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Electric Utilities Must Create Equitable Rate Structures to Fit a 21st-Century Grid

Fights over payments and charges for rooftop solar are getting a lot of attention, but the underlying issue is deeper and broader.

It shouldn't come as a surprise that "net metering" has become such a contentious issue, especially in states like Arizona and Nevada. Where there's lots of sunshine and growing numbers of solar-power installations at homes and businesses, whose owners expect to be compensated for the excess electricity they generate, huge potential exists to disrupt the income stream of electric utilities.

The utilities are by no means awaiting that disruption placidly. Under lobbying pressure, Nevada has approved new charges for net metering (also called "net energy metering," or NEM), and Arizona is looking at completely eliminating its net metering program. Whether sunny or cloudy, states are the battlegrounds because there is no overarching federal net metering policy. Forty-six of the 50 states have some form of net metering in place with varying types of regulation.

All of this is unfolding against the backdrop of utilities' traditional business model, under which they generated electricity and built a hub-and-spoke transmission system -- the grid -- to distribute power to customers. Overseen by public utility commissions (approximately 70 percent of U.S. customers are served by an investor-owned utility) these monopolies are paid, under a regulated rate structure, an agreed-upon amount to ensure a safe, affordable and dependable supply of electricity. But traditional rate designs, relatively stable for many decades, are getting upended by technology that enables distributed generation, time-of-use pricing, and localized control of demand.

Simply put, utilities no longer have sole control of generation. Rooftop-solar owners produce their own power (acting as their own "nano-utilities") and are examples of "distributed energy resources" (DERs). While net metering allows them to be compensated for energy they supply to the utility, they still need the grid when the sun's not shining. The utilities say that solar owners are getting too much credit for what they produce and aren't paying their fair share of the cost to maintain the grid and other services.

While solar may get the headlines, the underlying issue goes much deeper and broader. The bigger controversy centers on creating equitable rate structures to fit a 21st-century grid. Seen in this perspective, net metering is merely a lightning-rod issue that highlights the challenge electric utilities are facing to shed dated business models based on a one-way flow of electricity from power plant to consumer.

The pressure on utilities is just going to continue. Navigant Consulting expects DER capacity to grow almost three times faster than new central-station generation over the next five years. Total DER capacity in the United States is expected to more than double by 2023. In a white paper, Navigant describes how "profound technology changes across the electrical grid are ushering in an era of decentralized electrons … that challenge the traditional hub-and-spoke grid architecture."

Not unlike the changes the telephone phone industry went through with the advent of cellular service and mobile devices, this trend means that electric utilities are having to move away from simple volumetric pricing. A paper from the Rocky Mountain Institute describes what rate designs may look like under a model where there is a two-way exchange of value and services between customers and utilities. This entails shifting from fully bundled pricing (where the customer is changed based on the volume and cost of electricity) to rate structures that separate utility costs for energy, maintenance of sufficient generating capacity to meet peak power demands, and the grid itself.

Right now, however, there's little movement toward such a modernized rate structure. Instead, utilities across the country are engaged in a rearguard action to eliminate net metering, slow the growth of rooftop solar, increase fixed charges, or include mandatory demand charges.

The solar industry and its supporters are fighting back. But, getting above the fray, the appropriate target is to create a rate structure that provides fair compensation to solar customers. It should encourage customers to generate their own power and allow them to pay only for grid services they need. Pricing should also support the growing use of home automation technology that allows customers to better control their own electricity demand.

While all parties stand to benefit from a good rate structure, it's absolutely crucial to entrepreneurs like Elon Musk. With the planned merger of SolarCity with Tesla, Musk's electric carmaker, he's taking a big step toward a vertical integration of home and transportation energy systems. His vision for consumers is to provide them with rooftop-generated electrons to power their homes and cars, battery systems to make their houses less grid-dependent, and electric vehicles to take them around town and country.

With this in mind, the utilities need to understand one point really well: Whether Musk and Tesla succeed or not, the energy genie is out of the bottle. But it won't be the utilities that will be getting three wishes, despite some early victories in staving off innovation and disruption. As the energy future unfolds, they will find that they will have to work with their customers, the solar industry and regulators to develop a stable, well designed and equitable rate structure. Their long-term success depends on it. Genies always win.

This column was originally published by Governing.

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