Net Metering Reform: Premature or Long Overdue?

The growth of distributed energy resources (DERs) has significantly increased over the past decade as the U.S. moves to decarbonize the electric grid. Growth has been possible by incentivizing the transition to clean energy; states and federal legislation, such as the Inflation Reduction Act (IRA), have used tax credits and other programs to accelerate deployment.

One of the incentive mechanisms offered by many states is net metering. This billing methodology allows customer-generators to generate electricity through renewable energy systems such as solar panels or wind turbines and to receive credit for the surplus electricity they produce and export to the grid. The traditional net meter arrangement compensates for excess generation at the same rate the customer pays for electricity consumed from the grid—the retail rate. The retail rate includes the expenses associated with the electricity production, and transmission and distribution expenses.

The net metering methodology is most prevalently used to incentivize solar deployment among small residential and commercial customers. Compensating customers at the retail rate for excess generation improves the rate of return, making the initial investment more appealing and financially feasible.

However, one of the most significant issues with net metering is the cost shifting between non-net metering and net metering customers. The subsidy primarily stems from net meter customers not fully covering the cost of the grid services they utilize. As we grapple with an existential climate crisis, the question arises: Is it time for regulators to contemplate net metering reform?

In many states, public commissioners struggle between net metering and net billing. The tug of war between compensating customer-generators full retail value for solar panel excess generation or using the avoided cost method, that is, the cost of not having to generate or purchase power from a third party. A holistic approach is needed to ensure customers are incentivized to get solar while not burdening ratepayers. Several states have carried out net metering reforms or are conducting a cost-benefit analysis to determine whether rates should be amended.

Arizona

The Arizona Corporation Commission voted to adopt net billing in 2017 after two years of evidentiary hearings. Net billing resulted in customer-generators being offered between 70% and 95% of the retail price, and 20 years for the rate design and net metering to remain, for customers interconnected from 2008 to 2017.

According to regulators, the compensation for solar energy sent to the grid should be based on the avoided cost to address the issue of cost shifting. Utilities could only reduce rates by 10% each year. The reform came after two years of evidentiary hearings. The Commission felt confident about the change in the rate design because there was significant growth in rooftop solar over the years due to the incentive rate design, which justified a fairer compensation model. In October 2023, the Commission voted to explore whether the 10% yearly cap resulted in a subsidy for DER customers, causing cost shifting. Excess generation rates will be further reduced if approved to eliminate cost shifting.

California

California has had several iterations of net metering reform, but the most controversial is the most recent, NEM 3.0. As early as 2013, the state enlisted Energy Environmental Economics Inc. to conduct a cost-benefit analysis, where it was concluded that if the net energy policy were not reformed, it would lead to a $1.1 billion annual cost shift to non-NEM customers by 2020. NEM 2.0 was implemented in 2017, but left the retail rate for excess generation intact. Another research study conducted in 2021 by Verdant concluded that if NEM 2.0 were to continue, it would cause a $13 billion increase in bills for non-solar customers over 20 years.

The California Public Utility Commission (CPUC) voted to implement NEM 3.0 in 2022, which decreased excess generation credits by 75% from $0.30/kWh to an average of $0.08/kWh. Customer-generators will be compensated for the avoided cost rather than the retail rate for excess energy sent to the grid. The reform will also require solar owners to purchase a battery to see more significant savings.

The CPUC stated that solar owners should be able to pay off their systems in nine years or less. Solar developers and environmental stakeholders argued that the drastic change in compensation would result in a decline in rooftop installations, loss of jobs, and more extended payback periods for solar customers.

Since NEM 3.0 was announced, the California Solar and Storage Association reported a 77% to 85% drop in sales, leading to losses in the solar industry. NEM 3.0 legality has been continuously challenged, and in April 2024, the California Supreme Court granted a review of California’s First Appellate District Court decision to dismiss the matter in favor of the CPUC. The Appellate held that there was a strong presumption that the CPUC decision was valid.

