Is Net Metering Giving Arizona Solar Users a ‘Free Ride’?

Editor October 20, 2013 0

solar panels

by David Leeper, PhD
Scottsdale, AZ
October 9, 2013

The Short Answer is No. Here’s a Closer Look.

Over the past couple months, political-style attack advertising has been running on TV and radio for and against “net metering” for solar customers. The attack-ad vocabulary includes terms like “free ride”, “fair share”, “subsidy”, and so on.

Under current net metering arrangements, solar customers pay nothing to their power utilities for solar energy that they generate and consume themselves. Further, when they “export” surplus energy to their neighbors, the utilities are required to compensate them with energy and cash credits on their utility bill.

Utilities say that customer-generated energy and those credits end up shifting power plant and transmission costs to non-solar customers in an “unfair” way. They want to charge solar customers something for that plant even during times when the customers don’t use it. Solar companies, on the other hand, want to leave net metering “as is”, saying that tampering with those arrangements could kill residential solar. In addition, they say, some accounting studies show that non-solar customers actually benefit when their neighbors install solar.

So, looking beneath the politically charged rhetoric, when the solar system on my roof generates 1 kilowatt-hour (kWh) of energy, what happens to it? The two possibilities are:

  • (A) the kWh is consumed immediately by me or,
  •  (B) being more than I need at the moment, that kWh is consumed immediately by my neighbors who are connected to the same distribution transformer that I am.

Let’s start by considering Case (A) and talk about who gains and who loses when that kWh is consumed immediately by me.

  • meter close-upA1: Clearly, I gain because I don’t have to pay my utility (APS) for the kWh that I would have otherwise paid for. Of course it’s not “free” to me because I lease my solar PV system, but over time, my out-of-pocket expense should be lower than what I’d pay APS for that kWh. I have voluntarily taken on that risk.
  • A2: APS loses, they argue, because they have to forgo the retail revenue from that kWh that could have otherwise been theirs. In fact, using their own words, they argue that because I generated that kWh myself, APS effectively “paid” me the value of that kWh “in dollars of bill savings”.
  • A3: APS claims that my neighbors and fellow ratepayers lose because the revenue that APS would have received from me included an allowance for transmission lines and generating stations. Thus, they say, a portion of the costs for that “fixed plant” must be borne by ratepayers other than me.

It’s hard to accept A2 even on its face. In particular, if I generate a kWh on my own and consume it in my own house on my own property without ever using any APS facilities, then what business is it of APS, and in what sense are they paying me? This strikes me as hi-tech chutzpah. After all, APS could make the identical claims if I had simply shut down an air conditioner for about 30 minutes, avoiding the use of that kWh altogether, thereby denying APS that same revenue and shifting those same fixed plant costs to my neighbors. So what’s “fair” about APS wanting to charge me any kind of tax or fee for electricity that I generate and use entirely on my own?

Furthermore, regarding A3, APS neglects to mention that by generating a lot of my own electricity, most often during the hours of highest demand, I help APS defer investment in new generation and transmission facilities, thereby holding down electric rates for my fellow ratepayers. Where do they include that factor in their claims about “fairness”?

That said, APS does have a legitimate rejoinder. My solar system would be useless without APS as backup power and a source of timing and synchronization for the energy that my solar system generates. If a cloud passes over the sun, briefly causing my solar system’s output to fall below my demand, APS is there instantly to fill the gap with virtually no drop in voltage, distortion of waveform, or loss of 60-Hz timing that could cause trouble for my household appliances.

Of course, I pay APS the full retail price for every backup kWh I consume, and it’s the software and electronics in my solar system that make the transitions appear seamless to my home appliances. But the timing/synchronization and backup capability just being there is a valuable service, even when I’m not using it. Solar advocates seldom bring this up. Speaking for myself, I’d be willing to pay something for that service as long as APS doesn’t overdo it!

So, with the exception in the above two paragraphs, I don’t see where ratepayers or APS are being treated “unfairly” when I generate and consume my own electricity via solar.

Next — what about Case (B) above, where my system generates a surplus kWh and exports it to my neighbors who consume it immediately. What happens there, and who gains or loses?

