Net Metering: False Free Market Claims and a RegressiveTax
Across the country traditional electric utilities and rooftop solar installers are battling over a controversial incentive program for solar power owners called net metering. In many states, net metering allows utility customers who generate electricity, with solar panels for example, to sell the electricity to the grid at above-market rates. Utilities claim the unintended consequences of subsidizing the industry and allowing solar customers access to the power grid with little to no payment for grid services are now raising rates for non-solar customers. Advocates of the solar industry, on the other hand, claim that changes to the current system could have a devastating effect on solar expansion.
What this battle has come to represent, however, is a fight between a relatively wealthy minority taking advantage of lucrative economic handouts at the expense of their lower-income neighbors who cannot afford, or are not eligible to adopt solar usage.
What is Net Metering?
Net metering has been around since the early 1980’s. The idea behind the net metering system is simple—it allows people who generate electricity on their homes and businesses to sell electricity back to the grid when their generation exceed their usage. At first blush, this seems like a non-controversial proposition. In fact, in 2005 Congress passed the Energy Policy Act of 2005, mandated net metering in all states when requested by a state’s residents.
When net metering was first instituted, PV systems and installation were extremely expensive. Rate structures for net metering programs were untested and grid maintenance costs were shared by all utility customers, solar and non-solar alike.
Over the years, the costs of solar power systems have come way down yet the subsidies paid to solar adopters have remained the same. As customers have realized this, there has been a massive spike in solar expansion beyond what most utilities projected and had prepared for. In the last three years alone, the cost of solar panel units has dropped 75 percent, largely due to Chinese production and policies that have driven prices down. This drop in price combined with lucrative subsidies has resulted in a 600 percent increase of installed solar power capacity in the U.S. in the same timeframe.
So What’s The Problem?
Utilities have issues with net metering because of the rate they pay customers for generating electricity. When a net metering customer generates surplus power and feeds electricity to the grid, the utility is compelled to buy that power at the full retail price. Most of the time this represents an amount much higher than wholesale prices utilities pay when purchasing power generated from power plants. In Wisconsin, for instance, the average retail price is 400 percent more than wholesale.
Due to the intermittent nature of solar energy (it only works when it is sunny), solar users will have a need for backup power supplied by their utility. However, when solar owners are subsidized at high rates, and in higher than expected numbers, utilities are paying more than they would otherwise for electricity. A study by Navigant Consulting, prepared for Arizona Public Service utilities, showed that the amount solar customers pay for electricity after bill credits are below the utilities’ costs for servicing those customers. Utilities must then charge its non-solar customers to cover the fixed costs solar customers are avoiding in self generation, leading to higher bills for those non-solar customers.
The Regressive Burden
The option to utilize solar is principally available for those people who own their own homes, rental properties or businesses. This means that most solar energy installations and all of the government benefits flow to Americans of some means. Despite the steep drop in solar panel prices over the last few years, PV is still a pricey option that is unattainable for most. Therefore, more affluent Americans tend to be the beneficiaries of federal, state and local subsidies, mandates, and utility reimbursement for excess power generation that solar systems may provide.
The unintended outcome of the wealthier utility customers enjoying the benefits of net metering subsidies at the expense of their lower-income neighbors has been labeled the “reverse Robin Hood effect.” Utilities have seen this first hand and are now trying to initiate reforms before the burden on non-solar ratepayers becomes too great.
A study by the Edison Electric Institute (EEI) warned, “The mere fact that we are seeing the beginning of customer disruption and that there is a large universe of companies pursuing this opportunity, highlight the importance of proactive and timely planning to address these challenges early on so that uneconomic disruption does not proceed further.” EEI is concerned that the disruption caused by non-solar customers subsidizing expanded PV adoption will lead to an unsustainable economic model, which could ultimately hurt the solar industry.
Recently, utilities across the nation have actively engaged in attempts to reform net metering programs. Net metering is currently offered in 43 states, but it is two of the largest solar states, Arizona and California, that industry leaders say will be crucial in determining the future of net metering policies.
