Net metering: Or, how to tell if your local utility is going to go bankrupt in the next few years.

Net metering: Or, how to tell if your local utility is going to go bankrupt in the next few years.

Net metering, for those unaware, is a pricing model intended to encourage the growth of solar installations. It is similar to a feed-in-tariff in that it is definitely not in the best interests of the utility itself – which is why it may seem odd that utilities aren’t pushing innovation, seeking other options. Ok, ok: it’s why it should seem odd that utilities aren’t pushing innovation and seeking other options.

The gist of net metering is that, as a customer, you only pay for your ‘net‘ consumption; any power you produce and send back into the grid is deducted from your consumption. This is often referred to as ‘running the meter backwards’, because in many cases this is exactly how it works. On the side of your home is a meter that counts up for each kWh you use, and down for every kWh you produce.  

It is a rare case where customers on a net metering plan will be paid for surplus production at the end of a billing period. If you produce a 1000kWh and use 800kWh, your utility won’t pay you for the extra 200kWh you put on the grid. Usually it will be rolled over as a credit towards the next months bill. This works fine for most consumers today, as few solar installations generate 100% of annual consumption for the home. This will not be the case going forward, as the cost of solar materials continues to plummet.

As a customer with net metering you will also pay some base monthly charge, regardless of your meter reading. 

Overall this seems kind of  fair, right? Assuming that I generate less than I use, that is: I pay some fixed cost, and I get full credit for anything I put back on the grid. Yay.

Except, no. And before going into the gory details, lets apply this model to some other case. Car rental sounds good.

Imagine that we passed a law declaring that any company that rents cars MUST rent a customer’s car from them if (and when) offered. So, Bob wrecks his 2005 Toyota Corolla and rents a 2015 Lexus for a week from EnterThrift Rentals, while his own car is in the shop. Six months later Bob is flying to visit family for a week – so he returns to EnterThrift and drops off his Corolla and the keys. At the end of the week, EnterThrift must return to Bob the majority of what Bob paid to rent the Lexus. 

Obviously this scenario is insane. So is net metering.

Actually, net metering is even more crazy than the above.

The largest assumption of net metering by far is that a kWh today is worth exactly as much as a kWh tomorrow. Or, more to the point, a kWh at noon in July is worth exactly as much as a kWh at any other time of the year. This isn’t even true today, but within ten years it will be laughably wrong. As solar adoption skyrockets, power produced at noon in July will have negative value to utilities. Literally: the utility will have to pay money to put energy produced by their customers onto the grid. The very customers who are, at the same time, getting credited for their production. Yay win! Er, or not.

From the above one might get the impression that I’m siding with the utilities. Not even close.

Net metering is simply the most obvious symptom of the inflexible, bureaucracy bound anachronism that is pretty much every utility everywhere.

For one, net metering would never have become law anywhere if utilities were even slightly motivated to work with customers. But – and if you haven’t already noticed this, you will from now on – utilities are violently allergic to any suggestion that might lead to actually paying money to a customer.  Even if it would cost less on an annual basis.

In no article anywhere, ever, has one of the new magic technologies touted by a utility suggested even a hint of buying electricity at fair market rates from customers. Oh, sure, they’ll gladly buy your excess solar production at “fair market rates”… but only until your bill to them is zero (aside, of course, from some base monthly surcharge). This is great for a utility, as it lets them get around that little problem of price equivalence.  However, when applied only to the production of energy by a customer, fair market rates are anything but fair.

What about the Smart grid? In concept, it allows a utility to implement time-of-use billing. Which, in short short-sighted practice, typically means chopping a week into “weekday” and “weekend”, and chopping each day into three or four buckets – really cheap, cheap, normal and expensive, perhaps. 

Consumers, at least those without electric vehicles, can only benefit from time-of-use billing by upgrading their homes. Which means new appliances, especially HVAC systems, hot water heaters and possibly clothes dryers and dishwashers – though the last two can be handled ‘manually’ for the most part. Who can afford a new HVAC system and hot water heater, particularly when the cost savings they might see are on the order of a few dollars per month? Right. Nobody. Because if someone is dumb enough to make an investment that stupid then there is basically no way they have the money to do it. Which means that adoption of such equipment will only happen on a replacement basis – ten to thirty years for HVAC and hot water heaters. In the mean time? Slightly more profit for utilities, massively more stress on those families already struggling financially.

Time-of-use billing at such low fidelity benefits almost nobody. Not even utilities, in the long run.  In fact, we’ve already seen evidence that some utilities adore time-of-use billing, but become righteously indignant at the concept of a customer storing power into a home battery system when power is cheap and selling it back to the grid when it’s expensive. This is suicidal behavior for a utility. Unfortunately, it’s the also industry mindset.  

Public utilities are turning opportunity after opportunity into failure and loss. The epic breadth of failure in business acumen is simply astounding. It would almost make sense if there were a single national power company – but that’s not the case. In theory, we have hundreds if not thousands of regional utilities, each of which is hypothetically capable of independent decisions.  In most cases, a public utility can own their own production facilities – which means that they sell power not just to their regional customers, but to other public utilities as well. 