  • B1: APS gains because they charge my neighbors the full retail price for my surplus kWh even though APS paid nothing to generate it or transport it to my local power distribution transformer.
  • transmission gridB2: I gain, because APS credits my bill with a kWh that I can use later when my solar panels can’t quite deliver all I need. APS again argues they’re “paying” me the retail value of that kWh. However, APS has already been paid for that kWh at full retail rate (see B1) by my neighbors who consumed my surplus kWh that I paid for through my solar system lease. So the kWh that APS supplied to me and my surplus kWh that APS sells to my neighbors are pretty much “a wash”.
  • B3: APS gains in another way if I get to the end of the calendar year with that kWh credit still unused on my bill. APS then buys it from me with a cash credit on my bill that is well below the retail rate for that kWh. So while they charged my neighbors the full retail rate for my surplus kWh (which cost APS nothing) and collected the revenue for it in the month it was consumed, they paid me much less for it than my neighbors paid them for it. And APS got to wait until the end of the year to make their payment to me, while my neighbors had to pay APS for it in the same month it was consumed. How is APS hurt in that transaction? They’re not.
  •  B4: My neighbors and all ratepayers gain because my surplus kWh reduced the peak load on APS generation and transmission facilities. Every such kWh helps put off the need for additional APS capital equipment to handle peak demand, which in turn helps hold down electric rates for everybody.
  •  transmission linesB5: Ironically, via B4, APS does lose some revenue because putting off the need for new capital equipment hurts them, at least indirectly. It’s easy to overlook this factor because for a regular profit-and-loss business, putting off capital expenditures would normally be good news for the balance sheet. But APS, as a regulated monopoly, earns a guaranteed rate of return on their capital expenditures. More capital expenditures therefore produce more total revenue. So what is good news for ratepayers (in B4) is actually bad news for APS’ total revenue.

All in all, I have a tough time accepting APS’s claims that ratepayers are getting hurt by residential solar. I can see that APS and its investors may be getting hurt somewhat by restraining the capital investment on which they earn a guaranteed rate of return. And I can agree that I’m getting a valuable backup service from APS for which I’m making no explicit, separate payment. But as compensation, APS does get to sell some of my surplus (free to APS) energy to my neighbors at APS’ full retail price while paying me a far lower price and getting to wait until the end of the year to pay me. Finally, at least one detailed study shows a benefit to ratepayers when their neighbors install solar.

Agenda-driven anti-solar advertising tends to look at only portions of the transactions described above. By picking and choosing the right transactions, those ads can make net metering look unfair when it really isn’t. For example, some of those ads claimed that APS has been compensating me for a surplus kWh at “five times the market value” of that kWh when they give me a kWh credit on my bill. The ad neglects to mention that, as described in B1 above, APS charges my neighbors the full retail value for that kWh – a kWh that cost APS nothing at all for generation and transmission.

nuclear vs pvAs solar costs continue to plummet and electric utility rates continue to rise, there’s a crossover coming in the future when utilities could lose a lot of their cash-cow business to home-owner-generated electric energy. The ACC just granted Arizona power utilities a huge concession by closing a docket on allowing competition in the Arizona electric power market form other electric power providers. Now the utilities are running political-campaign-style ads against solar, with emotional terms like “fairness,” “free ride,” “fair share,” and “subsidy.” Perhaps they hope this rhetoric will convince the ACC to cripple the only other competition on their horizon. I hope that doesn’t happen.

In summary, in my view:

If the ACC truly wants to represent the ratepayers, they will make very certain that any changes to net metering do not destroy the economic incentives to install residential solar. That competition will restrain rising power utility rates automatically and far more effectively than the ACC’s regulatory oversight alone can do.

It is in the ratepayers’ interest to see that solar not only survives but thrives as competition to regulated monopoly power utilities. And it would be in the utilities’ interest to embrace distributed-generation solar as part of their business plan rather than just competition for it. In fact, if I were the CEO of APS, I would issue the following dictum: If anyone is going to cannibalize our business with distributed-generation solar, it’s going to be us, damn it! I want to see plans for how we can use distributed-generation solar ourselves, partner with solar providers, or even buy them if we have to. I want to see us lead in the use of distributed solar for our customers and not be dragged kicking and screaming into it long after someone else has been successful with it!


David Leeper is a retired engineer who lives in Scottsdale. He’s been a satisfied APS customer for 21 years, and he’s had a 48-panel SolarCity system installed and running on his roof for more than 4 years. He spent 23 years (1969-1992) as an engineer and manager in the old AT&T Bell System, a gigantic regulated monopoly that was overseen by government regulatory agencies not unlike the Arizona Corporation Commission (ACC) that oversees Arizona Public Service (APS). He knows how disruptive that competition can be to a regulated monopoly. He has a PhD in electrical engineering.