EBF 483
Introduction to Electricity Markets

12.5 Net Metering and the Value of Rooftop Solar

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The economics of rooftop solar PV for electric utilities are fairly complex. On the one hand, customers who install rooftop solar are using kilowatt-hours that they generate themselves and don’t have to buy from the utility. This robs the utility of revenue and the lower demand makes it harder to justify new capital investments in distribution lines, substations, and transformers (which, remember, are the things that go in the rate base and are thus primary drivers of utility profits). On the other hand, if demand goes down, then lower stress on the system should lead to fewer blackouts. Moreover, the utility could actually draw excess power from rooftop solar PV or residential batteries (or even electric vehicles) through a practice called Net Metering.

Net Metering has been a controversial political issue, and different states have very different rules about whether or not residential rooftop solar PV can be allowed to feed power back into the utility grid and what rooftop PV owners get paid for any power that they supply to the utility. The most generous Net Metering policies have given residential rooftop PV owners a credit equal to the retail electricity rate for every kilowatt-hour fed back into the grid.

While this policy is very generous to rooftop PV owners, most economists do not view it as being terribly inefficient. You can read more about the reasons why here (Billing Tweaks Don’t Make Net Metering Good Policy), but there are basically two economic problems with Net Metering policy.

First, the value of energy being fed into the utility grid from residential rooftop solar PV is very different at different times of the day, but consumers get the same dollar credit no matter what time of day that the energy is being supplied to the grid. As we have already seen, surplus energy fed into the grid from rooftop PV can have very high value to the utility during peak demand times but may have very low value during other times.

Second, remember that the retail price of electricity includes three charges: Generation, transmission, and distribution. Giving customers a rebate equal to that retail price for every kilowatt-hour of electricity fed into the utility grid reduces the amount that customers have to pay for the upkeep of the transmission and distribution grid, shifting those costs to other ratepayers. Reducing the customer’s generation charge makes sense – the more people generate their own solar power, the fewer power plants that are needed. Reducing the customer’s distribution charge, however, makes no sense. A customer with solar PV on their roof that feeds excess energy into the utility grid is still using the distribution infrastructure to do so but is basically using that infrastructure for free.

The economic problem is that it has historically been hard to charge individual ratepayers for their use of the distribution wires because measuring when that infrastructure is used more or less intensively has not been possible. As discussed in the blog post above, as more utilities adopt smart meters – those that are able to keep track of electricity usage in 15-minute or 30-minute intervals – it may be possible to use “demand charges” which are based on the maximum level of electricity consumption rather than an average.