My R Street policy study: Electricity market alternatives to regulatory net metering

Institutional persistence creates some of the thorniest problems in public policy, including electricity policy. Institutions change more slowly than technology and markets, because of both  design and status quo bias, which means that dynamic processes of economic and technological change can make regulatory institutions outdated.

This mismatch is showing up right now in the electricity industry as a consequence of innovation in digital smart grid technologies and distributed energy resources like residential rooftop solar (SG+DER). Since the PURPA legislation in the late 1970s states have offered net metering to residential customers whose DERs produce more electricity than they use. Net metering regulations allow homeowners to sell this excess generation back to the distribution utility, usually at a price equal to the full retail rate that includes charges for use of the distribution wires network. This regulation is simple to implement in a mechanical network because you essentially “spin the meter backward”.

In a digital network that is increasingly capable of two-way distribution of electricity with DERs and other intelligent devices interconnecting at the distribution edge, this outdated regulation limits innovation and the development of products and services at the distribution edge. I analyzed this problem in a recent policy study for R Street, Alternatives to Net Metering: A Pathway to Decentralized Electricity Markets:

As more residential customers adopt DERs and receive payments through net metering, their increasing heterogeneity is exposing the tensions of attempting to integrate them into a regulatory framework designed for large-scale central power generation. That framework makes disentangling the economic and political effects of DER costs and benefits difficult. DERs impose costs by using the distribution network when DER owners sell excess generation; they also confer benefits when they provide voltage and frequency regulation and other grid services to the network.

Reliance on net metering has driven recent controversies in several states, but the problems of net metering are structural problems of rate design. Net metering’s administratively determined prices fail to incorporate the local knowledge that would be reflected in market responses to price signals or changes in prices as system conditions change. Net-metering rates also obscure cross-subsidies inherent in traditional utility regulation, which often reveal themselves when new technologies change the energy-market opportunities that are of interest to consumers.

As DER technologies become more energy efficient, economical and attractive to residential customers, what is the appropriate rate structure for distribution-grid services? How can changes to rate design capture the opportunities available for DERs to generate electricity and provide other services outside of a regulated model? Open, competitive retail markets with low entry barriers to producers and consumers (and customer-generators) at a range of scales create those opportunities. A business model for the distribution utility as a market and distribution platform that connects them, and that procures resources for grid services through market transactions, would enable such value creation.

This paper analyzes the DER experience in the residential sector and suggests an alternative to current policy: open, transparent retail markets around the edge of a distribution platform, paying a grid-services charge to a distribution wires-platform company. The paper also proposes a framework to develop an appropriate grid-services charge for customer-generators and analyzes case studies to apply that framework and derive lessons for policymakers.

In states like Arizona and Nevada, increasing DER penetration and use of net metering has led to opposition from the regulated distribution utilities that increasingly see net metering as an unsustainable subsidy to DER use of the distribution network. Controversies like the recent change in Nevada’s net metering regulations to increase fixed charges and reduce credits for net excess generation to net metering customers have created controversy and uncertainty about the future of distributed solar and the bureaucratic processes for estimating the value of distributed solar.

Instead of political bickering over how best to adapt this obsolete regulation, a decentralized market platform with low entry barriers and interoperability at the distribution edge would enable retail providers to experiment with DER products and service offerings to consumers, which would create organic inducements to innovate in ways that would be more sustainable than the artificial and increasingly obsolete inducements of net metering regulation.

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2 thoughts on “My R Street policy study: Electricity market alternatives to regulatory net metering

  1. Dear Lynn,

    Good afternoon!

    I agree with you in that “Institutional persistence creates some of the thorniest problems in public policy, including electricity policy,” but by using an action oriented scientific attitude, and increasing the system architecting scope to the socioeconomy, we (myself and those that retweet me) have come up with an institutional innovation that is an alternative to current incomplete wholesale markets approaches, no just net metering.

    To privatize the benefits for themselves and socialize the costs to everybody else, crony capitalism led wholesale markets violated the warnings made by the late M.I.T. researcher Fred C. Schweppe and his team in the book “Spot Pricing of Electricity (Kluwer, 1988)” that said: “We believe the deregulation which considers only the supply side of the supply-demand equation is dangerous and could have very negative results.” There’s no doubt whatsoever of the global damage incomplete markets have done to the world, as we now experience, for example, in electoral processes driven by money in the USA and elsewhere.

    To address such a situation, which we describe as anti-systemic (contrary to systems), we need complete and fully functional markets, as suggested in the November 2013 post “A complete and fully functional electricity restructuring proposal ( http://bit.ly/259GMH ).” In that light, please consider, for example, the “Ninth update. Countries must leap into Hagel’s electoral strategy of trajectory on Handy’s curve of systemic civilization” of the post “Can we agree with the Second Curve, while not with Handy? ( http://bit.ly/UP86SA ),” from where it emerged the following strategic intent synthesis:

    The experience curve of the industrial civilization corresponds to the final area that is so saturated that even doesn’t allow innovators to crawl. No matter who wins the election, we will have unstable equilibrium by getting fatter governments.

    On the new curve of the systemic civilization to which countries must leap, we can start with the Systemic Electricity Law, so that people can co-create in social networks, with plenty of room for innovators to crawl, walk, run and then fly. This is how we will go to the market State equilibrium.

    Best regards!

    José Antonio Vanderhorst Silverio, Ph.D.
    Consulting engineer on systems architecting
    Servant-leader Dominican and global citizen

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