The costs to non-solar owning customers of net energy metering (NEM) policies that support rising levels of rooftop solar in more than 29 states have created division between utilities and DER advocates, but elements of a new policy that can balance the cost shift with system benefits for all customers are emerging, power system analysts say.
Distributed solar owners in many states pay only for the net kilowatt-hours on their meters after compensation for exported solar-generated kilowatt-hours is deducted at the retail electricity rate. This NEM policy does not significantly shift system costs to other customers at low solar penetrations, but the accelerating growth of distributed energy resources (DER) is creating growing concerns about a cost shift from customers who own solar to those who don't.
NEM "is a useful tool, but it's just a tool," Edison Electric Institute (EEI) General Counsel and Senior Vice President for Clean Energy Emily Fisher told a Feb. 9 National Association of Regulatory Utility Commissioners (NARUC) Winter Summit audience during one of three panels on NEM. "There are ways to reform it to allow even greater benefits from DER and still avoid imposing a cost shift."
DER advocates at the conference agreed NEM must evolve.
DER can be "leveraged for many grid services critical to achieving zero emissions goals," Strategen Managing Director for US Consulting Matt McDonnell said. But "rate designs need to evolve to more fully integrate DER for those services or we will miss taking advantage of customer investments, overbuild the system, and fewer customers will face larger fixed costs."
Discussions about an NEM successor tariff to sustain DER growth has, until recently, led only to controversy. But NARUC summit presentations suggested there may be some emerging consensus on policy elements like adding incentives for storage. And a new South Carolina proposal involving Duke Energy offers a "holistic product bundle" that could lead to "new possibilities," according to summit panelists.
An NEM successor tariff becomes important when DER penetrations of over 5% of system peak load threaten to impose significant costs for system infrastructure on non-solar owning customers, "and more states are moving toward that level," said North Carolina Clean Energy Technology Center (NCCETC) Senior Policy Program Director Autumn Proudlove.
Legislative and regulatory policy actions on distributed solar steadily increased from 2015 to 2020, Proudlove told the NARUC summit. In 2020, DER compensation was the focus of 92 actions in D.C. and 34 states, up from just 41 actions in 26 states in 2015.
Annual solar growth was forecast to be "10% to 15% between 2023 to 2025" without extension of the 30% federal tax credit, according to the Q4 2020 U.S. Solar Market Insight Report, published Dec. 15 by the Solar Energy Industries Association and Wood Mackenzie. The credit's extension in the December COVID relief bill is expected to increase DER growth even more and sustain it longer.
That growth increases concern about the cost shift, NARUC panelists said.
"When low-cost renewables penetrations rise, more of the costs in rates are not for generation but for maintaining, expanding, and running the grid," said Natural Resources Defense Council (NRDC) Climate and Clean Energy Program Senior Scientist Mohit Chhabra. When solar owners pay less, "system costs fall on other customers."
"Rates should be based on costs, and a fundamental principle of ratemaking is to avoid shifting costs."
General Counsel and Senior Vice President for Clean Energy, Edison Electric Institute
The cost shift tends to create an "equity problem" when those costs fall disproportionately on low and moderate income (LMI) customers, Chhabra added.
A wide range of alternative tariff strategies are being tested, Proudlove said. The most common proposals are moving away from the retail rate, and more frequent "netting" of credits, "which more accurately reflects system costs but is more difficult for customers."
Credits can be netted as infrequently as annually or as frequently as hourly intervals. The less frequently they are netted, the easier it is for customers to accumulate compensation, but the more frequently they are netted, the more accurately compensation reflects the system's real-time use of the distributed solar and the less predictable and apparent the customer's compensation will appear.
Also being considered to address the cost shift are time-of-use (TOU) rates, fixed fees like minimum bills or DER system capacity charges, and value of DER studies, she added. But there is no "real consensus" on which is best, she added.
