As Rooftop Solar Grows, What Should the Future of Net Metering Look Like?

Like solar installers across much of America, Mark Hagerty is adapting to drastic changes in the economics of his business. His state, Michigan, is one of many that are cutting the rates rooftop solar owners receive for selling excess power to the grid.

“We’re going to do fewer jobs, and each job is going to be a smaller size,” said Hagerty, president of Michigan Solar Solutions, a solar installer based northwest of Detroit. His comments echo concerns now being voiced by solar installers in many states as new rules take effect. 

The changes are part of a flurry of activity across the country as regulators and legislatures in almost every state referee a showdown between powerful utilities and a rooftop solar industry offering options that are more affordable and popular than ever. The results run the gamut, from a solar-friendly bill that became law in Maine to one that will sharply reduce the financial benefits of solar in Kentucky.

Amid the noise of competing proposals, a pattern is emerging: States are moving away from “net metering” policies that require utilities to pay solar owners the full retail rate for excess electricity sent to the grid.

The shift is happening in part because of an aggressive push by utilities to reduce what many of them see as a form of competition that could harm their bottom line. And yet, even solar advocates say these changes are likely inevitable as the electricity system adapts to the rapid rise in rooftop solar.

The question for all sides: What does a successor to net metering look like?

One possibility being explored in several states is to develop rates based on the value of rooftop solar power to the grid, including environmental benefits. Others are siding with the utilities in their push for rates for solar owners that are much lower. 

As Solar Makes Inroads, Utilities Push Back

More than 1.8 million U.S. households have their own solar power systems, up from just over 137,600 households in 2010, according to the Energy Information Administration. On average, a rooftop system on a house will pay for itself through utility bill savings in fewer than eight years, according to a recent EnergySage report.

Small-scale solar is still a tiny share of the country’s electricity output, just 0.7 percent last year, but utilities and regulators are looking ahead to when it may be much more.

Rooftop solar has been making inroads outside of the sunny states that were early adopters, helped by state incentive programs, falling costs and the momentum of new businesses that sell and install solar. This growth is part of the country’s transition toward a cleaner and less centralized grid, and it depends on many elements that affect the costs of systems.

“Solar is maturing,” said Sachu Constantine, managing director of regulatory affairs for Vote Solar. “We are having more penetration in more states, and, as a result, a lot of states are reconsidering the net metering structure.”

But increasingly, utilities are seeking reductions so deep that home solar systems will take much longer to pay off, making them less attractive to businesses and homeowners, he said. At the same time, a federal tax credit, currently worth 30 percent of a consumer’s costs of adding solar, is set to phase out by the end of 2021.

The solar industry would be much more anxious about the phase-out if not for countervailing factors, such as the declining costs and rising efficiency of solar panels. But the efforts to lower net-metering payments present a thornier problem.

Utilities have shown they have the political clout to overpower opposition in states such as Kentucky this year and Michigan in 2016, when lawmakers laid the groundwork for the rate changes approved last month for the state’s largest utility, DTE.

Many utilities argue that rooftop solar customers, who typically have very low electricity bills because they generate so much of their own power, are not covering enough of the costs to maintain the wires and other infrastructure of the grid, which they say shifts those costs to other customers.

Solar advocates say that is a stretch, especially in the many states where customer-owned systems remain a miniscule share of electricity generation. But it is a central theme in legislative debates almost everywhere, due in part to Edison Electric Institute, a utility trade group whose messages on net metering help to shape what utilities say on the state level, and the American Legislative Exchange Council (ALEC), a national group that supports corporate interests in statehouses.

Burcin Unel, energy policy director for the Institute for Policy Integrity at New York University’s law school, said it’s more important to look at costs in the context of broader benefits for the grid and the public.

“You need to look at what costs are avoided and what benefits we get and then ask if there is a cost shift from a societal perspective, and then ask if that’s something we’re willing to tolerate,” she said. “Just the existence of cost-shifting is not the Big Bad Wolf.”

Calculating Rates by Value of Solar 

The new rules that states are now debating would replace a framework that goes back to the early 1980s, when regulators and utilities used the full retail rate to compensate owners for the excess solar power they sent to the grid largely because the full retail rate was easy to calculate and manage.

The definition of the term “net metering” varies by jurisdiction, but it often means that a customer’s electricity meter runs forward or backward depending on whether the household is importing power from the grid or exporting extra electricity produced by its solar panels at that moment. When using a single analog meter, there is no easy way to charge different rates for imports and exports, so the default was to charge the full retail rate for both.

As utilities install advanced meters, more options are opening up.

