Net Metering: Two Bills, Two Approaches

Additional update: House lawmakers killed H.4421 on its third reading vote (normally a procedural vote, as amendments and debate occur on second reading) by raising the point that the state constitution requires a two-thirds vote on property tax exemptions. The bill failed to reach the required two-thirds majority on its third reading.  

Update: The House passed H.4421 after amending it with language stating that non-net metering customers would not be required to subsidize net metering customers. The incentive for large industrial net metering customers was struck, and a study committee was added. While the bill still contains questionable provisions, the final version passed by the House creates a more level playing field and entirely removes the cap on customer-based solar generation. It will now go to the Senate.

The solar industry has made great strides in South Carolina since 2014’s Act 236 created the net-metering program. That law incentivized the usage of solar energy, but it also capped it at two percent of a utility’s overall power generation. Now, as that limit has nearly been reached, South Carolina ratepayers who are not already in the net metering programs could soon lose that option.

To address this, two bills have been filed in the House. Each takes a different approach to alternative energy generation and how it should relate to public utilities. To understand and properly analyze them, however, a basic understanding of net metering and how it operates in South Carolina is necessary.

What is net metering?

Net metering is a system by which individuals can supplement their power consumption through solar panels or other customer-based renewable sources of energy, and be reimbursed by the utility for any excess energy generated. As a general rule, a home or business with solar panels is powered by solar energy as long as the sun is shining. When the solar panels are unable to generate power, the home uses power from the utility. Any excess solar power is fed into the grid, and if the panels generate more power in a given month than is used by the customer, the utility credits the customer against future power bills for the excess electricity. At the end of the year, the utility reimburses the customer for any outstanding credits from excess power generation.

The concept is a relatively straightforward one: If a customer provides power to the utility, he is compensated for it. Where things get tricky is in how the compensation is calculated.

Generally speaking, there are three elements to the retail per-kilowatt price charged by South Carolina utilities: The fixed costs (powerlines, capital costs, etc. – in other words, what it costs the utility to be ready to provide power when the solar panels shut off); the actual charge for the amount of power used; and a profit for the utility.

Under the current net metering program in South Carolina, the monthly credit for excess solar power is a one-to-one retail kilowatt credit: For every excess kilowatt fed back onto the grid, the customer gets a kilowatt-priced credit.

The difference between the retail kilowatt rate and the wholesale kilowatt rate is an element of fixed costs, and the utility’s profit. However, instead of forcing the utility to forgo that revenue for power not sold, the difference (both profit and fixed costs) is considered a solar incentive and is incorporated into the utility’s rates, and thereby recovered from the entire customer base – net metering and non-net metering customers alike.

Any outstanding credits for excess solar energy is reimbursed to the customer avoided cost (wholesale) rate – in other words, the utility pays the customer what the utility would have spent to generate that amount of power. This is because a customer’s solar panels are just another power provider for the utility, and the utility pays the same price it would pay to any other power source.

The current net metering program also includes a variety of additional customer incentives, from utility-based incentive programs to tax credits. State law allows utilities to incorporate their actual costs for operating as a power company into all customers’ rates, including the costs of net metering programs. However, the law also allows these solar incentives to be incorporated into the utilities’ rates and recovered from their entire customer base – net metering customers and non-net metering customers alike.

Since any revenue the utilities forego through the net metering programs and the cost of solar incentives are both recoverable from the entire customer base, non-net metering customers are, to a degree, subsidizing the net metering customers. This is the danger of incentives: Someone has to pay for them, and a perk for one person equals an additional burden on someone else.

Overall, the issues with the net metering program are two-fold: the two-percent cap and the solar incentives. Both of the House solar bills – H.4421 and H.5045 – would increase that net metering cap; the latter bill to four percent, and the former lifting it completely. The bills differ on how solar credits are calculated, and in the treatment of solar incentives.

H.4421: Weighted in favor of net metering customers

H.4421 would lift the two percent cap on net metering entirely, and require the Public Service Commission (PSC) to open a new rate determination proceeding to determine how to incentivize further solar expansion while minimizing cost-shifting between net metering and non-net metering customers.

Until the new rates are finalized, utilities would be required to accept new net metering customers under the existing net metering rates, and would incorporate the new customers into the new rates once finalized. Current net metering customers would be brought into the new rates when the current net metering programs reach their sunset date (December 31, 2020).

