NCPA - National Center for Policy Analysis

Reforming Net Metering

April 16, 2014

The use of rooftop solar panels and other on-site power sources -- known as distributed generation -- is becoming more and more prevalent. To encourage the use of these small-scale power systems, many states developed "net metering" -- a billing system that 43 states and the District of Columbia currently employ. These net metering policies, however, need to be reformed, says Tom Tanton, president of consulting firm T² & Associates.

Generally, the policies work like this:

  • Customers who have these power systems are credited -- at the retail electric rate -- for any excess electricity that they create.
  • Electric companies must purchase this excess power at the retail rate when it is sent back to the electric grid -- despite the fact that they could produce the electricity themselves at much lower cost, or they could purchase it at wholesale. For reference, the average retail price of electricity in Wisconsin costs 400 percent more than wholesale.

This requirement -- that companies purchase the distributed generation power at retail -- is essentially a subsidy, transferred from ordinary customers to net metered customers.

  • According to a study conducted for Arizona Public Service, the amount paid by net metered customers is actually below the utilities' costs of serving those customers. This means that non-net metered customers must pay higher prices to cover those costs. Arizona utilities pay three times the cost of electricity under net metering than in the competitive market.
  • According to one California study, customers who do not install net metering devices will pay an extra $1.1 billion in shifted costs each year by 2020.

Because of these cost-shifting policies, net metered customers do not pay grid support costs. Moreover, they actually impose costs on the system because the electric network has to handle power going two ways -- both to the customers, and to take the energy from them.

States need to restructure their net metering policies. Electricity rates should be fair and affordable for all customers, and all who use the electric grid should help to pay for it.

Source: Tom Tanton, "Reforming Net Metering: Providing a Bright and Equitable Future," American Legislative Exchange Council, March 2014.


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