Summary: Net metering policies are effective at supporting solar power adoption but can threaten the financial stability of electricity distribution companies and result in cross-subsidies between electricity users once solar penetration grows. The solution is to align network charges with the real drivers of network costs.
A widely adopted method to encourage distributed solar photovoltaics (PV) may cause real problems once solar adoption reaches high levels, according to a new paper by researchers from the Instituto de Investigación Tecnológica (IIT) at the Universidad Pontificia Comillas in Madrid and the Delft University of Technology (TU Delft).
Under “net metering” policies adopted across most of the United States, Spain, and other jurisdictions, owners of solar can offset their charges for electricity consumption by feeding excess energy back into the grid. In some cases, net metering can reduce electricity bills to close to zero.
Net metering has proven effective at incentivizing solar adoption, but as solar penetration rises, these policies also give rise to new problems.
Electricity distribution companies typically recover most of their costs through volumetric charges per kilowatt-hour of energy delivered across their networks. Yet while charges are based on energy delivered, most distribution network costs arise from fixed investments in wires, transformers, and other equipment sized to meet peak demands. To be clear, this mismatch between (mostly) fixed costs and (mostly) volumetric charges predates solar adoption and can cause inefficiencies and cross-subsidies on its own. Yet when volumetric network charges are combined with net-metering policies, the results can threaten the cost-recovery of distribution utilities and give rise to cross-subsidies between network users.
According to the paper, a typical Spanish residence with a 2 kilowatt solar system could offset 69% of their volumetric charges if consumption and production are netted out daily, 77% if credits can be saved across a month, and 99% for a full year rolling credit. If solar penetration rises to 20%, that could threaten 8-20% of a distribution company’s revenue. If utilities raise rates to cover these shortfalls, customers without solar end up paying more while solar owners continue to offset most of their bills through net-metering, resulting in cross-subsidies between electricity users.
The solution, according to the researchers, is to align network charges with the real drivers of network costs. That would include a blend of capacity charges based on a network user’s contracted or measured peak in electricity consumption and production and smaller volumetric charges for electricity consumed from or injected into the grid. To support solar PV adoption, implicit net-metering subsidies should be replaced by explicit supports for solar production or investment.
With solar penetration growing rapidly in many countries, the time is now to fix these issues and keep both solar growth and utility revenues healthy.
Publication: “The economic effect of electricity net-metering with solar PV: Consequences for network cost recovery, cross subsidies and policy objectives,” Energy Policy 75 (2014): 244-254.
Authors: Cherrelle Eid is pursuing an Erasmus Mundus Joint Ph.D. degree in Sustainable Energy Technologies and Strategies and is a visiting PhD researcher at the Institute for Research in Technology (IIT). Dr. Javier Reneses Guillén is Associate Research Professor at IIT and Dr. Pablo Frías Marína is a Professor of Electrical Engineering, both at the Universidad Pontificia Comillas in Madrid. Rudi Hakvoortis Associate Professor at the faculty Technology, Policy and Management of Delft University of Technology.
Note: This is article is part of an ongoing series of concise summaries of interesting and important conclusions from new research and peer-reviewed journal articles. This series at Full Spectrum is written in partnership with Observatorio de las Ideas, a Spanish-language publication which finds and summarizes important, cutting-edge ideas for policy makers, business leaders, and others on key topics like energy, health care, economics, and more.
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