This article was originally published in the January/February 1998 issue of Home Energy Magazine. Some formatting inconsistencies may be evident in older archive content.
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Home Energy Magazine Online January/February 1998
Promoting Profitable Home Power
by Thomas J. Starrs and Howard J. Wenger
The process is simple and easy to administer. Net metering programs encourage customers to use clean, renewable resources by giving them more return for that home-generated power than utility programs, which buy energy at a lower-than-retail rate, and require the installation of a second (very expensive) meter to track the home-generated power. (All utilities are required by federal law to purchase power from independent power producers. The dual-metering method is the typical version of that purchase agreement.)
The principle behind net metering is that customers should be encouraged to reduce their demand for utility power not only by reducing their electricity consumption, but also by generating their own electricity through environmentally preferred technologies that use renewable energy from local resources. In fact, some demand-side management programs treat customer-sited generation as equivalent to demand reduction, since the result is the same from the utility's perspective.
For instance, a customer whose electricity use is 10 kWh per day may cut that use in half by buying new energy-efficient appliances, relamping the building with superefficient compact fluorescent lights, or buying a 1kW rooftop PV system. From the utility's perspective, all three of these options have the same result. The only difference is that the photovoltaic system has the potential to make the customer's energy use negative during certain hours of the day when the sun is shining but no one is home using the electricity.
Participation in net metering programs is usually limited to certain customer classes, technologies, and system sizes. Most programs offer net metering to residential customers using PV or wind generators with a peak generating capacity of 10kW or less. Some programs extend the availability of net metering to other customer classes, to a wider range of technologies, and to larger systems (up to 100kW).
In addition to the state-mandated program, many utilities offer net metering of their own volition, having determined that the administrative and accounting simplicity of using the customer's existing meter to measure bidirectional energy flows makes more sense than treating the customer like a larger bulk power generating facility, such as a geothermal plant or a multimegawatt wind farm. These larger facilities usually require substantial contracting and monitoring expenses (see Figure 1). Typical of this perspective is the view of Rhode Island's Narragansett Electric, whose representative testified in a regulatory proceeding that the utility did not object to net metering for very small facilities because it does have various practical advantages in that it enables us and the customer not to install a second meter and not to process payments each month. Other utilities, however, oppose net metering out of concern that widespread use of the practice would substantially reduce their revenues. To address this concern, some recently enacted state laws have limited the total amount of generating capacity net metering can be applied to.
Under the dual-metering approach that preceded net metering, any time the customer's generation exceeds demand, the excess flows to the utility through a second (output) meter. The utility pays the customer for this excess electricity at the end of the month, but at the wholesale or avoided cost rate. In most states, avoided cost rates hover around 2¢-3¢ per kWh. Under net metering, when the customer's generation exceeds demand, the excess flows to the utility through the existing meter, turning it backward so that it offsets retail electricity purchases from some other time during the billing period. Customers are billed at the end of the month only for the net energy consumed--thus, net metering.
The economic benefits of net metering depend on a variety of factors, particularly the difference between retail and avoided cost rates, and the proportion of the customer's generation that goes directly to serve the customer's own load. Net metering is more valuable where the difference between retail and avoided cost prices is higher, and where the portion of customer generation going directly to load is lower. Assuming a retail rate of 12¢ per kWh, an avoided cost rate of 3¢ per kWh, and assuming that 40% of the PV system's output is going directly to load, the savings of net metering (as compared with dual metering) from a 2 kW PV system is about $14 a month, or $170 a year.
The benefits of net metering are modest compared to the cost of small-scale renewable generation. A 2kW PV system has an installed cost of about $12,000. But just because solar energy isn't economically practical doesn't mean no one is interested. Utility customers purchasing solar and wind generators are motivated by more than money. Time after time, surveys show that, if given the opportunity, consumers would choose renewables over all fossil and nuclear fuels at cost premiums of at least 10%. Net metering lowers the threshold at which these technologies become cost-effective.
