On December 21, 2015, the Nevada Public Utility Commission issued an order reducing the rate at which NV Energy is obliged to purchase electricity generated by net metering customers. The ensuing discussion of this order has been characterized (with a few exceptions) by a great deal more rhetoric than analysis. Now, normally, that is my cup of tea; writing an impassioned argument on a controversial issue is a lot of fun. However, the issues at stake in setting energy tariffs are complex and technical. I think it is difficult for honest and thoughtful people to take any absolute stands on the details of utility regulation. So I thought it might be a better use of time to try to at least outline the issues involved than to stake out my position.
Background:
First, a couple of vocabulary words: in the context of utility regulation, a “tariff” is the set of rules that the utility and its ratepayers are required to abide by. These rules govern things like the rates charged for electricity, the manner in which utilities need to provide service, public safety requirements, etc. “Net metering” refers to the practice through which an electrical utility’s customers are able to generate their own electricity through an alternative energy like solar or wind, and sell that power back to the power company. Customers who net meter are typically allowed to sell back only as much electricity as they use. In other words, if a you have solar panels producing electricity during the day while you are off at work, you can sell that enough of that unused energy to the utility to reduce your bill to zero, but the utility won’t be sending you a check.
Nevada started allowing net metering in 1997. Up until January 2016, NV energy was obliged to buy power from a net metering system at “retail” rates of approximately $.10/ Kilowatt Hour (“KwH”). With the PUC’s recent order, as of January 1, 2016, the rate NV Energy is required to pay for electricity purchased from net metering customers will start going down until, in a few years, it reaches a rate of about $.03/ KwH. In addition, NV Energy will be raising the monthly fees it charges net metering customers for the privilege of having a power plant on their roofs.
Net metering customers who installed rooftop residential systems under the previous net metering rates assert that the PUC duped them into believing those rates would continue indefinitely. Large residential solar companies like Solarcity and Sunrun have indicated that this decision will force them to cease operations in Nevada and lay off hundreds of employees. A class action lawsuit has been filed against Nevada Energy alleging unfair trade practices, price fixing, and all manner of nefarious conduct.
A lot of the discussion of these issues, from all sides, seems to miss some crucial points.
Net Metering Has A Built In Structural Problem. A lot of things go into the cost of generating a KwH of electricity. For instance, the utility needs to pay for (1) maintaining power lines, and power plants, (2) ensuring that it has enough generation capacity to meet demand, (3) pay the salaries and benefits for thousands of employees, and (4) pay for the fuel used by its power plants. The PUC sets rates that allow NV Energy to charge enough for electricity to pay for all those things, as well as provide a reasonable return on investment to its shareholders. The utility business model depends on the notion that it can spread these costs over all ratepayers. If the utility is buying electricity from a net metering customer at the same rate the utility charges for electricity, the the net metering customer gets the benefit of the vast utility infrastructure without paying for that benefit; the cost of maintaining that infrastructure is born by all non-net metering ratepayers. In that way, net metering customers are subsidized by a utility’s other ratepayers.
There are currently only a few thousand net metering customers out of hundreds of thousand of ratepayers, so the cost of this subsidy to ratepayers is fairly insignificant. As such, this structural problem probably remains theoretical at this point. However, as the percentage of net metering customers grows, so does the size of the subsidy. If, hypothetically, 50% of energy customers in Nevada were able to zero out their power bill, then the cost of maintaining the electrical infrastructure would need to be entirely borne by the remaining 50% of ratepayers. In other words, if the percentage of net metering customers is allowed to grow without limitation, eventually it becomes a problem.
The Legislature told the PUC that Ratepayers Should Not Have to Pay for Net Metering. Prior to 2015, the
legislature had addressed the problem posed by the potential success of the net metering program by capping the total amount of electricity that could be net metered at approximately 235 megawatts. Between 2008 and 2014, the solar industry everywhere exploded as the cost of solar panels dropped and state and local tax incentives reduced the price of installation even further. In 2014 and 2015, large rooftop solar companies like Sunrun and Solarcity had begun installing systems in Nevada. Unfortunately, it was becoming clear that the net metering cap was close to being reached.
The waning days of the 2015 legislature were, by all accounts, a complete shitshow. While everyone's attention was focused on the governor's tax plan and on whatever Michele Fiore was up to, solar advocates were making an ill-fated attempt to have the cap on net metering raised. When it became apparent that the cap was not going to be raised, the rooftop solar industry made a tactical retreat and agreed to support a measure that would kick the decision on net metering to the PUC.
