The economic effect of electricity net-metering with solar PV: Consequences for network cost recovery, cross subsidies and policy objectives

doi:10.1016/j.enpol.2014.09.011

Energy Policy

Volume 75, December 2014, Pages 244-254

https://doi.org/10.1016/j.enpol.2014.09.011 Get rights and content

Highlights

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Network users are frequently charged by energy charging and fixed charging.
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Net-metering with energy charging causes potential problems for DSO cost recovery.
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Increasing rolling credit timeframes amplify net-metering impacts on cost recovery.
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Observed capacity charging can incentivize local storage and self-consumption.
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PV owners should receive direct incentives in order to avoid cross subsidization.

Abstract

Net-metering is commonly known as a practice by which owners of distributed generation (DG) units may offset their electricity consumption from the grid with local generation. The increasing number of prosumers (consumers that both produce and consume electricity) with solar photovoltaic (PV) generation combined with net-metering results in reduced incomes for many network utilities worldwide. Consequently, this pushes utilities to increase charges per kW h in order to recover costs. For non-PV owners, this could result into inequality issues due to the fact that also non-PV owners have to pay higher chargers for their electricity consumed to make up for netted costs of PV-owners. In order to provide insight in those inequality issues caused by net-metering, this study presents the effects on cross-subsidies, cost recovery and policy objectives evolving from different applied netmetering and tariff designs for a residential consumer. Eventually this paper provides recommendations regarding tariffs and metering that will result in more explicit incentives for PV, instead of the current implicit incentives which are present to PV owners due to net-metering.

Introduction

Residential electricity consumers are increasingly motivated to install distributed generation (DG) units due to supportive renewable policies and decreasing costs. For instance, Europe’s residential and commercial sector already had 36.6 GWp of solar photovoltaic (PV) panels installed in 2012. Likewise, large numbers of PV installations are noticed in The United States (US) within California, Arizona and Hawaii (Greentech Media & Solar Energy Industries Association, 2013). The owners of PV units are frequently rewarded for the electricity fed-back into the grid through net-metering. Net-metering is a practice by which owners of PV units may offset electricity consumed against their production during a certain period of time (European Photovoltaic Industry Association, 2013, NREL, 1996, Wan and Green, 1998). Net-metering is positively perceived for these PV-owners due to the fact that it leads to reduced cost of customers’ final electricity bills and therefore incentivizes DG installation (Darghouth et al., 2011). Indirectly this DG installation has further positive effects on carbon emission reduction targets due to the fact that many DG units operate from renewable energy sources like solar and wind (Alanne and Saari, 2006, Darby et al., 2013).

However, contrary to the DG-owner and sustainable policy perspective, the issue of net-metering and PV penetration is not positively perceived by European Distribution System Operators (DSOs) and US Public Service Utilities (Cohen, 2013, The Electricity Journal, 2013). Both types of utilities are operating under economies of scale and net-metering causes those utilities to miss part of their financial incomes while remaining providers of transport and reliability services (California Public Utilities Commission, 2013, Cohen, 2013, Lipman et al., 2002, The Electricity Journal, 2013). More specifically regarding the network related issues of net-metering, unbundled Distribution Service Operators (DSOs) in Europe perceive net-metering as jeopardizing their cost recovery for their substantial stranded costs. In order to make up for this cost gap, DSOs increase network charges. As a consequence, both PV owners and non-PV owners are required to pay higher prices for network usage. The practice of increasing network tariffs results in cross subsidies for non-PV owners due to the fact that non-PV owners subsidize network costs that PV-owners avoided to pay. This issue of cost recovery and cross subsidies has also been pointed out by others (EEI, 2013, Pérez-Arriaga et al., 2013).

Hughes and Bell categorized net-metering methods within a taxonomy, making clear that net-metering can be applied very differently (Hughes and Bell, 2006). Furthermore, the impact of net-metering on public and network utilities’ income has been studied within numerous policy reports. Those reports argue differently regarding financial impacts of PV penetration, possibly due to the influence of main stakeholders involved (California Public Utilities Commission, 2013, Cohen, 2013, NREL, 1996). Consequently, different efforts have been made to deal with the issue of net-metering focused on financial stability of network utilities and preserving equity between ratepayers. A simplistic solution to correct for those cross subsidies is to apply a corrective tariff for DG-owners. This fee is also called a “back-up fee” in Spain or, differently, a self-consumption fee due to the fact that it might incentivize self-consumption instead of net-production. This charge was proposed in July 2013 in Spain (CNE, 2013). Furthermore in Germany, Czech Republic, Denmark, Austria and numerous states in US like Arizona discussions are ongoing regarding self-consumption charging (Bundesministerium fur Wirtschaft und Energie, 2014). Applying such fee leads to controversy due the discouraging signal it poses for PV installation and sustainability objectives. Consequently, policy makers are worldwide investigating ways to handle this controversial dilemma between sustainability on one side and cost recovery of network operators and public service utilities on the other.

