Why the Public, Especially Conservatives, Should Thank Net Metering

James Tong and Alison Mickey argue that NEM has helped reveal long-term deficiencies in the regulatory model.

While the anti-establishment campaigns of Donald Trump and Bernie Sanders divide voters, an even stranger revolt is happening on the electric grid. On one side, the Christian right, tea party activists, and Barry Goldwater, Jr. are joining forces with greens, arguing for capitalism. On the other, pro-capitalist, anti-tax groups are allying with government-sanctioned monopolies and some minority advocates, defending economic equity.

Net energy metering (NEM) is at the heart of this debate. The divisive question, as GTM readers well know, is: What should be the price of excess energy that solar customers send to the grid? The real question, however, is more fundamental: What is the right market structure for the electric power industry?

Let’s put this in perspective, using gasoline as an example. Currently, market forces largely dictate prices at the pump. But suppose instead we have a single gasoline supplier — which also owns all the means of delivering gasoline — and government-set retail prices — which don’t reflect gasoline’s relative scarcity at different times or locations. This is analogous to how our electricity “market” works.

Now imagine a new technology that allows individual consumers to produce their own gasoline. Say that an individual producer wants to share his gasoline with his neighbor. What price should he get for it?

We can probably argue over this question forever. But why debate how government should fairly set prices, when we should be re-examining the entire regulatory model? Especially when that model seems increasingly outdated and unsustainable?

Demand growth for the electric power industry has been declining for decades, but investment costs for the aging grid are escalating. While infrastructure utilization ratesare near all-time lows, reliability — already low among developed nations (see table below) — may be getting worse. Outages cost the U.S. anywhere from $18 billion to$150 billion annually. Meanwhile, a recent study by the Lawrence Berkeley National Laboratory found no correlation with utility investments and improvements in reliability.

FIGURE: Grid Reliability by Country Using SAIDI and SAIFI Metrics

Source: Galvin Electricity Initiative report; SAIDI is the average outage duration (in minutes) per customer and SAIFI is the average number of interruptions per customer

NEM did not create these concerns: Rooftop solar’s penetration is less than 1 percent of all U.S. households, and 90 percent of it came on-line after 2010.

To criticize NEM for creating inefficiencies would be like blaming a scale for making a person overweight. NEM has helped reveal long-term deficiencies in the regulatory model: poor pricing mechanisms, incentives to overspend, and rampant cross-subsidization, to name a few. Some states, including Hawaii, Minnesota and New York, are looking to revamp their utility models, thanks in part to NEM discussions.

Furthermore, NEM customers are pioneering a more efficient grid. Rooftop solar heralds a series of customer-sited technologies — collectively known as distributed energy resources (DERs) — that promise to make the grid more robust, cleaner and less costly. DERs, including smart thermostats, electric vehicles, energy storage, and automated appliances, can optimize consumption and supply depending on both the needs of users and the grid. They can create new business opportunities, like the peer-to-peer sharing models of Uber and Airbnb. They can also minimize the role of the public sector in the power industry. When customers invest in DERs, they use private capital, not utility capital that the public — that is, ratepayers — must ultimately repay.

Encouraging customer investments in DERs requires new pricing mechanisms to compensate DERs for the benefits they provide. NEM is simply a first-generation mechanism. It is blunt and imprecise, but we should expect that for any first-generation product — especially when it operates in a “market” hitherto controlled by governments and monopolies.

This is why those who value free markets, limited government and personal accountability should thank NEM. It’s not only exposing problems in the monopoly model, but it is also blazing a path for market solutions. It’s enabling customer choice and competition to keep suppliers accountable. It is encouraging private citizens to make investments that can benefit the public. Rooftop solar is also spawning other innovations: for instance, Sonnen, a Germany battery company, has created a trading platform for solar energy. By determining retail prices through markets rather than regulatory fiat, such a marketplace can resolve the dispute over NEM — and perhaps government price-setting altogether.

Herein lies the rub for many utilities and the policymakers who govern them. The century-old monopoly model will naturally resist murmurs of a free market or entry by new suppliers, especially when those suppliers are currently captive customers and constituents.

Like many voters, electric customers are becoming impatient with the business-as-usual approach. Whether you support solar or think it should be valued less is not the issue. The real question is how we can make the electric power industry more responsive and accountable to customers. We should all thank NEM for prompting this long-overdue discussion.