This compromise was embodied in SB 374, which provides, in relevant part at section 2.3(2)(d), that the PUC “May authorize a utility to establish just and reasonable rates and charges to avoid, reduce or eliminate an unreasonable shifting of costs from customer-generators to other customers of the utility.” Section 2.3(2)(e) further provides that the PUC “Shall not approve a tariff… or authorize any rates or charges for net metering that unreasonably shift costs from customer-generators to other customers of the utility.”
So, this statute authorizes the PUC to set “just and reasonable rates” for net metering, but requires that those rates may not “unreasonably” shift costs from net metering customers to the other ratepayers. It seems, from the PUC’s recent decision on net metering, that the PUC read that language to mean that any subsidy on the part of ratepayers was unreasonable and should steadily be eliminated.
The PUC may or may not be correct in interpreting what the legislature meant by “unreasonably shifting costs from customer-generators to other customers of the utility.” It is possible that PUC is justified in thinking that the legislature told it to make sure that ratepayers were not subsidizing net metering customers; that is something that a reviewing court will probably need to sort out. Could the PUC have also justifiably come to a different conclusion? Maybe. I will explain how in a couple paragraphs. But it is at least arguable that the PUC’s decision here is in line with the directions they received from the legislature.
It seems unfair for solar advocates to claim that the PUC acted entirely at the behest of NV Energy in arriving at this decision. The legislature, at the very least, told the PUC to pay close attention to the impact that the net metering program was having on other ratepayers. The renewable energy community should probably be directing their ire, and their lobbying efforts, at the legislature rather than at the PUC.
Everyone Subsidizes Carbon Based Energy. While ratepayers subsidize net metering customers, at least to some extent, those same ratepayers also enjoy some hidden subsidies that solar generators do not pay. There are a lot of subsidies built into energy that is generated by burning hydrocarbons. Along with direct and indirect subsidies provided to fossil fuel producers, there is a substantial (but difficult to quantify) environmental cost built into generating electricity by burning fossil fuels. The environmental costs of producing and consuming fossil fuels is generally not reflected in the price paid for those fuels. NV Energy’s ratepayers don’t pay for greenhouse gasses and other pollutants released in the atmosphere. Instead, every last one of us, as well as our children, will bear the cost of the environmental damage caused by traditional energy production. The fact that it is difficult to quantify this cost doesn’t make it any less real. Developing the regulatory framework for accounting for this cost is one of the most urgent and difficult challenges that has faced policy makers and will continue to do so. Despite a great deal of imagination and vigor that a number of policy makers and academics have applied to the problem, state and federal legislative bodies in the United States have largely failed to adequately address this question.
Utility Regulation Is Hard. While I have some interest in energy regulation, as well as a bias toward policies that encourage solar production, I do not have any particular expertise in the area. I have thought about these issues a fair amount, and I have read many different perspectives. The more I read, the more I am convinced that these issues need to be thought through carefully, and by people with the patience and technical expertise to analyze the issues in the light of data. While I provide some thoughts here about the legislative framework in which the PUC made its decision, I very specifically do not offer any opinion as to whether the evidence supports the technical and factual findings that the PUC made.
However, this is my blog, so I’m not going to let my own limitations stop me from offering a couple opinions, ill-informed though they may be:
First, I submit that the PUC could have concluded that, in light of the hidden subsidies that inure to the benefit of ratepayers purchasing carbon based energy, it would not be “unreasonable” under SB 374 to have ratepayers bear some cost of encouraging rooftop solar production through the net metering program. It make take a little more imagination than the PUC is accustomed to using to come to that conclusion, but I think it would be at least defensible for the PUC to determine that it has the discretion to allow net metering customers a reasonable subsidy.
Second, while I think there may be room in the existing legislative framework to provide a tariff that is more favorable to net metering, the PUC has just demonstrated that it does not share my view. As set forth above, even if I don't like the PUC's conclusion, it is arguable that the PUC did exactly what the legislature told it to do, or at least acted within its discretion in interpreting the statute. A reviewing court will need to decide whether the PUC “abused its discretion” in setting net metering rates, and whether these rates are “arbitrary and capricious.”
Finally, I suspect that the clearest pathway to restoring net metering rates to a level that will support development of rooftop solar leads through the Nevada Legislature, which will meet again in just over one year. Solar advocates — from grassroots supporters to industry lobbyists — need to prepare and execute a strategy for the 2017 session.
