GETTING MESSY BY GOING GREEN: THE UNINTENDED ECONOMIC BURDEN OF NET METERING POLICIES
While the rise of residential solar has been a major win for clean energy advocates, net metering policies have put undue burden on low income households
Conversation around climate change has been inextricably linked to global income inequality as many scientists predict that shifting weather patterns and rising sea levels will most significantly impact those living in developing countries[1]. However, less attention has been focused on this issue at a domestic level as it is only recently that scientists and economists have begun to study the unintended consequences stemming from the proliferation of residential solar. Net metering programs have caused a shifting of the economic burden of electric utilities to households of lower economic means and caused utility companies such as Lafayette Utilities System (“LUS”) to revisit their pricing policies.
Over the past decade, spurred in part by incentive schema, U.S. solar has experienced a compound annual growth rate of ~60%[2]. In Louisiana, households may be eligible for solar incentives at the federal, state and local level in addition to preferential feed-in tariffs[3]. Feed-in tariffs refer to the price at which households may sell electricity back into the grid, a practice known as net metering (“NEM”). Under NEM, excess energy can be sold back into the grid at the residential rate. Households with solar panels recognize savings stemming from lower grid energy consumption as well as the credits provided by NEM. Increased adoption of residential solar exerts pressure on revenues for utility companies but simply revisiting utility rates ignores the outsized impact these policies have on lower income households.
Utilities charge consumers a fixed and variable charge with the fixed charge purportedly representing the cost of administering customers and the variable charge representing electricity distribution and usage. Non-solar customers of LUS were charged a monthly $6.00 fixed charge, representing less than 10% of the average household’s monthly electric bill[4],[5]. However, NEM customers incur low variable costs and a study conducted by the Louisiana Public Service Commission (“LPSC”) found that, “on average, solar NEM installations are estimated to make a 64% contribution to overall utility costs across all LPSC-jurisdictional utilities. Any level below 100% indicates that solar NEM customers are estimated to pay less than 100% of their full cost of service”[6]. This becomes an issue of socioeconomic status as not only are residential solar systems unattainable for renters, who tend to be of lower economic means, but households in lower income brackets tend to be unable to either afford the upfront investment to purchase a solar system or do not have the credit to qualify for solar leases or loans. Tellingly, the LPSC study found that NEM households have a median household income of $60,460 as compared to statewide median income of $44,673[7]. A report by MIT on the Future of Solar produced similar findings, showing that by NEM policies have effectively shifted costs to non-solar households who are now shouldering an outsize portion of energy distribution costs[8].
In response to these findings, LUS recently introduced a new pricing schema. The most significant changes were the introduction of a $11.31 monthly service charge and a $15.95 monthly wire fee for NEM customers[9]. While this pricing adjustment addresses problems for LUS in the short-term, it is unclear whether LUS has truly addressed inherent frictions in the system. By reducing energy savings, LUS may stifle further adoption of solar as costs of solar systems outweigh benefits from energy savings. However, if solar penetration continues to grow, LUS is likely to continue to face challenges to its operating and pricing model. For LUS to be successful in the shifting energy landscape, it must adapt rapidly to change and be proactive in addressing shifting consumer energy consumption patterns. However, given the role that regulatory bodies play in the utility space, I believe it falls on governmental bodies to put forth coherent energy policies that do not benefit certain economic groups at the expense of others.
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[1] Henry Shue, Climate Justice: Vulnerability and Protection, Cambridge: Cambridge University Press, 2014.
[2] “Solar Industry Facts and Figures.” SEIA. Solar Energy Industries Association, n.d. Web. 03 Nov. 2016.
[3] “Louisiana Solar.” SEIA. Solar Energy Industries Association, n.d. Web. 03 Nov. 2016.
[4] $0.0401 / kWh energy charge plus $0.038 / kWh fuel charge at average of 901 kWh per month resulting in average monthly electric bill of $70.36
[5] Rate information from: “Electric Rates – Residential.” Residential Rates. Lafayette Utilities System, n.d. Web. 03 Nov. 2016. Usage stats from: “U.S. Energy Information Administration – EIA – Independent Statistics and Analysis.” How Much Electricity Does an American Home Use? U.S. EIA, n.d. Web. 03 Nov. 2016.
[6] David E. Dismukes, Ph.D. “Estimating the Impact of Net Metering on LPSC Jurisdictional Ratepayers” Louisiana Public Service Commission, February 27, 2015.
[7] Ibid. “Estimating the Impact of Net Metering”
[8] Richard Schmalensee, Future of Solar Energy, MIT Energy Initiative, 2015.
[9] Ibid. “Electric Rates – Residential”
It’s interesting how well intentioned efforts often have unintended consequences. When LUS introduced the wire fee for NEM consumers, did it alter it’s pricing position for all consumers? For exmaple, are variable rates now lower or back to normal given the NEM fee? I wonder if they evaluated subsidizing solar for low income families. Probably not economically viable I’d guess…
This is a great illustration of the need to think about solutions in a holistic manner. How did the LUS decide that this was the most effective new way to resolve the inequality the previous pricing method? What is the economic impact on these utility companies for each pricing scheme and what is the tension between doing what’s right for society as a whole versus their profitability?
If some company succeeds in creating a relatively cheap mechanism for storing electricity, it’s possible that many relatively wealthy households could elect to go off the grid altogether. If this happens, will utility companies be able to maintain their infrastructure with a smaller customer base that tends to delay or default on payments more often? Electricity, like water, is often considered to be a basic human right. What, if any, should the role of government be if major utilities begin to fold or need to increase electricity rates drastically?
Emma,
Really great post. To Alan’s earlier comment, I think this is a prime example of how well-intentioned regulations usually result in unintended economic consequences. My key question for you is if you think that governmental bodies can in fact put forth coherent energy policies that do not benefit certain economic groups at the expense of others? Do you think that this is doable in the solar energy space specifically? It seems like a key issue here is the utility company purchasing the NEM at the residential rate. I was recently reading that cities such as Austin were trying to come up with another model (value-of-solar tariff) but that ran into some income tax issues. Additionally, solar energy puts additional pressure on the grid, so I’m a little unclear as to way those households participating in NEM receive this residential rate that includes the cost of covering the grid when they are still putting pressure on the grid itself?
Thanks again!
Jess
Great post! Interesting to look at this issue from a social perspective. Do you think this will still be a problem in 5 or 10 years? At some point I expect the price of solar panels to drop significantly, and hence most customers would be able to benefit from NEM policies. There’s no real reason why solar panels are priced so high in developed countries when you know that start-ups in Sub-Saharan Africa (e.g. Mobisol, http://www.plugintheworld.com/mobisol/) offer solar panels for a fraction of the price!
Thanks for shedding light on this important issue, Emma. This dovetails nicely with my post about Sunrun, whose value proposition as a solar installation company is partially dependent on policies such as this one. Cost savings versus traditional utility energy are a big reason for consumers to switch to solar, and net metering credits generate a portion of that cost savings. While policies that incentivize consumers to switch to solar may be desired, public policies need to be evaluated in terms of their broader impact.