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Net Metering, Disruptive Change and Emerging Rate Policy Issues

Net Metering, Disruptive Change and Emerging Rate Policy Issues

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Published by CSGovts
Growing consumer interest in net metering has led to a surge in rooftop solar installations and the use of distributed energy technology. However, potential challenges are developing for some utilities with existing state incentive plans to bolster net metering using traditional rate recovery models they believe do not fully recoup the value of services and reliability provided.
Growing consumer interest in net metering has led to a surge in rooftop solar installations and the use of distributed energy technology. However, potential challenges are developing for some utilities with existing state incentive plans to bolster net metering using traditional rate recovery models they believe do not fully recoup the value of services and reliability provided.

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Published by: CSGovts on Aug 21, 2013
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Net Metering, Disruptive Changeand Emerging Rate Policy Issues
 U  G  U  S  0  3 
 The Council of State Governments
CAPITOL
RESEARCH
ENERGY AND ENVIRONMENT 
 THE COUNCIL OF STATE GOVERNMENTS
A unique conuence o challenging and revolu-tionary actors is occurring in the normally steadyand predictable utility industry. Electricity demandplateaued in 2007 ater years o stable growth andit may stay at or several years to come. Increasedenergy efciency rom both the private sector andstate/ederal directives, more stringent environmen-tal compliance regulations, planned retirements o coal-fred power plants and the substantial increasein the availability o relatively aordable domesticnatural gas have uniquely coalesced at roughly thesame time.Undergirding all these changes in market andregulatory orces is the emergence and utilization o 21st century computing capability via the applica-tion o smart grid technology, while the rate recoverymechanisms used in some states to pay or projectsand new consumer options is based on a mid-20thcentury model. These new technological applicationsand devices oer great promise or utilities, grid man-agers and consumers by giving them the capability tomanage energy use, reduce harmul air emissions andprevent power outages. Policies surrounding thingslike net metering also have given consumers a fnan-cial incentive to harness renewable energy eitherthrough owning their own systems or through attrac-tive leasing options to have solar panels installed bythird party companies. Rootop solar installationsgrew 76 percent between 2011 and 2012 and providemore than 3,000 megawatts o installed capacity.
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Depending on perspective, these can be excitingprospects or ones o potential strategic concern.
Smart Grid, Distributed Energy and NetMetering Generation Basics
Smart grid is a comprehensive term that describesthe technological advancements o the transmissionand delivery o electric power. In essence, smart gridencompasses the utilization o 21st century inor-mation technology and computing processing toremotely monitor and automate aspects o the elec-tric grid. The grid traditionally has been made up o substations, transormers, transmission lines, switchesand a variety o other physical components. By apply-ing new technological advancements to the existinggrid inrastructure, electronic devices can now havetwo-way digital communication with a utility to helpmanage load, voltage and directly monitor outages.
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 This automation allows the simultaneous andefcient monitoring o millions o devices that couldhave signifcant uture ramifcations or consumersand the economy. For example, utilities previouslyhad to wait or customers to report outages duringa storm, but with smart grid technology, grid manag-ers and utilities can immediately locate problems asthey occur. Minimizing outages and quickly repair-ing storm damage can save money, reduce hard-ship and delays or customers. It also allows betterprioritization o the utility’s assets and personnel.The advanced sensing and computing capabilitieso these smart systems also can detect when criticalcomponents o the grid may be damaged or near theend o its useul lie and indicate repairs beore majorproblems happen.One o the practical outcomes rom the increaseduse o smart grid technology is the growing expansiono distributed energy technologies. These technolo-gies are reerred to as “distributed” because they aretypically small, modular devices placed at or near thepoint o energy consumption, rather than a tradition-al centralized system, where electricity is producedat a large utility some distance away that transmitspower on existing inrastructure through substationsand power lines. Examples o distributed energy
 
