs. Declining system costs and higher energy output from DG solar systems are expected to exacerbate already-reduced electric consumption trends.