Even though the effect of net-metering is discussed in different policy reports, a study of the effects of net-metering on higher policy issues like cross subsidies, cost recovery and sustainability has not been conducted. An interesting issue that remains is the impact of differently applied net-metering schemes with different types of tariff designs on policy criteria like DSO cost recovery, cross subsidies, cost-causality and PV incentives. The authors of this paper aim to provide policy insight regarding the connections between these issues. This study focuses on a Spanish case of net-metering with a PV unit for a low voltage network user, whereof the effects are mostly felt by the DSO. However, due to the fact that the nature of the US related public service utility is largely related to that of the European network operator, the results of this study are interesting for both the European and US net-metering case.

The paper is organized as follows. In Section 2 we describe main context surrounding the net-metering issue with a description regarding the DSO, net-metering practices itself and tariff designs. In Section 3 we present the approach and assumptions for the study and Section 4 presents the results. Following in Section 5, the outcomes of the study are discussed and in Section 6 conclusions and policy implications are provided.

Section snippets

Net-metering and DSO cost structure

The DSO incurs in operational expenditures (OPEX) and capital expenditures (CAPEX) in order to supply the electricity transport service under certain quality standards. OPEX consists of operation and maintenance costs (O&M) of network installations and costs associated to commercial services. On the other hand, CAPEX consists of mainly investments in the distribution network and are merely related to capacity utilization (Frías et al., 2007). Due to the fact that the electricity transport

Method

The focus of this study is to provide insight on a policy level in the cost recovery and cross subsidy issues related to net-metering and tariff design. For this purpose, the network user considered here is a prosumer owning a PV unit, based in Madrid (Spain). Even though PV generation and customer load curves are in the short term subject to many random issues, there has been no modeling needed but rather a quantitative illustration of hourly based electricity consumption and production values

Network billing per alternative

Table 2 presents the measured kW h and customer costs for each of the alternatives. In this table, self-consumption refers to the households’ direct consumption of the electricity produced by the PV unit. Net-consumption presents the households’ total consumption from the grid, while net-production represents the surplus electricity that is fed-in the grid. Due to the fact that the used values of consumption and production data were hourly based, there is no difference visible between the

Discussion

The results of this study show that net-metering combined with an energy tariff (or volumetric tariff) causes major decrease of DSO incomes and a potential for cross subsidies (see Section 4.2). This effect is being amplified with larger rolling credit timeframes. For example, with a rolling credit timeframe of a year, the network user was not billed any network costs at all. Applying such energy network tariff potentially leads to cross subsidies between network users due to the fact that the

Conclusions and policy implications

Net-metering presents an important dilemma between incentivizing distributed generation (DG) on one side and securing financial stability of the Distribution System Operator (DSO) on the other. This issue is increasingly complex due to the fact that net-metering itself can be applied differently with regard to processes of metering, accounting and billing of the network user. This paper has presented a study to provide insight into the dynamics that result from different types of net-metering

Acknowledgments

Cherrelle Eid has been awarded an Erasmus Mundus PhD Fellowship. The authors would like to express their gratitude towards all partner institutions within the program as well as the European Commission for their support. Furthermore, the authors would want to thank Rafael Cossent and the anonymous reviewers for their valuable feedback on the manuscript of this paper.

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The economic effect of electricity net-metering with solar PV: Consequences for network cost recovery, cross subsidies and policy objectives

Highlights

Abstract

Introduction

Section snippets

Net-metering and DSO cost structure

Method

Network billing per alternative

Discussion

Conclusions and policy implications

Acknowledgments

Renewable Sustainable Energy Rev.

Energy Policy

Energy Policy

Energy Policy

Energy Policy

Solar Energy

Natural Monopoly Regulation

Paying for the Smart Grid

Sistemi di misura dell’energia elettrica

Norma Tecnica

Potential carbon impacts of smart grid development in six European countries

Energ. Effic.