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 THE COUNCIL OF STATE GOVERNMENTS
are ound more commonly in photovoltaic systems,localized wind turbines, uel cells, and combined heatand power systems, which recover heat that normallywould be wasted in an electricity generator by usingit to produce steam or hot water heaters, heatingor cooling. When connected to the electric grid withsmart technology, distributed energy can provideutilities options to meet peak power demand, powergeneration and localized distribution with discretebatches o electricity.
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Another beneft o distributed generation is theability to help so-called microgrids isolate themselvesrom disturbances by continuing to provide powerduring outages with the local utility. The most com-mon example supporters o expanding microgriddevelopment use is the New York University Medicalcampus, which invested heavily in an efcient cogen-eration plant that utilized natural gas and combinedheat and power. The medical campus’s systemcreated almost continuous electricity and providedheat when Hurricane Sandy was causing tremendousdamage to the New York/New Jersey area.
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 Net metering is one policy nexus that utilizesthe connective, two-way unctionality o smart gridtechnology with distributed energy. According to arenewable energy consortium, the Database o StateIncentives or Renewable Energy, managed by theU.S. Department o Energy, 43 states have adoptednet metering policies allowing customers o certainelectric distribution companies the ability to generatetheir own electricity, which can be used to oset theirelectricity usage.
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Net metering is an increasinglyattractive option or consumers because it also allowsa customer to sell excess power to the utility. Homesand acilities are connected with a smart meter thatcan communicate directly with a distribution com-pany or utility, which measures the net quantity o electricity that the customer uses. These meters spinorward when the customer uses electricity rom thedistribution company and spin backward when thecustomer generates excess electricity. In essence, theexcess electricity is exported to the electric grid andused to power other homes or businesses in the area.
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 I consumers generate more electricity than theyconsume, they receive a credit that is typically ap-plied to their monthly power bill. The value o thecredit is determined by a methodology approvedby the state public utility commission or publicservice commission. The size and capacity o powerloads available or net metering vary rom state tostate. Overall, the Solar Energy Industries Associa-tion, a trade association o solar energy companies,estimated in 2012 that roughly 220,000 customersnationwide utilized net metering—primarily throughsolar photovoltaic systems on homes and business.
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AJuly 2013 report published by the advocacy organiza-tion Environment America ound that Arizona hasthe most cumulative solar power capacity per personin the country, while Caliornia leads the nation withoverall installed solar capacity at 1,033 megawatts.
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 The U.S. solar photovoltaic systems market can bebroken down into three segments: customer-owned,third-party owned and utility-owned. The astest-growing segment o the residential rootop solarindustry is the third party business model, which grew76 percent between 2009 and 2011. Many consumersfnd contracting with a third party an easier way toaccrue the benefts o solar power that can reducepower bills, while allowing a private company toshoulder the upront costs o installation and owner-ship o the inrastructure.
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The solar installationcompanies, in return, get the ederal tax advantage o the alternative energy investment tax credit, whichprovides a 30 percent dollar-or-dollar credit againstederal tax liability.The American Recovery and Reinvestment Act o 2009 created a program in the Treasury Departmentcalled Section 1603, which allowed developers toreceive a direct ederal grant in lieu o the 30 percentinvestment tax credit. The Solar Energy IndustriesAssociation said the program has supported morethan $7 billion in private sector projects.
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Combiningederal tax incentives with state programs, renewableenergy mandates, accelerated depreciation schedulesand long-term contracts allowed in purchase poweragreements or lease scenarios can be fnanciallyrewarding or third-party companies. Venture capi-talist Nat Kreamer, CEO o Clean Power Finance,estimated that as much as 45 percent o an inves-tor’s expenses can come back through avorable taxtreatment in the frst year o a loan and the returnon investment can be in the high single digits andmid-teens.
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Fundamental Shifts
Although the total number o customers utilizingnet metering and distributed options is relativelysmall nationwide (less than 1 percent o the popula-tion), the growing consumer interest and anecdotalevidence o its expanded use across the country hassome in the utility world seriously questioning thelong-term viability o the traditional power deliverysystem. David Crane, the president and CEO o theutility group NRG Energy, said at a March 2013conerence hosted by
The Wall Street Journal 
thatutilities “do realize that distributed solar is a mortal
 
