Net Metering: Subsidy or Compensation?

By Russell King, 2L Staff Editor, Vermont Journal of Environmental Law

    As mentioned in a previous post, anthropogenic climate change poses a grave threat to civilization. We can, and thus ought to, curb the effects by releasing less greenhouse gasses (GHGs). In America, energy policy provides one avenue towards this goal: electricity generation produces one third of America’s GHGs. Not all generation, of course, contributes to climate change. Zero-emission energy (the renewables and nuclear) produces no emissions. As demand for electricity is projected to be more or less stagnant, zero-emission energy must displace fossil fuel fired generation.

While there are many paths to creating zero-emission power, one lets the everyday citizen directly contribute to our climate goals while reaping the direct benefits of renewable energy: distributed generation. Distributed generation is just that—generation connected directly to the distribution grid. Normally, large scale, central station power is connected to the transmission grid, which transports high-voltage electricity over long distances. This, in turn, connects to the distribution grid, a much lower voltage system that eventually provides electricity to industrial, commercial, and residential customers. Distributed generation is much smaller, rarely exceeding 1 MW of nameplate capacity, and is directly connected to the distribution grid, bypassing transmission altogether. Because it bypasses the transmission grid, this rooftop solar, small wind turbines, and microhydropower provides benefits in addition to no emissions. Namely, it avoids the costs electricity transmission incurs and generates revenue for the owner of the system when the owner produces more power than consumed. This last benefit is particularly valuable for low-income communities, creating a way to offset power costs and even make a little money.

Recognizing these benefits, 39 states have implemented net metering policies for distributed generation. Net metering is the method by which utilities pay distributed generation for electricity injected into the transmission grid. There are two categories of policies. The first is the net metering “subsidy.” While there are myriad ways to implement this method, the basic structure is simple. The utility pays the retail rate plus any other adders for excess generation. For example, a Vermont net-metered customer’s solar panels produce more electricity than the customer uses. The customer is paid the retail rate—about $0.17/kWh in Vermont, for example—plus a few extra benefits, such as a $0.01/kWh benefit for roof-mounted solar. The retail rate is arguably more than the electricity generated is worth, and thus is a subsidy. The “subsidy” method ensures a considerable payback for customers, potentially zeroing out their bills and saving thousands over the lifetime of the panels. Indeed, states like Massachusetts have seen substantial increases in solar, largely attributable to favorable net metering policies. With this increase in renewables comes a corresponding decrease in GHGs from electric generation.

The second net metering structure is value-based net metering, a relatively novel method and no state has yet implemented it. Rather than subsidizing new distributed generation with the retail rate, this method seeks to compensate distributed generation for the value of the power produced. The compensation uses the two-variable LMP+D method. The LMP is the locational marginal price, which is essentially the wholesale rate of power. This is substantially lower than the retail rate, which averages $0.02-$0.04/kWh. The second variable, D, is the value of distributed generation, and incorporates numerous variables, from the times that the system runs to where the system is located on the grid. This rate will only be equal to or exceed the retail rate if D makes up the difference between wholesale and retail—about 13¢-15¢ in Vermont, and similar values elsewhere. Additionally, wholesale prices vary substantially hour-to-hour, whereas retail rates rarely fluctuate between rate cases. This reduces the certainty needed to accurately measure whether investing in distributed generation is worth it. Simply, the compensation model may be worth far less than the subsidy model.

     The answer to the emerging dilemma of whether to compensate or subsidize distributed generation lies in the purpose of distributed generation. If we want to treat renewable distributed generation like any type of generation, then compensation makes sense—competition between generators is valuable, and distributed generation furthers that goal. We shouldn’t pay more for a product than it is worth. However, if we want to see an increase in distributed generation as a means towards meeting our climate goals and allowing low-income communities to participate in the green boom, then distributed generation needs a subsidy. As our climate goals become ever more pressing, we need every method available. The LMP+D likely cannot achieve that. Subsidizing distributed generation can.