Net Settlement Reform: Early or Late?

The growth of distributed energy resources (DERs) has increased significantly over the past decade as the United States takes steps to decarbonize the electricity grid. The growth has been made possible by encouraging a transition to clean energy; states and federal legislation such as the Inflation Reduction Act (IRA) have used tax credits and other programs to accelerate deployment.

One incentive mechanism offered by many states is net billing. This billing methodology allows customer generators to generate electricity through renewable energy systems, such as solar panels or wind turbines, and receive credit for the excess electricity they produce and export to the grid. Traditional net billing compensates the excess production at the same rate the customer pays for electricity drawn from the grid—the retail rate. The retail rate includes expenses associated with producing the electricity, as well as expenses for transmission and distribution.

Net metering is most commonly used to encourage solar deployment among small residential and commercial customers. Compensating customers for excess generation at a retail rate improves the rate of return, making the initial investment more attractive and financially feasible.

However, one of the most significant problems with net settlement is the shifting of costs between non-net settlement customers and net settlement customers. The subsidy is mainly due to the fact that net settlement customers do not fully cover the costs of the network services they use. In the face of an existential climate crisis, the question arises: is it time for regulators to consider reforming net settlement?

In many states, public commissioners are struggling between net metering and net billing. The tug-of-war is between compensating generator customers for the full retail value of their solar panel surplus production and using the avoided-cost approach, which is the cost of not generating or buying power from a third party. A holistic approach is needed to provide customers with an incentive to use solar without burdening ratepayers. Several states have implemented net metering reforms or are conducting cost-benefit analyses to determine whether rates should be changed.

Arizona

The Arizona Corporation Commission voted to adopt net billing in 2017 after two years of evidentiary hearings. Net billing resulted in generator customers being offered between 70% and 95% of the retail price, and for customers connected from 2008 to 2017, there was a 20-year term of the rate design and net billing.

Regulators said compensation for solar power fed into the grid should be based on avoided costs to address cost-passing. Utilities could only reduce rates by 10% per year. The reform came after two years of evidentiary hearings. The commission was confident in changing the rate design because there had been significant growth in rooftop solar over the years due to the incentive rate design, which justified a more equitable compensation model. In October 2023, the commission voted to investigate whether the 10% annual cap resulted in a subsidy for DER customers, causing cost-passing. Excess generation rates would be further reduced if approved to eliminate cost-passing.

California

California has gone through several iterations of net billing reform, but the most controversial is the latest, NEM 3.0. Back in 2013, the state commissioned Energy Environmental Economics Inc. to conduct a cost-benefit analysis that found that if the net energy policy were not reformed, it would result in an annual cost change of $1.1 billion for non-NEM customers by 2020. NEM 2.0 was implemented in 2017, but left the retail rate for excess generation intact. Another 2021 study by Verdant found that if NEM 2.0 were retained, it would result in an increase in bills for non-solar customers of $13 billion over 20 years.

The California Public Utility Commission (CPUC) voted to implement NEM 3.0 in 2022, which reduced excess generation credits by 75% from $0.30/kWh to an average of $0.08/kWh. Generator customers will be compensated for avoided costs, rather than the retail rate for excess energy sent to the grid. The reform will also require solar owners to purchase a battery to achieve greater savings.

The CPUC said solar owners should be able to pay off their systems in nine years or less. Solar developers and environmental stakeholders argued the drastic change in pay would lead to fewer rooftop installations, job losses and longer payback periods for solar customers.

Since the announcement of NEM 3.0, the California Solar and Storage Association has seen sales declines of 77% to 85%, leading to losses in the solar industry. The legality of NEM 3.0 has been continually questioned, and in April 2024, the California Supreme Court granted review of the decision of the First Court of Appeals of California to dismiss the case in favor of the CPUC. The Court of Appeals found that there was a strong presumption that the CPUC’s decision was valid.

Illinois

Beginning January 1, 2025, the state will begin phasing out net billing, with new customers being paid only the delivery rate for their excess generation. As a result of the rate reduction, customers will also receive a $300 per kW rebate to provide financial assistance. Customers who install solar before January 1, 2025, will continue to receive the full retail rate for the life of the system. Illinois regulators have determined that the rebate, combined with the IRA incentives, will not lead to a reduction in DER deployment.

West Virginia

In 2023, Mon Power and Potomac Edison, in their rate case, requested that the West Virginia Public Service Commission change the compensation structure for net settlement. The argument for changing the compensation for selling excess generation at retail price resulted in the customer-generator not covering the costs of the distribution, transmission, and power facilities it uses, leaving those costs to be covered by customers who do not use solar. The retail rate for excess generation was 13 cents per kWh (¢/kWh), while the utilities offered basic credits towards the wholesale electricity rate of 6.6¢/kWh. The final settlement occurred in 2024 and was 9.34¢/kWh for residential, churches, schools, and general services; 9.15¢/kWh for large general services customers; and 8.91¢/kWh for large utility and alternative energy customers.

Wisconsin

In Wisconsin, there was an unsuccessful attempt to reform net billing through the Madison Gas and Electric rate case. The utility proposed that commercial and residential customers be compensated at the same rate, which would reduce residential rates from 16.6¢/kWh to 7¢/kWh. The proposal included a $200 rebate for up to 5 kW of installed solar. The utilities argued that they should maintain affordability by treating all customers fairly. The Public Service Commission of Wisconsin found that Madison Gas and Electric needed to provide more information to justify reduced rates for residential customers. However, it suggested that the case be left open for the formation of a working group to determine an appropriate rate structure.

Elsewhere

This approach is being used in Delaware, where lawmakers in February 2024 passed legislation to analyze net billing and the cost impact on state residents to determine whether cost shifting occurs. In Oregon, Portland General Electric will also propose a rate change of 20% to 30% to reduce subsidies for rooftop solar customers.

Alternatives to Net Metering Reform

Net metering advocates call cost-shifting a myth because regulators have overlooked the social and environmental benefits of renewable energy. Using renewable energy leads to lower electricity costs by replacing more expensive energy sources, reduces air pollution, reduces grid costs, reduces construction costs to meet peak demand, and increases energy security.

Minnesota regulators approved a solar value methodology in 2014 that includes factors such as the social cost of carbon dioxide, preventing new power plants and replacing more expensive energy sources. Xcel Energy applied the methodology to community solar gardens. In 2024, Xcel Energy received approval to reduce its solar value rate because it was costing ratepayers about $40 million per year, or $7 per ratepayer at the current compensation rate.

Instead of eliminating net billing, New York implemented a flat fee in 2022 after discovering that solar customers were not paying their share of public good initiative spending through volume charges, which resulted in costs being passed on to non-solar customers. The customer benefit fee is a fee paid to customers who connect residential and small commercial solar systems on a per-kW-month basis. This fee recovers expenses from solar customers to support necessary policy initiatives that benefit low-income customers and to fund initiatives focused on energy efficiency and clean energy.

The rise of net-metering reform shows that the cost shifting from DER growth is too significant to ignore. But is there a middle ground that renewable energy advocates, utilities, and regulators can agree on that doesn’t hurt this growing industry? NEM 3.0 shows the harmful effects of swinging the pendulum too far to the right. On the other hand, policies in West Virginia and Illinois show that compromise and support from the renewable energy community are possible. Balance is key to supporting a sustainable and equitable energy system that supports both renewable energy growth and efficient grid operation.

—Janice Williams is a licensed attorney who works as a senior regulatory analyst at Pepco.