Fortunately, net metering programs are easy to administer and establish. By what appears to be a matter of circumstance rather than intent, the typical rotating disk-style meters widely used in the United States for residential customers happen to be bidirectional. As a result, most residential customers can obtain the benefits of net metering without any change in metering equipment.New Net Metering Between 1978 and 1994, 14 states required utilities to offer net metering. Since 1994, net metering legislation has been enacted in five additional states (California, Maryland, Nevada, New Hampshire, and New York) and introduced in 4 others (Colorado, Hawaii, Nebraska, and Oregon). On a federal level, Representative Edward Markey (D-Massachusetts) introduced a proposal to require net metering as part of an electricity industry restructuring bill.
There are several reasons why net metering has resurfaced in the political eye. A renewed interest in commercializing renewable energy technologies, perhaps as a result of increased focus on the threat posed by global climate change, comes from environmental forces at the state and federal level. Both Germany and Japan appear to be well ahead of the United States in their commitments to reducing greenhouse gas emissions, and these two countries have also developed important initiatives to promote renewable energy technologies in recent years (including national net metering policies).
Interestingly, the resurgence of interest in net metering among renewables advocates and policy makers has not resulted in a dramatic increase in the number of customers enrolling in net metering programs. A recent study by the National Renewable Energy Laboratory found that in most states, the number of program participants was very small--usually numbering below a dozen households, and in only a few instances more than two dozen. These low enrollments suggest that net metering programs are not fulfilling their potential role in encouraging small-scale renewable generation.Net Metering Hurdles There are two reasons for the low participation rate in net metering programs.
First, the economics of small-scale renewables--though much improved-- are still not attractive enough to draw the attention of utility customers, with the exception of the early adopters, who are motivated by environmental or other considerations. Net metering improves the economics of small-scale generation, but it doesn't create a mass market for these technologies. To attract anyone other than the early adopters, additional policy initiatives or financial incentives are needed.
Figures 2 and 3 show two different policy scenarios for 20 U.S. cities and the economic effects relative to the widely accepted market clearing price for PV technology of $6 per peak watt of generating capacity. Figure 2 shows that although net metering improves the economics of PV generation by an average of about 15% (for the cities in which net metering is not already available), in only one of the cities analyzed--Hilo, Hawaii--does net metering alone provide enough of a boost to cross the $6 per watt threshold.
Figure 3, on the other hand, illustrates the combined effects of net metering, a low interest (5%) loan for financing the PV system, and a $3 per watt rebate program. With this combination of incentives, PV system costs cross the $6 per watt threshold in every one of the cities analyzed. Moreover, it is worth noting that this particular combination of incentives may be available in California next year as a result of newly available renewable energy funding associated with the restructuring of California's electricity industry. Other states are considering similar initiatives that provide comparable incentives for solar and other renewable energy technologies.
The second reason for low participation rates in net metering programs is the existence of institutional barriers that discourage customers--even those who have not been deterred by the basic economics--from investing in renewable energy. These barriers are typical of the problems encountered by early adopters seeking to use new or emerging technologies that have to operate within an established, complex network system. According to one PV equipment manufacturer, roughly four out of five potential customers who are willing and able to pay the $5,000-$20,000 price for a rooftop PV system that will offset some or all of their electric utility bills end up abandoning their efforts because of unanticipated problems associated with these institutional barriers.
Most of the problems stem from the lack of familiarity with the technology among utilities, building code officials, insurers, lenders, and others whose blessing is needed to install and operate even the smallest-scale generating facilities. These institutions tend to be wary of new technologies. This is particularly true with respect to technologies that constitute a radical departure from the traditional way of doing business. Self-generation among residential and small commercial customers clearly falls into this category.
One area of particular concern is the lack of uniform, standardized utility interconnection requirements for small-scale renewable generating facilities. For example, although the Institute of Electrical and Electronic Engineers (IEEE) has developed a recommended national standard for utility interconnection of small-scale PV systems, utilities can choose to adopt this standard or develop their own. The result is a confusing array of utility requirements, most based on the IEEE standards, but many imposing additional requirements that to some PV industry members seem arbitrary. Moreover, these additional requirements can add significantly to the cost of a PV system. Similar problems arise with local building codes, which are based on the National Electrical Code but which vary significantly in implementation and enforcement at the local level.