We see a utility buy and build a massive new solar installation, and talk up the wonderful economics of grid-scale storage – and then the exact same utility goes on record supporting legislation that will make it more expensive for its customers to install solar, or legislation that will prohibit a residential customer – their customer! –  from using a small storage system, because the customer might ‘buy cheap and sell high’.  

Consider this: A newish solar power plant might generate 100MW.  An average home solar install today is around 5kW. Thus, it would take about 20,000 home systems (100MW/0.005MW) to equal a single smallish ‘utility scale’ solar plant. But here’s the fun bit: the local utility doesn’t need to finance or build the home systems. 

Average home solar installation size is going to skyrocket in the coming years. Homeowners with electric vehicles or home battery storage have larger systems installed even today, and as materials drop in price and improve aesthetically homeowners will increase install sizes accordingly. Home efficiency will also increase. Almost every homeowner that has solar panels installed also makes at least some energy efficiency improvements, but pretty much everyone, solar owner or not, will have LED bulbs throughout their home within five years (as CFLs burn out and get replaced). Lighting alone accounts for about 14% of US electricity consumption. LEDs are nearly 50% more efficient than even fluorescent tube lights, which have long been the poster-child of efficient lighting. Over the next few years we will see that 14% decrease to 12%, then 10%, then who knows.  

Where the balance of “better efficiency + increased use” lies isn’t incredibly relevant – focus the fact that we can be completely certain that we will have a few percent decrease in total electricity consumption from the grid due to higher efficiency – not just in lighting, but overall –  as well as due to increasing numbers of homes adopting larger and larger solar installations.

This is half of the amazing, glorious, beautiful feedback cycle that is going to utterly destroy most public utilities within the next 20 years. By destroy I don’t mean simply forcing the utility into bankruptcy or some other form of insolvency. I mean actually, physically destroy: brownouts, blackouts, damage to grid equipment, and even damage to industrial and residential electronics. But their will be insolvency in abundance as well, of course.

The other half of the feedback cycle is the utilities themselves. Nearly every public utility has been responding to nearly every innovation of the past few years in a fashion that encourages an even more rapid decent into a completely untenable state. To wit:

  1. Net metering encourages homeowners to install only a system sufficient to offset a fraction of annual use, while discouraging installation of home storage on these “smaller” installations. As installation costs drop, homeowners will increasingly choose to install larger systems combined with some form of storage. Due to the complete lack of economic incentive to be grid connected, these customers will “quit”, unsubscribing from the local utility and going off-grid.  
  2. Net metering with ‘market-rate’ purchase of customer produced energy will chase customers off-grid even more aggressively. 
  3. Passing, or attempting to pass, legislation preventing homeowners from connecting grid storage – either EV or installed battery – on the premise that customers will  ‘buy low and sell high’ will result in even more customers unsubscribing. More importantly, it discourages adoption of the only significant method by which customers can actually benefit from time-of-use pricing models.
  4. Time-of-use pricing will only serve to raise costs for most residential consumers. Higher monthly bills makes installing solar more attractive.
  5. Preventing or stalling on the tying of new solar installation into the grid due to “inability of the grid to handle the instability”, while at the same time not upgrading the grid. This will push more customers to opt for the ‘off-grid’ package. Or, in cases like Hawaii, it will trigger lawsuits and state intervention, bringing mandates shaped by pissed off and vocal residents.

Local utilities are driving away those customers who would otherwise be able to help stabilize the power grid by storing power when it’s cheap, and chasing all their other customers into the arms of a solar installation – either through purchase or through lease. When public utilities finally do respond in some vaguely positive way it tends to be because they were forced to do so through acts of law. Innovation through mandate is rarely as effective as through incentive, and, as if out of some deep-seated petulance, is nearly always far more expensive. Sadly, utilities simply don’t seem capable of recognizing incentive. Looking at how we’ve structured them, I simply can’t imagine why that would be. Oh. right…

So. Wealthy and upper-middle income customers leaving the grid in droves. Middle income customers signing up with solar leases through companies like SolarCity, as fast as SolarCity can install new systems, or buying small systems to help offset rising costs from the utility. Everyone else simply using less energy. Anything else? Oh, right! Coal and gas prices aren’t going to be low forever. 

All of which adds up to a local utility spending increasing amounts of money trying stabilize a power grid that will be serving less and less power to fewer and fewer people each year. While suing and trying to pass legislation in order to maintain the status quo. Beautiful, no?

Of course it’s not beautiful. Thankfully, it doesn’t have to be this way – and, to be honest, public utilities would probably be able to get away with everything described above for an incredibly long time, were it not for one tiny little detail: at some point, some utility somewhere is going to embrace customer-produced power. This company will upend the entire business model underlying one-directional power distribution, undercutting independent power producers and public utility operated power plants alike in order to sell customer-produced power to the very public utilities that refuse to adapt to a world of distributed energy production.

I’ll describe what I think the new model will look like in another post, but the basics are very, well, basic: The utility of the future won’t make money selling electricity. It will make money by acting as an exchange; a broker of energy, but at the level of a neighborhood. Oh, and it might do things like, say, lease solar installations. Maybe.