California's 5% Net Metering Compromise and the Implications for the Energy Future

A compromise was reached in the California State Senate July 7th to raise the cap on net metering of electricity from 2.5% to 5% instead of the proposed 10 percent in AB560.[1] The Senate Energy, Utilities & Communications Committee sent the bill to the Senate Appropriations Committee by a vote 9-1.  If the full Senate approves the compromise the matter will go to Conference Committee since the State Assembly approved the bill in May at the 10% level.

Net metering is one of the key components of California’s strategy to encourage home owners and businesses to install solar panels to supply their own energy needs and sell the excess back to the power grid. But net metering also applies to wind and hybrid combinations of renewable projects under 1 megawatt. Current net metering payments to customers are at the applicable utility’s retail rates for the excess electricity.

Among the three California investor owned utilities, Pacific Gas & Electric (PCG) is nearest the 2.5% of aggregate customer peak demand cap generating almost123 MW from solar followed by 81.2 MW at Southern California Edison (EIX) and 18.6 MW at Sempra’s San Diego Gas & Electric (SRE).  PCG had gone on record opposing an expansion of the net metering cap arguing it was an additional subsidy of solar that would have to be paid unfairly by remaining customers.

Solar advocates were howling for an increase in net metering to improve their development potential.  Most feared the impact of the three IOU’s refusal to accept more net metering participants once they reached the 2.5% cap would stall further market penetration.  Since PCG is closest to reaching the cap and the solar development activities for Northern California outpace Southern California, PCG was on the hot seat.

California has a policy goal of a million solar roofs and supports that goal with state rebates in addition to the Federal investment tax credits available.  Progress on achieving the solar goal is closely monitored by the California Public Utilities Commission and the California Energy Commission. [2]

Why AB560 Matters

AB560 is the incremental next step in implementing a fundamental policy change in the functioning of the electric power market.  There is a convergence of interests in advancing the market penetration of renewable energy in the United States with solar and wind advocates at the forefront.  Their best ally today is the Obama Administration and its drive for emissions reduction and expanding market share for clean, renewable energy.  This goal also coincides with California’s AB32 emissions reduction goal; auto emissions waiver request denied by the Bush Administration and recently approved by US EPA, and California’s proposed 33% renewable portfolio standard target.

Net Metering is Part of a Broad Clean Energy Strategy

Net metering is a key component in a package of measures and policy changes that are essential to changing our energy future.  Other components include Feed-in Tariffs that require utilities to buy renewable energy at premium prices, Federal intervention in transmission to assure access and overcome NIMBY environmental obstacles to building new transmission lines to connect renewable energy projects to markets, and real-time energy pricing subjecting consumers to the marginal cost of energy instead of the traditional average cost.

Taken together these policy changes offer the promise of enabling a rapid growth in market share for renewable energy and progress toward reduced dependence on fossil fuels and thus lower emissions.  But such rapid changes may be costly and risky.

If net metering caps are expanded the next initiative will likely be Feed-in Tariffs followed by real-time pricing.  In my view, that is why the investor owned utilities using PG&E as their unofficial spokesman opposed AB560 but only enough to water it down so as not to attract the wrath of regulators or advocates.

Policy Implications and Risks

The risk for consumers is that the policy changes come with “managed economics” in the form of subsidies, incentives, feed-in tariffs and other policies that impede competitive markets and will, inevitably, drive up the cost of energy.  There is a growing potential for a rate payer revolt over the high cost of energy caused by the growing cost of renewable energy.  This revolt will become explosive if customers are exposed to the volatility of the commodity energy markets through real-time pricing without opportunities to mitigate that risk.

Arguably, the price for real-time pricing should be retail direct access to allow new entrants to aggregate customers, bundle energy and services and insulate customers from price volatility and market risk.  The irony is customers may actually be willing to pay more for “premium power” to avoid the risk of volatility than they currently pay for commodity energy even with the add-on costs and subsidies.

The risk for utilities is that this expanding market share for renewable energy, expanding transmission access if the Feds use their authority to overcome NIMBY objections to transmission construction, and expanding use of real-time pricing and net metering is a direct frontal assault on the utility business model creating a distributed generation utility of the future that is not regulated, does not actually deliver the energy, but sucks the earnings growth potential out of the traditional investor owned utility business.

The risk for the nation is that the dual drive for renewable energy and emissions reduction risks will leave behind the practical demand for energy to meet America’s economic recovery and return to growth from a lack of adequate power generation capacity to meet our future needs.  In a policy environment opposed to new coal fired generation, unhelpful in new nuclear power development, opposed to new hydropower development, the growing dependence on rapid expansion of renewable energy sources means that the fuel of choice for future power generation is natural gas.  It is not a bad choice.  We can build it faster than other mid-merit or baseload options.  And fortunately, we have a growing opportunity for natural gas supply domestically from unconventional sources.

Are We Asking Renewable Energy to Do Too Much Too Soon?

The bottom line is expanding renewable energy market share is a worthy goal, but it is not sufficient to meet the long term energy needs of a recovering and growing American economy.  This does NOT mean we should not build wind and solar and other renewable energy sources.  But it is a serious policy mistake to force it to carry the burden of baseload and intermediate power generation demand.

The consequence of a renewable energy policy failure is that energy prices for consumers will likely go up—way up impeding economic growth.  We could see spot shortages.  We will sully the good reputation of renewable energy in the eyes of a public which will blame it for high prices and problems of reliability.  As a result, we will build combined cycle gas fired power generation like crazy to fill the gap.  It is not the worst outcome, but it fails the least cost best fit resource planning best practice.