Utility contracts for small-scale generators are another source of problems. Many utilities have developed boilerplate contracts for the purchase of power from nonutility generators. For the most part, these contracts were designed with $100 million cogeneration facilities or geothermal plants in mind rather than a $5,000 wind turbine or PV system. As a result, these contracts often contain complex liability and indemnification provisions that require the involvement of attorneys and other outside experts. For a well-capitalized energy company building and operating a large facility, these contracting costs are an acceptable part of doing business. For a residential customer with a casual interest in renewable energy, however, these costs are likely to be prohibitive. Some utilities have responded to this concern by developing simplified contracts for small-scale generators; Southern California Edison, for example, has a two-page contract for facilities under 10kW. Wider use of these simplified contracts would go a long way toward removing this particular barrier.
Insurance requirements are a related problem area. Many utility boilerplate contracts require nonutility generators to carry $500,000 or more worth of liability insurance, considerably more than most standard homeowner's policies. These insurance requirements are higher than is necessary or appropriate for small-scale renewable generators. Similarly, many utility contracts contain liability indemnification provisions that homeowner's insurance carriers find unacceptable. Because small-scale renewables pose little if any threat to utility equipment and personnel, these indemnification provisions are excessive and unnecessary.
Many small-scale renewable energy generators have also reported problems working with local building code officials, who are responsible for inspecting electrical systems in new or remodeled residential and commercial construction. Many building code officials are unfamiliar with renewable energy generating technologies and related components, such as the direct current (DC) subsystems associated with most PV and wind energy facilities. Although the National Electrical Code specifies safety and equipment standards for renewable energy facilities, most inspectors have little experience with these standards and may be hesitant to approve unfamiliar equipment. One possible remedy would be for renewable energy industry groups, such as the Solar Energy Industries Association or the American Wind Energy Association, to support education and training programs for local code officials.
A final example of the barriers facing small-scale renewable generators is the frequent imposition of additional fees and charges by utilities, building inspectors, and permitting authorities--fees that do not appear to be commensurate with the scale of the proposed facility. Of course, some such fees may be appropriate, since authorities responsible for approving the design and installation of these facilities incur costs in fulfilling these obligations. But many customers have been stunned by the magnitude of these fees. To cite just one example, a homeowner in New Hampshire recently testified at a legislative hearing that his utility, Public Service Company of New Hampshire, had imposed a $900 fee to review the specifications for his 900W PV system; had required an additional protective relay (beyond what was incorporated in his inverter) that was purchased from the utility for $450; and had required an annual test of the protective relay, for which the customer pays the utility $100. The annual test alone is enough to wipe out roughly six months of energy production from the PV system, and the other fees increased the cost of the PV system by about 15%. These fees and charges should reflect the size and complexity of the facility, so that kilowatt scale facilities do not face the same fee schedules as megawatt scale facilities. The renewable energy industries can help by standardizing their designs so that the requisite approvals are simply a matter of checking that proper safety and power quality components are reflected in the design and included in the installation.Managing the Metering For large numbers of utility customers to invest in small-scale renewables, one of three things must happen. Technology costs must continue to come down; electricity prices must go up; or additional economic incentives must be put in place.
At the same time, net metering provides enough of an economic boost to encourage significantly greater market penetration of small-scale renewables--if the problems with institutional barriers can be resolved. Although these barriers are almost always the result of unfamiliarity rather than outright hostility, the end result is the same. Customers who want to play a part in encouraging the development of these technologies are prevented from doing so.
One recurring problem has been the lack of familiarity with these small-scale generating technologies among utility engineers or building inspectors. This problem could be addressed on a case-by-case basis by developing an information clearinghouse where utility customers, system installers, and other affected parties could quickly identify a contact person within the utility or building department who has previous experience with the technology. These measures, though modest, would go a long way toward overcoming existing barriers to renewable energy investment.
Thomas J. Starrs is a renewable energy consultant with Kelso Starrs & Associates on Vashon Island, Washington. Howard J. Wenger is a principal and founder of Pacific Energy Group, a renewable energy consulting firm in Walnut Creek, California.
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