Net Metering In Iowa

Michael Giberson

On July 21, 2004, the Iowa Supreme Court issued an opinion in the case of Windway v. Midland Power Cooperative, ordering Midland to allow net metering to the owner of a 65-kilowatt wind turbine. [See story at IREC website.]

Under net metering, a retail energy consumer with a small generator is only billed by the electric utility for the net power consumption over the billing period. In the Iowa case, the cooperative wanted to charge the retail consumer the retail price for power the consumer took from the system, and pay the retail consumer a lower “avoided cost” rate for any power the consumer put back into the system. The plaintiffs wanted to to be paid at the higher retail rate for power put back into the system.

The Iowa Supreme Court decided for the plaintiffs on the grounds that the underlying law, PURPA, was intended to encourage renewable resource development, and paying the (higher) retail rate would encourage renewable resources more than paying the (lower) avoided cost rate. In a dissenting opinion, a judge argued that PURPA required payment of a rate not higher than the incremental cost to the utility (i.e., the avoided cost), and the retail rate “is manifestly not the cost to the utility.”

After citing the dissenting opinion, IREC commented, “This argument is well reasoned, but not the majority opinion.”

Economically, the arguments in favor of net metering are all mush. If I picked apples from a tree in my backyard and took them into the supermarket, should the supermarket have to pay me the retail price for my apples? The cooperative’s proposal to charge retail for amounts consumed and pay avoided costs for amounts produced by the generator-equipped customer seems a little more reasonable, at least as a matter of logic.

Of course the inefficiency created by overpaying a few net metered customers must be tiny compared to the inefficiencies created by flat-rate cost-of-service based pricing of retail electricity. I’d be more sympathetic to utilities’ concerns about their other customers being required, in effect, to provide a subsidy to the net-metered few if the utilities were similarly concerned about the numerous other cross-subsidies created by their flat-rate pricing structures.


6 thoughts on “Net Metering In Iowa

  1. Your apples at the supermarket analogy is both correct and indicative of the inequity of the marketplace for power. With apples, if the individual who grows them sells them to a market vendor who will resell them, he would reasonably pay the cost of production. In that case, though, the grower has the capability to take his apples and sell them to the end consumer at retail if his opportunity cost is less than or equal to the difference of retail and production cost. With power, the owner of the wind turbine does not have the capability to put his extra power in a basket and sell it to the next door neighbor, so he has no option but to pump it into the power grid and accept whatever payment the power company is obligated to provide. Certainly the existence of barriers to entry are both valuable to power companies and the reason for such a heavily regulated industry, but the Iowa Supreme Court’s ruling may also, whether intentionally or not, somewhat rectify the fact that while in Chicago a consumer has both the right and obligation to use power from the public utility service, Iowans have a more feasible and economical capability to supply their own power, in whole or in part, and public welfare would be less detrimentally affected by this.

  2. Economically, the arguments in favor of net metering are all mush. If I picked apples from a tree in my backyard and took them into the supermarket, should the supermarket have to pay me the retail price for my apples? The cooperative’s proposal to charge retail for amounts consumed and pay avoided costs for amounts produced by the generator-equipped customer seems a little more reasonable, at least as a matter of logic.

    No but assuming the apples I grow were identical in every relevant way to the markets, the market would be fine to charge me the ‘net price’ of the apples I brought them…. In other words, I bring 5 apples to market and then ‘buy’ 10 apples….I walk out with 10 apples in my bag and a receipt charging me for just 5. Of course, I could have just as well left 5 apples in the car and brought 5 from the store.

    Which leads me to ask, if ‘net metering’ isn’t used then why not allow owners of a mico-generator to just use its power and be metered only for what they pull off the grid? Is it that the generator is sometimes producing more power than the building is using and therefore the generator has to either put the surplus on the grid or find a way to store it?

  3. Yes, the issue is exactly that the generator — in residential cases often a small solar installation or wind turbine — may produce more at some time periods than the consumer himself needs. Rather than waste the opportunity to generate, the consumer-generator would rather sell the extra power. It improves the project economics.

    And, of course, the higher the rate that the utility has to pay, the better the rate of return on the generator.

    Like I indicated in the main posting, for the relatively small number of current net-metered customers, I can’t see getting too worked up one way or the other. But for a host of reasons I think that we are going to have a lot more distributed energy power sources in the future. What isn’t such a big deal, when you are talking at most 1 percent of power generated, becomes more significant at a 20 percent share.

    As a policy matter, we should work out sustainable commercial models for small scale distributed generation interconnecting at the distribution system level.

    Actually, in a somewhat related development announced today by FERC, the Commission will be hosting a technical conference on Sept. 24 to consider interconnection issues for wind generators. A glance at the notice (Link to FERC PDF file here) suggests they’re more oriented toward technical issues at the transmission system interconnections.

  4. Why perhaps should the local source not be able to charge a rate which reflects her cost to produce? With capital, maintence, and maybe fuel cost it will be larger.

  5. The issue becomes significant when the peak share of renewable (but unreliable) power exceeds the conventional power capacity reserve margin. At that point, the conventional capacity is not sufficient to meet all demands in the absence of the renewable power. While 20% has been a typical number for capacity reserve margin, it is definitely not the universal margin.

  6. The local generator should have the freedom to set a desired selling price; but, the potential buyers should also have the freedom to decline to pay that price (or any price, for that matter). Unfortunately, that is not the situation which prevails.

    This situation is particularly unfair, not only because the utility is overpaying for the purchased power but also because the net metering offsets both power cost and the portion of the utility’s fixed costs and return recovered through the variable portion of the rate.

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