Net Metering Hides Solar’s True Costs, Making It Seem Affordable While Raising Electricity Rates for Everyone!
Planning Engineer Russ Schussler writes at Judith Curry's site to correct the record on the real costs of solar and wind energy. The following is a consolidated version of Part II of the story.
In Part I, we showed how wind and solar’s low costs over 80% of the time are overwhelmed by expenses at peak times such that they offer no cost advantages to the generation mix.
Residential solar follows a similar pattern: it seems affordable for homeowners, but raises system costs through rate structures that over-incentivize adoption. Generous subsidies, like retail-rate net metering, drive excessive solar growth, risking grid stability and shifting costs to non-solar customers that are often less affluent. Less generous rates for residential solar slow adoption, but better align solar adoption with grid needs, ensuring fairness and sustainability…
How Residential Solar Rate Structures Work
Rate structures today vary to the degree to which they subsidize residential solar. Below are general categories of rate structures, ordered by levels of subsidies, from high to low.
Retail-Rate Net Metering: Credits residential solar at full retail rates (~$0.20–$0.42/kWh, e.g., Hawaii, Massachusetts, New York, New Jersey, Rhode Island). Yields high returns for residential solar (20–50% ROI) and encourages rapid adoption (e.g., Hawaii’s 30% penetration, ~200,000 homes).
Partial Retail/Hybrid Net Billing: Credits at 50–80% of retail (~$0.10–$0.20/kWh, e.g., Connecticut, Vermont, Maryland, Minnesota) support moderate adoption of residential solar (e.g., Vermont’s 8% penetration, ~15,000 homes) with less cost-shifting.
Net Billing at Avoided Cost: Lower credits (~$0.05–$0.08/kWh, e.g., California’s NEM 3.0, Arizona, Arkansas) slow growth.
Wholesale/Avoided Cost Rates: Minimal credits (~$0.03–$0.07/kWh, e.g., Alabama, South Dakota, Tennessee, Idaho, Kentucky) yield low penetration (0.02–1.2%, ~270–10,000 homes), reducing subsidies and
Initially, solar power rate structures used retail-rate net metering. Lower subsidies could not attract sufficient participation. Since participation was low initially, the small subsidies from the overwhelmingly large group of non-participants were not significant. As more customers adopt solar, the economics change. California’s experience highlights the unsustainability of this approach. California now on version 3.0 of its net metering approach, which pays only for avoided costs for new customers. Retail-rate net metering became unsustainable as participation levels increased.
This chart shows the relationship between higher credits and the resulting penetration of residential solar for a sampling of states.
Of course, higher subsidies correlate with greater participation. California NEM 3.0 looks like an outlier, but it must be understood this participation rate was built not on the NEM 3.0 rate structure. The big base they have of residential solar was built on legacy policies, and viability today is supported by the area’s high retail rates and grandfathering of existing residential solar customers under the old tariffs.
In a 2015 post, I discussed various approaches to cost sharing for residential solar. It’s worth reviewing at this time as it provides additional coverage on the topic at hand. In that piece I noted that the models with the least subsidies still only required residential solar users to pay the incremental costs they incur, not shared system costs. Should residential solar customers help with basic system costs?
The answer becomes increasingly important with high levels of residential solar. Responsibility for the basic system costs becomes attributable to fewer and fewer customers. Unfortunately, those footing the bill are disproportionately less affluent consumers who are most burdened by increasing energy costs.
The economic toll of overly generous rates:
Lost Revenue: Utilities need steady charges to cover fixed costs (grid lines, backup power). Solar homeowners avoid these during low-demand periods, reducing revenue.
Overpaid Purchases: High credits for low-value power strain utility budgets.
Fat Tail Costs: Peak periods drive high costs (peaking plants and transmission and distribution expansion). Non-solar customers face 1-2% rate hikes in high-solar areas, per National Renewable Energy Laboratory studies.
Generous rate structures, like retail-rate net metering, fuel excessive solar adoption, raising costs and inequity. Less supportive rates, like California’s NEM 3.0 or South Dakota’s wholesale rates, reduce uptake, which is proper when solar outpaces system needs.
Early net metering aimed to boost solar, but its costs—shifted expenses and grid risks—are now evident. Regulators, prioritizing green energy, often mandated generous rates, as in California’s NEM 1.0/2.0, which achieved 25% penetration before NEM 3.0’s lower rates slowed growth. Fair pricing proposals are often labeled as anti-renewable, stifling reform.
A common justification is that subsidizing residential solar will lower prices and increase affordability. What goes unrecognized is that the cheaper residential solar becomes, it exacerbates unsustainable rate designs as fewer non-solar customers remain to support the system…
Wrapping Up
Poor rate designs hide solar’s true costs, making it seem affordable while raising electricity rates for all. Retail-rate net metering drives excessive adoption of solar, shifting costs to non-solar customers.
Less supportive rates, like avoided costs or California’s NEM 3.0, slow solar growth, aligning it with grid needs. This ensures fairness and avoids cost spirals. A sustainable energy supply requires pricing that reflects true costs, ensuring affordability for all.
Future posts will focus on utility economics, discuss problems with energy markets and delve into many of the often-ignored unaccounted costs associated with wind and solar. For example, many assume the grid is easier to operate when part of the load base meets its own needs.
In reality, residential solar burdens system operators, increasing complexity and costs of stabilization efforts. In Australia, a renewables leader, operators see a need to switch off rooftop solar during stressful periods to maintain system stability. Look for follow-up posts in the coming weeks.
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There is a simple answer - just quit wind and solar in the grid. If at a residential site, let the utility decide whether or not to allow selling back into the local distribution - that reduces the utility’s revenue - their choice. It reduces the residential site utility bill when not drawing from the local distribution system. No need to worry about commercial/industrial sites as those sites are making a cost benefit based decision for self generation, and those decisions have not gone to large scale wind and solar - go figure. We need to just quit forcing the entire population to keep paying for the wind and solar grift. Pay your own way and make better choices.