Illinois

Beginning Jan. 1, 2025, the state will start phasing out net metering, and new customers will only be paid the supply rate for their excess generation. As a result of the decrease in rates, customers will also receive a $300 per kW rebate to provide financial assistance. Customers who have solar before Jan. 1, 2025, will continue to receive the full retail rate for the system’s life. Illinois regulators believed the rebate, coupled with incentives under the IRA, would not lead to a reduction in DER deployment.

West Virginia

In 2023, Mon Power and Potomac Edison, in their rate case, requested that the West Virginia Public Service Commission change the compensation structure for net metering. The argument for change in compensation for the sale of excess generation at the retail price resulted in the customer-generator not covering the costs for the distribution, transmission, and capacity facilities they utilize, leaving these costs to be supported by customers who do not use solar energy. The retail rate for excess generation was 13 cents per kWh (¢/kWh), while the utilities had proposed base credits on the wholesale rate for electricity at 6.6¢/kWh. The final settlement was made in 2024 for 9.34¢/kWh for residential, churches, schools, and general service; 9.15¢/kWh for large general service customers; and 8.91¢/kWh for large power service and alternative generation customers.

Wisconsin

There was a foiled attempt in Wisconsin to have net metering reform through a rate case by Madison Gas and Electric. It was proposed by the utility that commercial and residential customers should be compensated at the same rate, which would reduce residential rates from 16.6¢/kWh to 7¢/kWh. The proposal included a $200 rebate for up to 5 kW of solar installed. Utility companies argued that they should maintain affordability by treating all customers fairly. The Public Service Commission of Wisconsin stated that Madison Gas and Electric needed to provide more information to justify reduced rates for residential customers. However, it was suggested that the docket remain open to establish a working group to determine the appropriate tariff structure.

Elsewhere

This approach is being followed in Delaware, where in February 2024, lawmakers advanced legislation for analysis on net metering and how the costs impact residents in the state to determine whether there is a cost shift. In Oregon, Portland General Electric will also propose a rate change of a 20% to 30% reduction to reduce the subsidization of rooftop solar customers.

Alternatives to Net Metering Reform

Net metering advocates have referred to cost shifting as a mythical concept because regulators have overlooked renewable energy’s social and environmental benefits. Using renewable energy leads to lower electricity costs by replacing higher-cost energy sources, lowers air pollution, reduces expenses for the electric grid system, reduces expenses for construction to fulfill peak demand, and increases energy security.

Minnesota regulators approved the value of solar methodology in 2014, which includes factors like the social cost of carbon, the prevention of new power plant construction, and the substitution of costlier power sources. Xcel Energy used this methodology for community solar gardens. In 2024, Xcel Energy received approval to reduce the rate for the value of solar because it cost the ratepayers roughly $40 million per annum or $7 for every ratepayer at the current compensation rate.

Instead of eliminating net metering, in 2022, New York introduced a flat fee after discovering that solar customers were not paying their share of expenses for public benefit initiatives through volumetric charges, resulting in a cost shift to non-PV customers. The Customer Benefit Charge is a fee for customers connecting residential and small commercial solar PV systems based on a per-kW-month rate. The fee recovers the expenses from solar customers to support essential policy initiatives that benefit low-income customers and to finance initiatives focused on energy efficiency and clean energy.

The upsurge in net metering reform shows that cost shifting with the growth of DER is too significant to ignore. But is there a happy medium where renewable energy advocates, utility companies, and regulators can agree without hurting such a developing industry? NEM 3.0 shows the detrimental effects of the pendulum shifting too far to the right. On the other hand, policies in West Virginia and Illinois show it is possible to have compromise and receive support from the renewable energy community. A balance is crucial for fostering a sustainable and equitable energy system that supports both renewable energy growth and the effective operation of the electrical grid.

—Janique Williams is a licensed attorney, working as a Senior Regulatory Analyst with Pepco.