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quo bias, which means that dynamic processes of economic and technological change can make regulatory institutions outdated.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distribution of electricity with DERs and other intelligent devices interconnecting at the distribution edge, this outdated regulation limits innovation and the development of products and services at the distribution edge.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.