Net metering for solar power isn’t sustainable, so it will end

Recently, utilities in two states have started the process of ending the net metering incentives for solar power installed on homes. With the advent of solar power financing companies like SolarCity that will finance the cost of the solar power system and take the payments from the savings on your power bill, the number of solar power installations on homes is proliferating. But when you play out the scenario of most single-family homes having solar power on the roof, and net metering providing them with a bill of around $10-20 each month, you discover that net metering isn’t sustainable for the balance sheets of utilities – so here we are at the end of net metering.

The underlying economics is why net metering isn’t sustainable for the grid or the utility that runs it. The 11c per kWh (national average) you pay is really three component parts – the electricity generation (including the power plant and the feedstock used as fuel), the transmission and distribution infrastructure costs (power lines from the plant to your city, high-voltage distribution throughout your city, lower voltage distribution to your neighborhood, and finally 240V distribution from you local transformer to your house), and overhead and profit (the costs of running the company).

The costs of each are about 5-7c for generation and fuel, 3c for transmission and distribution and the remainder for the overhead/profit. Beyond these cost estimates, the price of electricity varies throughout the day (on- and off-peak pricing) as well as different times of year due to supply (from hydroelectric generation stations in the spring) and demand (air conditioners in the summer and electric heaters in the winter).

When you’re generating solar power to use within your own house, you’re eliminating the demand for the first two items in that list – generation and transmission/distribution. But you haven’t eliminated the third, while the grid just sits underutilized but still must be paid for (capital costs and maintenance). Beyond that, when you’re generating more than you can use within your own home, you’re increasing the cost of the generated fuel from 5-7c to the net-metered cost (11c), and using the local distribution network (at a fractional rate of the whole), so the cost of electricity to the power company goes from 11c to about 17c per kWh. This was acceptable to most utilities when the on-peak summer prices for energy were 15c or more per kWh. But current spot market prices hover anywhere between 5 to 8c per kWh, which means they could buy extra power cheaper on the spot market than a customer selling their excess solar back to the grid under a net metering program. Bottom line is that the utility is forcing customers without solar power to subsidize those with solar power.

I’m still bullish on solar power – but the rate structures will have to change, and likely become more complex, and more in line with how commercial and industrial customers are charged. The structure would like be both consumption and capacity based. You would be charged for power consumption at 6c/kWh, plus demand charges based on the maximum power you’ve drawn from the grid over the 12 months (e.g. 6.3kW on July 15). Using solar would cut your consumption and likely decrease your maximum power, but the free ride is over.

Beyond net metering, grid-battery integration will have to become cheaper and more feasible so that those who generate solar power can store their own over-generation and use it at later times to bring down their costs.

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