Diminishing returns: Why an upcoming Utah rate case may signal the end of net metering

Source: By Emma Penrod, Utility Dive • Posted: Tuesday, April 21, 2020

A move to end the compensation approach for rooftop solar owners has sent sales plummeting. Many other states are also looking at successor tariffs.

Net metering is not the future of solar, Bill Ellard says.

An economist who lives just outside Zion National Park in Southern Utah, Ellard installed his own rooftop array in 2013 after several years of watching Utah’s air quality deteriorate with growing concern. But while he remains a staunch advocate for rooftop solar and clean energy, he and other experts agree net metering is not the way these things will be accomplished.

In the mid-2010s, despite its notoriously conservative politics, Utah seemed to embrace its identity as a sort of promised land for the solar industry, with installations tripling one year to the next until thousands of residents purchased rooftop arrays every week. Businesses sprang up to meet the demand, motivated not only by the opportunity to earn a fortune, but to clean up the environment and promote self-reliance to boot.

That rapid growth led to calls from both state energy officials, and Utah’s electric utility monopoly, to end net metering and government-backed subsidies for the booming rooftop solar industry. Solar company officials believed the then-unrelenting growth trajectory was proof their industry was sufficiently established to stand on its own two feet. So they sat down with state and utility leaders and hammered out an agreement to replace net metering with a yet-to-be finalized program.

Where net metering required electric utilities to reimburse rooftop solar customers for excess power at full retail rates, the new program would allow the utility to cap reimbursement tariffs at a lower rate that more closely reflects wholesale power costs. State regulators initially set a temporary tariff at $.092/kWh pending a series of rate cases scheduled to take place this fall.

PacifiCorp — which does business under the Rocky Mountain Power name in Utah, Idaho and Wyoming — has proposed discussing a $.015/kWh tariff later this year as part of a rate case planned when state regulators agreed to end net metering in 2017. Per that agreement, the new tariff — which Rocky Mountain Power emphasizes is paid as a credit against future electrical bills — would take effect in 2021. The new rate would only apply to customers who install rooftop systems after the end of this year.

News of the agreement sent solar sales in Utah tumbling, but as the rate hearings approach, no one is clambering to bring net metering back. This is because net metering, Ellard says, was structurally unstable from the start.

Long-term success will require both solar energy providers and Rocky Mountain Power to innovate and find new models for funding clean energy. The solar industry, Ellard suspects, will move toward increased deployment of home battery storage and self-sufficiency, eventually reversing the industry’s current downward trend in Utah. The utility, meanwhile, has begun to offer new options for crowdsourcing clean energy projects at the community level.

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And while Utah is among the first states in the nation to end net metering and replace it with a lower successor tariff, according to the North Carolina Clean Energy Technology Center, it won’t be the last. Another five states are already in the process of transitioning from net metering, and at least 25 states are considering similar actions, according to Autumn Proudlove, the North Carolina center’s senior manager of policy research.

Balancing the net metering budget

Regionally, Utah remains a strong player in the rooftop solar market. But sales are currently a fraction of what installers enjoyed a few years ago.

Spencer Hall, a Rocky Mountain Power spokesperson who works out of his division’s Salt Lake City headquarters, said the company logged 383 new residential generators in Utah this past November, compared to just 54 in Oregon.

“So Utah is still far ahead of Oregon on solar,” he said.

But the change in pace in Utah following the end of net metering was stark. Installations grew rapidly in the three-state Rocky Mountain Service area prior to 2017 — 1,380 new rooftop solar connections in 2014, then 3,151 new customers in 2015. Growth peaked at more than 10,000 connections per year in 2016 and 2017, with the vast majority located in Utah. But new customer sign-ups fell to 6,351 in 2018 and 4,968 in 2019.

Though some in Utah’s solar industry initially thought the decrease in sales would prompt Rocky Mountain Power to leave the $.09/kWh rate as-is this fall, Ellard, an economic consultant who advises utility companies, wasn’t surprised when Rocky Mountain Power proposed an even lower rate. Other states and utilities have come up with similar numbers, putting the reimbursement rate in the 1.5-2 cents per kWh range.

“Eventually, solar advocates have agreed that at a certain market penetration rate, it makes sense to look at the numbers and come up with a successor tariff rate.”

Cutting the export rate is necessary, according to the utility company, because the current rate is forcing Rocky Mountain Power to pay more for solar power than necessary, thereby increasing costs for customers who do not have rooftop solar panels. In 2019, the company credited customers paying the $.09/kWh rate a total of $2.3 million for surplus power; they argue they could have purchased an equivalent amount of power for less than $1 million on the open market.

Rocky Mountain Power, Ellard says, isn’t going to want to pay more for solar power from rooftop providers when it can buy the same thing for less elsewhere. This isn’t because the company is anti-solar, he says, but it does have reasons to dislike rooftop solar.

For utilities, the name of the game is what Ellard calls “load defection.” If too many customers are no longer dependent on the utility for power, the utility loses money. At first, when the number of people with rooftop solar was small, utilities didn’t need to worry about revenue lost to rooftop solar, and net metering — trading electricity at full retail rates — was a nonissue.

But as solar began to take off, a trade that once resulted in negligible losses became a growing pain point.

This is particularly true in states like Utah, Ellard said, where electricity is billed in graduated “blocks,” becoming more expensive per unit as a customer’s use increases. These rate structures are usually designed to incentivize conservation, but it also meant that rooftop solar cost the utility even more than the one-to-one trade of net metering suggests.

