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Learning a Lesson about Net Metering

| Written by John Farrell | 7 Comments | Updated on Jun 1, 2011 The content that follows was originally published on the Institute for Local Self-Reliance website at

I just got a copy of a utility bill for a Minnesota business that has a 40 kilowatt (kW) solar PV array.  I’d hoped to get a sense for how quickly he’d pay off his array with the net metering revenue.  I was shocked.

Payback time was 30 years.  Even if the business owner had received a generous $2.00 per Watt rebate on top of federal tax incentives, it would still take 22 years.  It all came down to the way net metering is actually accounted.

A quick tutorial.  Net metering essentially lets a utility customer run their meter backward if they have an on-site electricity generator.  So if I’m a commercial customer who uses 10,000 kilowatt-hours but my solar panel generates 4,000 kWh, I only pay for 6,000 kWh.  This is supposedly a great deal, because rolling back the retail rate typically beats getting paid the utility’s “avoided cost” wholesale power rate – 3-4 cents per kWh in a state with cheap coal or natural gas power.

But the trick is how the meter rolls back.  You might think that your cost per kWh is simply the total bill divided by the number of kWh consumed.  In the case of the business owner, that would have been a rate of 21 cents per kWh and a payback period of just 9 years.

It’s not that easy.

In this case, 12 percent of the bill is taxes and fees.  And of the remaining 88 percent of the bill, 60 percent isn’t an energy charge for kWh, but a “demand charge,” which the solar PV array doesn’t affect.  So the customer can “net meter” their power, but only affect 35 percent of their total bill.

So instead of 21 cents per kWh, this commercial customer actually pays about 5.4 cents per kWh, divided between an energy charge (41%), fuel cost charge (57%), and (tiny) environment improvement rider (2%).  And net metering at that rate means a payback period of 30 years.

Net metering doesn’t do a whole lot for the customer’s bill, but it sure makes the utility happy.

With net metering, the utility treats solar PV electricity generation exactly the same as it would conservation or energy efficiency (with the exception that solar usually gets a more generous rebate).  And since both of these strategies are significantly less expensive than PV for reducing electricity demand, the customer loses out.

The customer loses, but the utility wins.

That’s because the energy charge doesn’t necessarily take into account the additional value that solar provides to the utility.  The CLEAN Coalition worked with the Palo Alto, CA, municipal utility and found that solar PV was worth nearly 75 percent more than typical “brown power” because of its time of delivery (peak), avoided transmission access charges, renewable energy credits, and additional local value.  Similar calculations were also made in Ft. Collins, CO.

Accumulating solar PV and other distributed generation sources can also allow the utility to defer infrastructure upgrades and reduce stress on the distributed grid, especially when spread over a wide geographic area.

There are a few caveats.  The energy charge rate on the utility bill may exceed the marginal wholesale cost of electricity (there are a lot of cheap fossil fuel power plants out there); even so, the structure of net metering means that the utility isn’t paying for electricity generation, but demand reduction.  The particularly poor economics are also a factor of the rate structure in Minnesota, where this analysis was done.  Minnesota has relatively low electricity prices and there are no time-of-use rates or consumption tiers that would allow solar PV to offset marginally higher rates.  Other states, like California, have rate structures such that net metering values are 15 to 20 cents per kWh, rather than 5 cents.

There’s much more to net metering rules than just the price paid, but measured by that price in most states with flat electricity rates, net metering doesn’t measure up well.

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About John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power. More

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