3
 THE COUNCIL OF STATE GOVERNMENTS
threat to their business” because utilities increasinglywill have to split the cost o continued inrastructureupgrades and maintenance with ewer customers.
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 The Edison Electric Institute, the largest umbrellaorganization representing investor-owned utilities,published a report in January 2013 highlighting thestrategic challenges ahead or the industry. The reportcalled distributed energy resources and demand-sizetechnologies potential game-changers that couldaect the uture economic viability o utilities. Itound, “While the various disruptive challengesacing the electric utility industry may have dier-ent implications, they all create adverse impacts onrevenues, as well as on investor returns, and requireindividual solutions as part o a comprehensive pro-gram to address these disruptive trends. Let unad-dressed, these fnancial pressures could have a majorimpact on realized equity returns, required investorreturns, and credit quality. As a result, the uture costand availability o capital or the electric utility in-dustry would be adversely impacted. This would leadto increasing customer rate pressures.”
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 In practical terms, here is the long-term potentialfnancial problem or the utility sector. As distributedgeneration and energy demand gain market shareand consumer acceptance or utilization through nu-merous ederal and state incentive programs, utilitiesare acing a declining loss o revenue. Utility projectsthemselves are very long-lived assets that rely on afnancial rate-recovery model set by state public util-ity commissioners or public service commissions thatspread costs to consumers out over a lengthy periodo time, usually over several years. Utilities, however,must continue to keep pace by providing integratingtechnology or distributed energy and metering, aswell as maintaining the existing fxed costs o powergeneration, transmission and distribution inrastruc-ture or customers when they need to reconnect tothe grid. But on cloudy days, evenings or during timeso particularly high demand, distributed customersstill need power and the utility is obligated to provideit instantaneously to maintain reliability.
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Further,many states like Caliornia and Massachusettsrequire utilities to pay net-metering customers at thehigher retail rate or the power they generate ratherthan the wholesale rate regardless o i or when theutility needs excess peaking load. This potentiallycan lead to a signifcant drop in uture revenue ora utility, and without revenue, it is difcult to attractcapital in the private market to pay or uture inra-structure or make the new technology investments toenable enhanced distributed options that customersdesire.
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The Growing Debate in States
A growing dispute between utilities and solar ener-gy providers and advocates is playing out across thecountry over the most appropriate way to continueincentivizing net metering and distributed technol-ogy. High-profle rate cases in Arizona, Caliornia,Idaho and Louisiana are largely centered on argu-ments raised by power providers that net-meteringcustomers are not paying the ull cost o the electricservices and system maintenance being providedto them because o generous incentive programs inplace. The utility Arizona Public Service estimatesthat each o the roughly 18,000 residential rootopsolar homes in its service territory shits about $1,000in costs annually to other ratepayers.
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Solar industryand installation companies and renewable energygroups argue these systems provide signifcant eco-nomic value to all consumers by reducing their powerbills and household energy consumption, as well asproviding numerous economic and clean air beneftsby reducing the need or uture power generationand transmission costs that most likely would comerom less environmentally riendly sources.Those who support net metering believe mucho the utility pushback is a result o the potentialthreat net metering and distributed options couldhave to the utility industry’s bottom line. A January2013 study conducted by an advocacy group calledVote Solar estimated that Caliornia’s net meteringprogram provides electricity consumers $92 milliona year in economic benefts and that it “does notproduce a cost shit to nonparticipating ratepay-ers; instead it creates a small net beneft on averageacross the IOUs’ (investor owned utilities) residen-tial markets.”
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In an interesting turn, conservativegroups not normally associated with the promotiono alternative energy have spoken out against plansin Arizona and Georgia to change the incentivestructure to promote rootop solar at their respectivestate public service commissions. Barry Goldwater Jr.has ormed an organization in Arizona to representsolar installation companies decrying reductions innet-metering incentives in TV and radio commercialsclaiming such changes will “extinguish” the use o household solar power or the beneft o utilities.
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 In solar riendly Caliornia, with the nation’s mostaggressive renewable energy targets o 33 percent by2020 and the nation’s leader in installed solar capac-ity, the issue o cost-shiting prompted legislators topass Assembly Bill 2514 in 2012, which directs thestate Public Utilities Commission to complete a studyanalyzing the ull costs and benefts o the state’snet energy metering program. The bill, sponsoredby Assemblyman Steven Bradord, also requires the

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