NEM policies have existed for almost 20 years, though for most of that time, few customers took advantage of it. Over the last few years, however, the plummeting cost of PV equipment and low up-front costs due to new business models, such as solar leasing, have made this a cost-effective decision for many consumers. NEM is especially effective in areas where the electric rates are high and the sunshine is plentiful.
 
The specifics of NEM tariffs and other incentive structures can vary significantly by state. For instance, in California, incentives are structured so that over the course of the year, the PV generation balances out consumption and, therefore, the bill can be zero. Any excess generation can be credited toward the following year’s bills or the customer can receive payment at the wholesale market rate. Systems up to 1 megawatt in size are allowed, and total NEM capacity is limited to 5 percent of utility peak load.
 
This differs from other states (see Figure 1). For instance, Kansas only allows residential systems up to 25 kilowatts (kW) and non-residential systems only up to 200 kW under its NEM tariff, and it limits total NEM capacity to 1 percent of utility peak load. In New York, system capacity limits differ by renewable technology, as does compensation for net excess generation. And in Ohio, there is no specific capacity limit, but excess generation in each month is credited at the wholesale energy price rather than the customer retail rate. 

There is an increasing concern that current rate structures do not allow utilities to recover the costs needed to serve NEM customers, and these costs are being shifted to non-NEM customers. The effect, then, is an unfair cross-subsidy from non-NEM to NEM customers.

Solar proponents advocate that NEM – in addition to distributed energy generation the utilities gain –  offers a variety of benefits to the utility system that compensate the company for any lost revenue from the reduced customer energy bills. The benefits include lower fossil-fuel generation, less greenhouse gas emissions and reduced requirements for the utility transmission and distribution system.
 
On the other hand, some market participants, including utilities, are concerned that NEM customers are not paying their fair share of utility system operating costs when they offset essentially all of their electric bills. They contend that NEM customers are not paying for the utility services they still receive when they are not generating electricity, such as reliability services, ancillary services, and transmission and distribution operations and maintenance. In addition, there are capacity costs, administrative costs and charges for the energy efficiency programs that are paid for through each customer’s bill.
 
Furthermore, NEM may actually increase utility costs in certain cases, utilities say. For instance, the variability of solar output could cause voltage fluctuations that require distribution equipment upgrades.

California is at the forefront of addressing the NEM debate, and its policies are being closely watched by the rest of the industry in the United States and beyond. Black & Veatch is leading a study of a California utility’s NEM program, examining the “cost of service” for NEM customers. The objective is to identify all of the services that the utility provides to the net metered customer, identify all of the services that the NEM customer provides to the utility (which take the form of avoided utility costs), and then quantify the costs associated with those services.
 
Black & Veatch identified 13 distinct services that the utility provides to the NEM customer in California, and also identified which costs were avoided by NEM customers.

The results of Black & Veatch’s study in California are still pending, but the bottom line is that while NEM customers should get full credit for the energy they generate and the benefits they provide to the utility, there are certain costs which PV generation does not avoid.

Assuming that there is indeed a structural problem with NEM tariffs, there are a variety of other ways to define the relationship between the customer-generator and the utility. Currently, two approaches stand out as the most likely options:

1. Value of Solar Tariff

As one alternative to NEM, a few utilities have adopted a hybrid billing/compensation plan. For instance, a municipal utility in Texas has dubbed its scheme the “value of solar” tariff. Under this model, renewable generator customers are billed in the same manner as traditional customers. However, all renewable electricity these customers produce is at a rate based on the utility’s “avoided energy cost of generation.” The goal is to ensure that customer generation is compensated based on the actual “value” it provides to the grid, and the rate is adjusted annually to keep pace with fluctuating utility costs. However, this approach has generated its own controversy, as payments are perceived by some as inappropriately low.

2. Unbundled Rates

Some utilities are now advocating for a change from the current “one-size-fits-all” rate structure to an “unbundled” rate structure that allows utilities to charge customers for the individual services that they use. Traditional customers would pay for the full suite of services, while NEM customers would pay only for certain services (such as transmission and distribution infrastructure) and not for the energy component. Utilities would thereby be able to recover their costs without any cross-subsidies between customers.

Though both approaches have merit, it is not yet clear which one, if either, will offer a widely applicable solution that is acceptable to both utilities and solar advocates. Black & Veatch’s study in California does not recommend one solution or the other, but rather seeks to identify and value NEM as accurately as possible, based on the most accurate and transparent data available. It will also add to a growing base of  literature on this topic and help to better define the costs and benefits of NEM for the industry.