I don’t know what the specific goals and parameters of a pro-solar legislative strategy ought to be. However, I am fairly confident that participation in the November 8, 2016 election is the best shot most of us will have at influencing the shape of Nevada’s policies on alternative energy for the next few years. I am also pretty confident that the solar industry needs to be a good deal more prepared for the 2017 legislative session than it was in 2015.
First, a couple of vocabulary words: in the context of utility regulation, a “tariff” is the set of rules that the utility and its ratepayers are required to abide by. These rules govern things like the rates charged for electricity, the manner in which utilities need to provide service, public safety requirements, etc. “Net metering” refers to the practice through which an electrical utility’s customers are able to generate their own electricity through an alternative energy like solar or wind, and sell that power back to the power company. Customers who net meter are typically allowed to sell back only as much electricity as they use. In other words, if a you have solar panels producing electricity during the day while you are off at work, you can sell that enough of that unused energy to the utility to reduce your bill to zero, but the utility won’t be sending you a check.
Nevada started allowing net metering in 1997. Up until January 2016, NV energy was obliged to buy power from a net metering system at “retail” rates of approximately $.10/ Kilowatt Hour (“KwH”). With the PUC’s recent order, as of January 1, 2016, the rate NV Energy is required to pay for electricity purchased from net metering customers will start going down until, in a few years, it reaches a rate of about $.03/ KwH. In addition, NV Energy will be raising the monthly fees it charges net metering customers for the privilege of having a power plant on their roofs.
Net metering customers who installed rooftop residential systems under the previous net metering rates assert that the PUC duped them into believing those rates would continue indefinitely. Large residential solar companies like Solarcity and Sunrun have indicated that this decision will force them to cease operations in Nevada and lay off hundreds of employees. A class action lawsuit has been filed against Nevada Energy alleging unfair trade practices, price fixing, and all manner of nefarious conduct.
A lot of the discussion of these issues, from all sides, seems to miss some crucial points.
Net Metering Has A Built In Structural Problem. A lot of things go into the cost of generating a KwH of electricity. For instance, the utility needs to pay for (1) maintaining power lines, and power plants, (2) ensuring that it has enough generation capacity to meet demand, (3) pay the salaries and benefits for thousands of employees, and (4) pay for the fuel used by its power plants. The PUC sets rates that allow NV Energy to charge enough for electricity to pay for all those things, as well as provide a reasonable return on investment to its shareholders. The utility business model depends on the notion that it can spread these costs over all ratepayers. If the utility is buying electricity from a net metering customer at the same rate the utility charges for electricity, the the net metering customer gets the benefit of the vast utility infrastructure without paying for that benefit; the cost of maintaining that infrastructure is born by all non-net metering ratepayers. In that way, net metering customers are subsidized by a utility’s other ratepayers.
There are currently only a few thousand net metering customers out of hundreds of thousand of ratepayers, so the cost of this subsidy to ratepayers is fairly insignificant. As such, this structural problem probably remains theoretical at this point. However, as the percentage of net metering customers grows, so does the size of the subsidy. If, hypothetically, 50% of energy customers in Nevada were able to zero out their power bill, then the cost of maintaining the electrical infrastructure would need to be entirely borne by the remaining 50% of ratepayers. In other words, if the percentage of net metering customers is allowed to grow without limitation, eventually it becomes a problem.
The Legislature told the PUC that Ratepayers Should Not Have to Pay for Net Metering. Prior to 2015, the
legislature had addressed the problem posed by the potential success of the net metering program by capping the total amount of electricity that could be net metered at approximately 235 megawatts. Between 2008 and 2014, the solar industry everywhere exploded as the cost of solar panels dropped and state and local tax incentives reduced the price of installation even further. In 2014 and 2015, large rooftop solar companies like Sunrun and Solarcity had begun installing systems in Nevada. Unfortunately, it was becoming clear that the net metering cap was close to being reached.
The waning days of the 2015 legislature were, by all accounts, a complete shitshow. While everyone's attention was focused on the governor's tax plan and on whatever Michele Fiore was up to, solar advocates were making an ill-fated attempt to have the cap on net metering raised. When it became apparent that the cap was not going to be raised, the rooftop solar industry made a tactical retreat and agreed to support a measure that would kick the decision on net metering to the PUC.
This compromise was embodied in SB 374, which provides, in relevant part at section 2.3(2)(d), that the PUC “May authorize a utility to establish just and reasonable rates and charges to avoid, reduce or eliminate an unreasonable shifting of costs from customer-generators to other customers of the utility.” Section 2.3(2)(e) further provides that the PUC “Shall not approve a tariff… or authorize any rates or charges for net metering that unreasonably shift costs from customer-generators to other customers of the utility.”