Earlier this year, the California legislature ordered a study to be performed by the California Public Utility Commission to determine the costs and benefits of net metering. The study will also look at the effects on ratepayers and associated costs of such policies. Despite recent setbacks for utilities attempting to rein in solar subsidies in Idaho and Louisiana, many feel that the California study—set to be released this fall—will set the tone for future net metering reform nationwide.
Arizona, on the other hand, is in the middle of a statewide “tug-of-war” between their largest power company, Arizona Public Service (APS), and the state’s many rooftop solar installers. APS has presented two proposals to the Arizona Corporation Commission (ACC) in an effort to reform net metering policies for future solar installations to ensure the utility can continue its level of service without disproportionally burdening its non-solar power users.
APS said in a statement earlier this month, “We see a future of rapidly increasing adoption of solar power, where individual customers can “go solar” by putting solar panels on their homes and businesses. Our responsibility is to make sure the electricity grid is in place to support that goal. As more people install solar on their homes, it becomes more important that everyone who uses the grid helps cover the cost of keeping it operating at all times. Under current rules, rooftop solar customers benefit from a reliable grid, but pay little to nothing for their use of it.”
Free Markets vs. Free Markets?
In an interesting twist in Arizona, both sides of the argument claim they are just trying to promote free market principles as it relates to solar energy.
Solar advocates in the state claim that APS is essentially a monopoly trying to strong-arm competition and eliminate consumer choice. The group Tell Utilities Solar won’t be Killed (TUSK) is appealing to free market believers by comparing the choice of solar energy for consumers to that of a charter school for concerned parents. 
The problem with this free market argument by solar subsidy backers is that solar owners get a 30 percent rebate (in the form of an investment tax credit) from the feds on most installations, on top of any state and local funding along with the generous mandated net metering payout outlined earlier. Those costs are then passed on to their neighbors in the form of higher taxes and larger utility bills. The incentives provided for solar adopters then, effectively invalidate any ‘free market’ arguments.
Prosper Arizona, a free market advocacy group headed by former Arizona Speaker of the House Kirk Adams, argues against the “free choice” claims of TUSK. “In a free market, individuals should be able to choose solar…But utilities subject to the existing net metering policy are being forced to pay solar users more than five times the market price, and other Arizonans are left paying the bill,” Prosper claims. “This is NOT about solar. It is about fairness and ensuring reliable power. Solar has a bright future in Arizona. Updating the state’s net metering policy will protect our commitment to solar, but not doing so would jeopardize our ability to provide a reliable power grid for future Arizonans.”
With net metering and solar rebate proposals, the goal was to increase solar adoption across the country. While that has occurred, the resulting distortion in the market has created unintended burdens that are now resting on the shoulders of those who cannot afford to install solar panels.
All Americans use power. Not all, however, can afford to buy their way into the financial incentives that come from purchasing and installing solar units for their home or business. Restructuring net metering compensation to consider the cost of grid maintenance and development incurred by utilities when supporting solar users, aims to remove some of the distortion caused by inefficient subsidy initiatives.
Ideally, no source of electricity would be given preferential treatment. There would be no subsidies, no government stimulus, no rebates, and all sources would compete on an even footing in a free market.
In states like Arizona, utilities are not calling for the elimination of net metering and compensation of solar power created by customers, but they are hoping to ensure all ratepayers are being fairly charged for their use of the electrical grid and energy services.
By revising net metering policies, states can ensure that middle to low-income families (those hurt most by high utility rates) are not subsidizing their wealthier neighbors who see solar power and all of its related government payouts and mandates as a lucrative long-term investment. Government programs that confer benefits on some at the expense of others are not free-market solutions and only hinder the effective progress of solar options in becoming competitive in the marketplace.
The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.
 Energy Policy Act of 2005, § 1251, http://www.gpo.gov/fdsys/pkg/PLAW-109publ58/pdf/PLAW-109publ58.pdf