Setting aside the debates about whether net metering actually cost the utility money, Ellard believes net metering was inherently sustainable because utilities were never going to stand for paying above-market rates for solar power. Once the number of rooftop users reached a certain critical mass, Ellard said it was inevitable that Rocky Mountain Power would move to eliminate net metering in favor of successor tariffs designed to reflect the true cost of rooftop solar to utilities. This, he said, is already playing out across the nation.

“I think we’re slowly moving in that direction,” Proudlove concurred. “Eventually, solar advocates have agreed that at a certain market penetration rate, it makes sense to look at the numbers and come up with a successor tariff rate.”

Unintended consequences for customers, installers

While Utah’s solar industry initially supported the transition from net metering, some in the industry feel less favorably about that decision today — especially in light of Rocky Mountain Power’s proposed tariff rate.

Utah-based Vivint, one of the state’s largest solar installers, has denounced the utility’s proposal as greatly undervaluing distributed solar power. The proposal would not only harm Utah customers, according to a company statement, but also has the potential to “shutter” Utah’s solar industry.

Vivint argues customers invest in rooftop solar to lower their power bills, but in exchange they decrease the utility’s grid maintenance costs. Cutting the export tariff another 80%, as Rocky Mountain Power has proposed, would damage an industry that is already struggling to make ends meet under the current agreement, according to Wyatt Semanek, the company’s public relations manager.

“Like the rest of the industry, we have seen less business in Utah since the settlement went into effect,” Semanek said. “With positive solar legislation passing in neighboring states, we shifted some of our resources to Nevada and expanded in Colorado to diversify our footprint in the Mountain West.”

But that option isn’t available to everyone, Evans said. He estimates that Utah has lost at least 500 solar jobs over the course of the last year and a half, and several companies have moved their operations out of state, or closed entirely.

While rooftop solar sales have taken a dive in recent years, Hall, the Rocky Mountain Power spokesman, points out that current sales rates are still twice the number of sales just five years ago.

Perhaps, he says, the loss of net metering isn’t responsible for slowing the market after all — at least not entirely. Rather, he suggests the market could simply be normalizing after a period of unsustainable expansion.

“I think there was a saturation point, where the folks who wanted it pulled the trigger, and then I think there were diminishing opportunities after that,” he said.

However, no one Utility Dive spoke to outside Rocky Mountain Power agrees with this point of view. While talk of the settlement likely spurred some fence-sitters to invest in rooftop arrays in 2016 and 2017, Ryan Evans, president of the Utah Solar Energy Association, believes the way the settlement was structured has resulted in losses beyond the inevitable stabilization of the market.

“What the clean energy advocates are looking at is a non-interconnected world, where each home would generate its own power … We’ve just found that between Mother Nature and changing technology and maintenance and investment, that people get incredible value by interconnecting.”

The current arrangement not only set in place a “temporary” tariff rate that was destined to change, but also made it harder for rooftop solar customers to understand their power bills, Evans said. He believes the uncertainty and increased complexity has made solar sales more difficult.

Proudlove agreed that “uncertainty can spook the market.” In Hawaii, she said she’s heard reports of solar installers who found that customers who felt confused by rate changes were less willing to make a decision about buying.

She suspects the issue is more a question of rate complexity — not simply an issue with a decreased payment for electricity.

“That’s something that needs to be considered,” she said. “There’s a tension between a more complex rate structure that may be accurate, and something that is more simple. With something too complex, customers may just say forget it.”

And that balance does need to be struck, Proudlove said, because net metering is likely on its way out nation-wide.

Toward a more balanced solar future

While Evans and the Utah Solar Energy Association gear up to battle for simple, longer-term rate agreements this fall, Ellard and Hall believe there are factors beyond the new rate structure itself that have contributed to the decline of some solar company revenues.

Hall believes that the creation of a new community solar program, which allows Utahns to vote at the community level to participate in a 100% clean energy offering provided by Rocky Mountain Power, has created another cost-effective solution for residents looking for a clean energy option — one that might be more affordable for consumers than rooftop solar. Under this and other programs, Rocky Mountain Power plans to install 7,000 MW of renewable energy by 2025, compared to 309 MW installed by residential customers by the end of 2019.

“It’s been shown to be clear, that at a utility scale, you get economies of scale that provide huge value for customers,” Hall says. “What the clean energy advocates are looking at is a non-interconnected world, where each home would generate its own power. That’s a dream they can still pursue. Everyone is still totally welcome to get off the grid and generate their own power. We’ve just found that between Mother Nature and changing technology and maintenance and investment, that people get incredible value by interconnecting.”

Ellard agrees that the availability of easy, low-cost clean energy solutions may dissuade some residents from installing their own solar panels. In the future, he says, solar installation companies will have to shift away from the renewables argument and put more emphasis on self-sufficiency to win over customers.

Market timing could also explain why the state’s solar sales have dropped, Ellard says. Though considered an ideal state for solar development, Utah residents still enjoy relatively low electricity rates compared to states like California, where frequent power outages have prompted some residents to begin investing in newly affordable technologies that prevent the power generated by rooftop panels from flowing back onto the grid. This “curtailment control” could enable customers with battery storage to power their own homes in the event of a blackout.

If Utah’s electricity rates were as high — and power as unreliable — as California’s, Ellard thinks the state’s solar growth would have continued. Customers would have simply opted to abandon the grid partially or entirely in revolt. But because they’re not quite so high, the economics don’t yet make sense, resulting in the slowdown the state is currently experiencing.

But at some point, Ellard said, prices will catch up again — and so will Utah’s solar growth.