“I think we’ve always known that there had to be some sort of reckoning,” said Constantine of Vote Solar.

Solar advocates in several states have responded to utility proposals by saying a better approach would be to replace net metering with rates that are based on a calculation of the value of solar to the grid, including environmental benefits.

But this approach comes with plenty of its own challenges.

A ‘Value of Solar’ Test Case: Minnesota

Minnesota has been a leader in developing a system to determine the value of solar for setting rates. Five years ago, the state came up with a method based on estimates of the costs utilities are avoiding because they don’t need to generate and deliver the electricity being produced by solar, and of savings due to emissions reductions and other environmental benefits.

So far, Minnesota uses its “value of solar” rate to pay for electricity generated by solar gardens, which are subscription-based solar developments, while retaining full-retail net metering for solar power systems owned by individual residents and businesses.

Utility companies make annual estimates of the value of solar, subject to review and approval by regulators. The rates submitted by Xcel Energy, Minnesota’s largest utility, have been lower than full retail and have had some big fluctuations from year to year.

The results raise questions about whether this is really capturing the value of solar, said Timothy DenHerder-Thomas, general manager of Cooperative Energy Futures in Minneapolis, an organization that manages and develops clean energy projects.

“There is so much statistical noise and uncertainty in how you calculate these things that I don’t know how to do it in a way that’s quote-unquote accurate,” he said. Developers are in the position of waiting until a year with a good rate, hoping to lock in the best terms.

The upshot is that regulators are still figuring out how to calculate the value of solar in way that leads to rates that are conducive to solar development.

‘A Pretty Big Transition Underway’

Already this year, officials in at least 43 states, the District of Columbia and Puerto Rico have considered measures related to customer-owned solar, according to a report by the NC Clean Energy Technology Center at North Carolina State University.

“It indicates that there’s a pretty big transition underway,” said Autumn Proudlove, the lead author and senior manager of policy research for the center. “Part of it is increasing adoption of solar and reduction of prices.”

The Kentucky law is notable as the clearest example this year of utilities successfully using an aggressive anti-solar strategy. Other attempts, such as a push for a solar fee in Iowa, were defeated. The Kentucky measure reduces the rates paid for rooftop solar, with regulators left to decide the specifics of the new rates.

There’s a possibility that some utilities’ gains may be short-lived, based on one-sided proposals passed in recent years that led to customer backlash and reversals in some states. Nevada passed a measure cutting rates for rooftop solar in 2015 only to largely restore the old rates after an uproar from residents. Maine regulators cut solar rates in 2017, and then the old rules were restored by a law signed in April by the new governor, Janet Mills.

Policy changes are more likely to endure when they arise from compromise, said Constantine. So far this year, new laws in Arkansas and South Carolina look like they have resolved many of the concerns of the solar industry in a way that is amenable to utilities.

Arkansas legalized solar leasing, which opens up the solar market to residents and businesses that can’t afford to buy systems, while also leaving some restrictions that utilities wanted. South Carolina lifted a cap on new rooftop systems eligible for full retail net metering. It was part of a larger plan that begins a process that likely will reduce rates, but not as low as they would have been if the cap had continued.

In Michigan, Installers Feel the Impact 

Solar installers and consumers, meanwhile, are trying to deal with the changes in the rules. In Michigan, this affects the territory of the utility DTE, which serves the southeast part of the state, including the Detroit area.

Under DTE’s old rates, a typical household solar system would pay for itself in 9.4 years, according to a fact sheet from the Michigan Public Service Commission. Now, under the rates approved last month, it’s 13.3 years. If DTE had gotten the rates that it wanted, that would have been 17.7 years.

So far, people shopping for systems are responding to the changes by buying smaller systems, which means they will have lower upfront costs and less excess electricity, said Hagerty, the solar installer. That’s bad for his business.

“We were working seven days a week before, and now we have to work even harder,” he said. “And the amount of work we’re putting in is leading to even less money now.”

But he also has seen an uptick in customers who want to buy solar along with battery storage because there is now a financial incentive to reduce their excess energy that would otherwise go to the utility.

The rules are so new that he doesn’t yet know how they will affect his business and the growth of solar in Michigan. But at a time when the country needs to lower its carbon footprint, he thinks the state is sending the wrong message and failing to see the larger picture.

Indeed, the debate about net metering is just part of a much larger one about how the energy system and economy will adapt to rapid changes, said Unel of New York University.

“This is not just about solar panels,” she said. “It’s about how we want to transform the grid. The grid is going to transform whether we want to or not, so we should put in the policy framework to guide the investments in the most societally beneficial way.”