DER advocates say properly compensating DER customers is necessary as they provide invaluable grid services that reduce system costs, Proudlove said. And utilities say utility-scale solar, now at a much lower cost almost everywhere, is more cost-effective than distributed solar.
But "it is not an either-or situation" because we need all solutions for reducing emissions, Solar Energy Industries Association Senior Director of Utility Regulation and Policy Kevin Lucas told the NARUC audience. NEM's "simplicity" for customers has allowed the rooftop solar solution to grow and regulators should not "create barriers" to state decarbonization efforts.
States at work
The NARUC conference panelists described the wide range of state trials of NEM successor tariffs.
Hawaii, the first state with distributed solar penetrations high enough to threaten system stability, struggled for years to design a successor tariff, Synapse Energy Economics Principal Associate Melissa Whited said. But regulatory rulings in October 2015 and November 2017 led to a TOU rate design for residential customers that is now shifting Hawaii's solar installations to solar plus battery systems.
In contrast, Georgia just started a retail rate NEM trial last year while Connecticut announced its first successor tariff Feb. 10. In Vermont, NEM is on its fourth iteration and "provides almost 30%" of the state's peak load, Commissioner Sarah Hofmann of the Vermont Public Utilities Commission said. But growth is now imposing transmission system constraints in Vermont and creating a need for a locational value in the tariff, she said.
California is now working on an NEM 3.0 successor tariff and looking for ways to use the time-based and location-based components of compensation, stakeholders recently told Utility Dive. A joint utilities proposal focuses on the cost shift, with solar owner-only charges. Solar advocates have proposed more targeted TOU periods they say would more accurately reflect the value of DER to the system and compensate solar owners for adding storage.
"The future will be integrated DER compensation through a tariff design that links all factors that impact system value, including things like non-wire solutions."
Managing Director for US Consulting, Strategen
New York uses wholesale market time- and location-dependent granularity for its Value of DER tariff, Regulatory Assistance Project Associate Mark LeBel said. But that does not resolve cost shift concerns in states without wholesale markets or resolve questions in New York about other rate components like time intervals.
Emerging limited consensus
Ratemaking is "as much art as science," and the best way to structure an incentive for rooftop solar is through rates with both fixed and variable time- and location-based value components, NRDC's Chhabra said.
But locational value "can be very difficult" without transparent wholesale market nodal pricing, he agreed with LeBel. And a January 2021 study of California's current NEM, which includes a time-based value in its mandatory TOU rate, concluded there is a cost shift allowing residential solar owners, the majority of net-metered customers, to pay less than the cost to serve them.
"Rates should be based on costs, and a fundamental principle of ratemaking is to avoid shifting costs," EEI's Fisher said. Utility-scale solar "is way less expensive" than distributed resources and also displaces emissions. Compensation for DER "should be based on where and when they produce" and NEM "is not the right tool."
The common ground that emerged among most NARUC panelists was that cost shifts must be prevented, and time-based and location-based valuation of DER is important to identify its precise value to the system at any specific time or place. They also agreed that carbon emissions need to be addressed and that the flexible use of DER can be critical to power system reliability.
"Policymakers know that DER growth is accelerating and there is value in rate design to integrate it into core operations," Strategen's McDonnell said. "That will grow with implementation of the Federal Energy Regulatory Commission Order 2222, which requires bringing DER into wholesale markets."
"Our solution links a TOU rate with dynamic critical peak pricing, and new netting periods with an upfront rebate for participation in Duke's demand response and energy efficiency programs."
Vice President for Rate Design and Strategic Solutions, Duke Energy
There is consensus among stakeholders on "more sophisticated successor tariff design elements" that more precisely reflect DER value to the system, McDonnell said. The newest successor tariff proposals tend to have more granular export compensation and netting intervals to make price signals accurate, non-bypassable charges to share the costs of public benefit programs equitably, and structures like TOU rates that drive self-consumption, he added.
