The following is a contributed article by Justin Gundlach and Burcin Unel, senior attorney and energy policy director, respectively, at NYU Law School's Institute for Policy Integrity.
A mysterious group has asked the Federal Energy Regulatory Commission (FERC) to kill net metering. FERC should say no – not because net metering should last forever, but because states, not the feds, have the tools needed to reform it.
Net metering continues to be the most common way for states to compensate owners of solar panels and other distributed energy resources (DERs). Does this approach provide accurate compensation for the value of the electricity that system owners send back to the grid? Dozens of reports and thousands of hours of debate before public utility commissions have endeavored to answer this question, which remains open and contentious.
We think the answer is a clear "No", and we explained in a recent report why states should begin developing new approaches that do a better job of linking compensation to value. But we are also certain that states are the only ones who can get those new approaches right.
Until this April, no one was debating whether FERC should expand its jurisdiction to cover net metering programs. That debate was long over. FERC had resolved it with a decision back in 2001, which established a bedrock principle on which the steady growth of net metering programs and participants have since relied.
The principle is this: So long as a retail consumer consumes more electricity than they send back to the grid over a netting period (e.g., one month, six months, or one year), whatever electricity they send back is not a "sale for resale" and so is not subject to federal jurisdiction. Instead, it's just a "netting" of electricity flows reflected in the customers' utility bills.
NERA insists, contrary to all evidence, that controversy over this long-settled question persists, and that FERC must act "promptly" so that the situation "becomes settled." To be clear, NERA's circular reasoning assumes a controversy rather than identifying one, and also ignores that controversy would result from what it's asking of the Commission.
Whatever NERA's stated reasons might be, its aim is clear: The declaration it seeks would spell doom not only for net metering programs but for any state-level program that specifies how to compensate the owners of small-scale DERs for electricity they export to the grid.
Would that be so bad? Yes, it would very bad indeed.
The DERs compensated by net metering (and other state programs) play an important and growing role in the energy sector. First of all, nearly all of them are clean resources, so their use can reduce the emissions of greenhouse gases and local pollutants caused by generating electricity.
Secondly, installing and operating DERs can avoid other costs — those arising from generating electricity in power plants, transmitting and distributing it to customers, and building and maintaining the grid. DERs can also support resilience — the ability to bounce back from an outage.
If NERA succeeds, it will hand control of DER compensation to federal regulators and thereby stymie ongoing state-level efforts to realize DERs' potential benefits.
We say "potential" because DERs can add value in numerous ways, whether they actually do depends on how well policy aligns their compensation to sources of value. Net metering programs often do a poor job of this, not because the programs themselves are designed badly, but because they rely on the retail rate that determines how electricity customers are charged by utilities. Retail rates tend to obscure how the costs of supplying electricity vary across time and place.
But if a retail rate reflects those variations, so too will a net metering program that is layered on top of it. State public utility commissions understand this, and some state commissions' efforts to reform rates and net metering programs in tandem, or even to move to net metering "successor tariffs," are ongoing.
An overhaul of retail rates that makes them fully cost-reflective will take time, but states can, in the meantime, better align DER compensation with its value by moving to a Value Stack framework. Value stacking can compensate DERs for all the values they bring to the grid, including to the bulk power system, the local distribution system, and — by avoiding emissions — society as a whole.
In either case, determining DER compensation is a job for the states, not FERC, which disclaimed the authority to determine how states should compensate DERs back in 2001 and affirmed that decision in 2009.
States have the regulatory flexibility to change retail rates and net metering programs in ways that better translate DERs' value into the compensation paid DER owners. FERC doesn't.
As we explained in comments on the proposal, taking the authority away from states and giving it to FERC would not only kill net metering, but would also shut down ongoing efforts in California, New York and other leading jurisdictions that have begun to move beyond net metering and toward more sophisticated approaches to DER valuation.
DERs can add tremendous value, but they won't if the rules that determine where they're installed and how they're paid don't align value and compensation. FERC lacks the tools to accomplish this alignment as well as authority to direct how to pursue it, and should leave that task to the states.