So, this statute authorizes the PUC to set “just and reasonable rates” for net metering, but requires that those rates may not “unreasonably” shift costs from net metering customers to the other ratepayers. It seems, from the PUC’s recent decision on net metering, that the PUC read that language to mean that any subsidy on the part of ratepayers was unreasonable and should steadily be eliminated.
The PUC may or may not be correct in interpreting what the legislature meant by “unreasonably shifting costs from customer-generators to other customers of the utility.” It is possible that PUC is justified in thinking that the legislature told it to make sure that ratepayers were not subsidizing net metering customers; that is something that a reviewing court will probably need to sort out. Could the PUC have also justifiably come to a different conclusion? Maybe. I will explain how in a couple paragraphs. But it is at least arguable that the PUC’s decision here is in line with the directions they received from the legislature.
It seems unfair for solar advocates to claim that the PUC acted entirely at the behest of NV Energy in arriving at this decision. The legislature, at the very least, told the PUC to pay close attention to the impact that the net metering program was having on other ratepayers. The renewable energy community should probably be directing their ire, and their lobbying efforts, at the legislature rather than at the PUC.
Everyone Subsidizes Carbon Based Energy. While ratepayers subsidize net metering customers, at least to some extent, those same ratepayers also enjoy some hidden subsidies that solar generators do not pay. There are a lot of subsidies built into energy that is generated by burning hydrocarbons. Along with direct and indirect subsidies provided to fossil fuel producers, there is a substantial (but difficult to quantify) environmental cost built into generating electricity by burning fossil fuels. The environmental costs of producing and consuming fossil fuels is generally not reflected in the price paid for those fuels. NV Energy’s ratepayers don’t pay for greenhouse gasses and other pollutants released in the atmosphere. Instead, every last one of us, as well as our children, will bear the cost of the environmental damage caused by traditional energy production. The fact that it is difficult to quantify this cost doesn’t make it any less real. Developing the regulatory framework for accounting for this cost is one of the most urgent and difficult challenges that has faced policy makers and will continue to do so. Despite a great deal of imagination and vigor that a number of policy makers and academics have applied to the problem, state and federal legislative bodies in the United States have largely failed to adequately address this question.
Utility Regulation Is Hard. While I have some interest in energy regulation, as well as a bias toward policies that encourage solar production, I do not have any particular expertise in the area. I have thought about these issues a fair amount, and I have read many different perspectives. The more I read, the more I am convinced that these issues need to be thought through carefully, and by people with the patience and technical expertise to analyze the issues in the light of data. While I provide some thoughts here about the legislative framework in which the PUC made its decision, I very specifically do not offer any opinion as to whether the evidence supports the technical and factual findings that the PUC made.
However, this is my blog, so I’m not going to let my own limitations stop me from offering a couple opinions, ill-informed though they may be:
First, I submit that the PUC could have concluded that, in light of the hidden subsidies that inure to the benefit of ratepayers purchasing carbon based energy, it would not be “unreasonable” under SB 374 to have ratepayers bear some cost of encouraging rooftop solar production through the net metering program. It make take a little more imagination than the PUC is accustomed to using to come to that conclusion, but I think it would be at least defensible for the PUC to determine that it has the discretion to allow net metering customers a reasonable subsidy.
Second, while I think there may be room in the existing legislative framework to provide a tariff that is more favorable to net metering, the PUC has just demonstrated that it does not share my view. As set forth above, even if I don't like the PUC's conclusion, it is arguable that the PUC did exactly what the legislature told it to do, or at least acted within its discretion in interpreting the statute. A reviewing court will need to decide whether the PUC “abused its discretion” in setting net metering rates, and whether these rates are “arbitrary and capricious.”
Finally, I suspect that the clearest pathway to restoring net metering rates to a level that will support development of rooftop solar leads through the Nevada Legislature, which will meet again in just over one year. Solar advocates — from grassroots supporters to industry lobbyists — need to prepare and execute a strategy for the 2017 session.
I don’t know what the specific goals and parameters of a pro-solar legislative strategy ought to be. However, I am fairly confident that participation in the November 8, 2016 election is the best shot most of us will have at influencing the shape of Nevada’s policies on alternative energy for the next few years. I am also pretty confident that the solar industry needs to be a good deal more prepared for the 2017 legislative session than it was in 2015.
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