Solutions for locational value are being trialed, he added. One is using interconnection or integration costs as proxy price signals, which fits with California's requirement that utilities identify the best areas to add DER. Another is Vermont's compensation adders for adding DER at agreed-on higher value locations.
Beyond these points of agreement, specifics of a successor tariff design are limited. But "the future will be integrated DER compensation through a tariff design that links all factors that impact system value, including things like non-wire solutions," McDonnell said. That should also include social justice objectives, "because this can't just be a transition, it has to be a just transition."
Jurisdiction by jurisdiction, "the core regulatory principal of gradualism will guide a methodical transition toward optimizing DER compensation," he added. "That will require better market valuation of flexible DER to allow new and more sophisticated tariff solutions."
But a policy jointly proposed by Duke Energy and DER advocates in South Carolina could represent a new compensation paradigm, most NARUC panelists agreed.
A holistic product bundle
The proposed settlement in response to South Carolina's current NEM structure was specifically designed to end the cost shift debate, said Duke Energy Vice President for Rate Design and Strategic Solutions Lon Huber.
"Our solution links a TOU rate with dynamic critical peak pricing, and new netting periods with an upfront rebate for participation in Duke's demand response and energy efficiency programs," said Huber, who represented the utility in the proposal's development.
If approved by South Carolina regulators, it would grow DER, reduce utility peak demand challenges, and support policy goals without imposing costs on other customers, NCCETC's Proudlove said.
The proposal provides dispatchability to meet winter peak demand more reliably through controllable DER, "which starts to drive more system value," Huber said. The concept's "technology coupling" will enable an "innovative and holistic product bundle," he added.
"Utilities might be able to introduce pilots of new approaches for DER in large grid modernization proceedings, but it may ultimately be necessary to educate policymakers to enable the regulatory process."
Senior Policy Program Director, North Carolina Clean Energy Technology Center
The proposal is "the exact opposite" of NEM's "bluntness," EEI's Fisher said. It "aligns DER deployment with larger clean energy goals instead of throwing DER anywhere, adding to curtailment issues, and imposing costs on the distribution system."
If approved, "it could be a model for other states to move past the old cost shift debates," she added.
The holistic South Carolina concept "opens up a lot of new possibilities" by bringing in elements like demand response and multiple dynamic rates, Proudlove said. "It also showed different stakeholders can collaborate and agree, and that is in short supply in today's regulatory processes."
The holistic South Carolina approach to NEM and the cost shift has added to questions about how to address DER in today's regulatory paradigm.
Holistic solutions like the South Carolina proposal "should be on the table, but a better rate can provide most of the solution" to the cost shift, NRDC's Chhabra said. A way to remove barriers to LMI customer owning solar "without raising rates," for example, is "an equity charge to existing residential solar customers" that have paid off their initial investment under retail rate NEM.
Another approach to replacing retail rate NEM that faces pushback was proposed by NARUC panelist and E&E Legal's Director of Science and Technology Assessment Tom Tanton. He would introduce an auction process to set the price for DER.
"The preferred way to set value, but it is too complex, is an auction approach that would show the value of flexibility and other resources to customers," Tanton told Utility Dive. The South Carolina proposal and any other kind of innovation that builds compromise among stakeholders is acceptable if there is "a strong consumer advocate voice in the process," he added.
That would not eliminate the cost shift, but would be a negotiated agreement based on the "true cost of service" in which the utility's needs and the provider's costs are accepted by the consumer advocate, Tanton said.
South Carolina regulators now face what has in the past been challenging, which is "getting a holistic approach through the regulatory system's traditional single-issue dockets," Duke's Huber said.
With regulators' ability to innovate limited by executive, legislative and judicial supervision, introducing new approaches "is a huge challenge," Proudlove agreed. "Utilities might be able to introduce pilots of new approaches for DER in large grid modernization proceedings, but it may ultimately be necessary to educate policymakers to enable the regulatory process."