The bill does not specify what the new rates must be, except that customers must at least be credited at the avoided cost rate. However, the bill does require the new rates to achieve specified goals: provide fair compensation to the utilities; minimize cost-shifting between net-metering and non-net metering customers; and incentivize alternative energy usage.

As the bill does not require unfair cost-shifting to be eliminated, and as solar incentives must be paid for somehow, there is a large possibility that non-net metering customers would be forced to continue subsidizing net metering customers to some degree.

The bill would also add a number of protections to the solar program and solar customers. It allows for technological expansion (e.g. battery technology for storing excess solar power); allows utilities to charge one-time fees (capped at $250) for interconnection requests; prohibits utilities from requiring solar customers to purchase additional liability insurance as a condition for interconnection; and prohibits utilities from delaying solar interconnection requests through red tape. It also bars utilities from trying to recover lost revenue from customer-based solar panels.

The bill also creates additional solar incentives. For instance, it adds a property tax exemption for installing solar panels and related equipment. It also requires utilities to have an incentive program encouraging solar to be installed on first responders’ homes, and emergency shelters, with at least 25% of available incentive capacity reserved for first responders’ homes. The cost of all of these incentives would be recovered from the ratepayers.

The bill goes so far as to exempt industrial customers using solar with a certain capacity (100 kilowatts) from paying the net metering program costs that the rest of the customer base is subject to. This type of favor is consistent with the incentivizing mindset, perhaps, but is outside the proper jurisdiction of government and unfair to the rest of the customers.

In summary, the bill does expand the net metering program, but would likely do so at the expense of non-net metering customers.

H.5045: Weighted in favor of the utilities

In contrast to the previous bill, H.5045 is much shorter and more straightforward. Instead of lifting the two-percent cap on the net metering program entirely, it merely doubles it to four percent. In other words, no more than four percent of the utilities’ overall power generation could come from customer-based solar panels.

This is impractical, as the rapid growth of the solar industry would likely mean that a four-percent cap would be reached quickly and another bill would need to pass in order to continue the program. This arbitrary barrier would serve to protect utilities’ profit margins at the expense of consumer choice.

The bill would also change the way solar customers are credited for excess solar generation. Instead of receiving a one-to-one retail kilowatt credit for excess power generation, the customer would receive a wholesale credit equal to the utility’s avoided cost rate. In other words, only what the utility saved by not having to generate that power would be passed on to the customer and used to offset the customer’s power bill. While this would ensure that all customers pay their share of the utilities’ fixed costs, it also means that net metering customers would pay for profit on power they did not consume.

The bill also states that non-net metering customers would not be required to subsidize the costs of net metering customers. While this sounds like a protection for non-net metering customers – and it would certainly protect them from paying for solar incentives – it could also result in a disproportionate burden on net metering customers.

This is because all of a utility’s actual costs for generating power are expenses that can be recovered from the entire customer base. This includes the cost to a utility for offering a net metering option (not to be confused with net metering incentives) as well as the cost for providing power and services to non-net metering customers. Under this arrangement, all the expenses are recovered from all of the customers.

This bill’s wording could result in the net metering customers bearing the sole burden of net metering expenses, in addition to the rest of the utility’s expenses recovered from all customers.

In summary, the bill would limit the expansion of net metering and would place net metering customers at a disadvantage to the utilities.

Removing barriers vs. picking winners

One key element of a truly free state is freedom of choice in the energy industry. However, there is a big difference between eliminating barriers to consumer choice and incentivizing one particular choice and industry. The former moves toward a more level playing field for all concerned, and the latter selects a favored player and forces the others to pay for it.

The two bills in question form opposite ends of the spectrum. H.4421 favors net metering customers at the expense of non-net metering customers, and H.5045 favors utilities at the expense of net metering customers. Both bills are inherently unfair to at least one party.

The correct policy approach to net metering in South Carolina is to eliminate barriers to consumer choice, and to create a level playing field between all parties to the extent possible. This would involve lifting both the solar cap as well as the solar incentives, and requiring solar customers to pay their share of the fixed costs component without requiring them to pay the profit component on power they did not use.

The energy fiasco from the ill-fated V.C. Summer project is the outcome of a backwards approach to consumer choice. Allowing free market principles to work – even in a limited way – in the power generation industry has already resulted in more prosperity, better technology, and cleaner energy for South Carolina ratepayers. Equitable net metering laws do not have to jeopardize these benefits, and would provide equal protection for all – not just solar customers. To accomplish this, however, lawmakers will need to change their paradigm from controlling the energy industry to protecting consumer choice.