Distributed solar policy is undoubtedly in a period of fast-paced – and often controversial – change, mirroring the rapid expansion of the solar industry itself. We at the North Carolina Clean Energy Technology Center (NCCETC) began formally tracking solar policy as part of the Database of State Incentives for Renewables and Efficiency (DSIRE) in 1995. The center has since expanded these efforts (in addition to its work in other renewables and energy efficiency), tracking proposed changes to distributed solar policy and rate design in its “50 States of Solar” quarterly report series for the last few years.
The center works to provide a trusted and objective review of these changes and, through this research, has observed several trends in the changes states and utilities are considering, as well as the decisions being reached.
Policy review across the country
While one might expect to see only states with high levels of installed solar capacity actively contemplating the next generation of distributed solar policy, the vast majority of states across the country are engaged in these discussions.
Since 2015, 48 states have considered changes to distributed solar policy or rate design as of press time. Of these states, 40 considered changes to distributed solar compensation rules or conducted a formal investigation into the value of distributed solar (see Figure 1), and at least 16 of these states have adopted or are currently considering the development of a successor to net energy metering (NEM).
In four of the eight states to adopt a NEM successor tariff, net-metered solar capacity currently makes up less than 5% of system peak demand. Interestingly, the policy changes proposed or adopted by states are not necessarily aligning with local grid penetration rates that typically drive the justification for such changes.
Rapidly spreading discussions
Prior to South Carolina adopting a NEM policy for the first time in 2014, Alaska was the last state to enact a NEM policy in 2009. In this five-year period, several states made adjustments to their NEM programs, but the basic structure of monthly one-to-one netting of production and consumption remained a given.
NEM’s long-held status as the dominant distributed solar compensation scheme changed when Hawaii and Nevada adopted the first successor tariffs to retail rate NEM in 2015. The following year, three more states formally adopted successor tariffs, and already in the first half of 2017, three states have made successor tariff decisions, with at least eight states actively considering new tariffs as of press time.
NEM initially emerged as a simple way for states to implement Public Utility Regulatory Policies Act requirements for relatively small solar systems, and it remains the dominant compensation mechanism for distributed solar in the U.S., with 38 states still utilizing monthly (or annual) retail rate netting as of press time. However, its future is now uncertain as more and more states elect to re-evaluate these rules. The principal driver of these reviews is concern over general ratepayers subsidizing NEM customers. Although the Lawrence Berkeley National Laboratory found that the impact of net-metered solar on rates will remain negligible into the foreseeable future for most states, some states with low levels of installed solar capacity have expressed a desire to “get ahead of the issue” and prevent future cost shifting, should the state’s distributed solar market quickly expand.
Another driving force behind state solar policy reviews are the aggregate capacity limits put into effect in many states. In these states, once net-metered capacity reaches a certain threshold, utilities are no longer required to offer NEM, necessitating legislative or regulatory action (at whichever level the cap was established) to determine the future course for distributed solar compensation in the state. While some states have chosen to simply increase their aggregate caps, other states have taken this opportunity to conduct broader policy reviews.
NEM successor tariffs
States are taking unique approaches to NEM successor tariffs, with none of the eight states that have adopted a tariff as of press time taking the same approach. However, three basic frameworks for distributed solar compensation have emerged: 1) a continuance of NEM, 2) net billing, and 3) buy-all, sell-all.
Under NEM, total energy production and consumption over the billing period are netted, providing a retail rate credit for all energy produced by the system up to the customer’s level of consumption. Any “net excess generation” remaining is credited at retail, avoided cost, or not at all, depending on the state. Under net billing, customers may consume energy produced behind the meter, effectively receiving a retail rate credit for this portion. Any energy not consumed directly on-site is then exported to the grid and credited at a non-retail rate. Lastly is the buy-all, sell-all, whereby all energy produced by a customer’s system is credited at a non-retail rate, and all energy consumed by the customer is purchased at the retail rate.
Within these three basic frameworks exists a multitude of variations, largely centered on credit rates for energy exported to the grid. These credit rates are the source of much debate, with stakeholders across the country proposing rates based on avoided cost, the value of solar or distributed generation, a percentage of the retail rate, and the rates with temporal and locational variation or rates that phase down over time or as installed capacity thresholds are reached.
Another important variable is the existence and size of various non-bypassable charges. Both California and New Hampshire have adopted policies that delineate certain charges, such as system benefits charges, as ones that may not be offset by NEM credits.
In the less than two years since the first NEM successor tariffs were adopted, we have already seen some “first movers” consider substantial changes to these new tariffs. Nevada made the most dramatic adjustments to its successor tariff since adopting it in late 2015, first reversing course to permit grandfathering of existing NEM customers and then increasing the credit rate for energy exported to the grid from avoided cost to 95% of the retail rate.
California – the third state to adopt a successor tariff – is set to evaluate its approach and consider changes in 2019, and New Hampshire will consider further tariff changes after pilot programs and a value of distributed energy resources study are conducted.
Although much attention is rightfully being paid to successor tariff development, the decisions being made are proving to be flexible. As states gain experience with different approaches, a convergence toward a particularly enduring structure could occur, but for now, it appears that states will continue to customize their NEM successors with an eye to local politics and stakeholder action, but keeping an open mind to policy adjustments.
As stakeholders propose new distributed solar compensation structures and rate designs, increased granularity is a common thread. Compensation structures with temporal and locational variation, in particular, are garnering support from solar industry stakeholders and utilities alike.
Each NEM successor tariff adopted thus far incorporates greater specificity and complexity, whether by crediting behind-the-meter consumption and exports at different rates, tying compensation rates to installed solar capacity, or adjusting credits based on individual project characteristics.
Residential fixed charges
One rate design element receiving an exceptional amount of attention is the residential fixed charge, or customer charge. Since 2015, more than 80 investor-owned utilities have filed for residential fixed charge increases of at least 10%. This matters greatly to the distributed solar industry, as fixed bill charges may not be reduced by NEM credits.
While a large number of utilities are proposing fixed charge increases, the majority of the requests put forward – approximately 90% since 2015 – have been either denied or approved only in part. Of requests partially approved in 2016, utilities received 43% of their original requested increase, on average. Although regulators are not granting most of these requests to increase residential fixed charges, we have not observed a slowdown in new proposals.
Residential demand charges
Residential demand charges are a related area of much conversation today. As of press time, no investor-owned utility has a mandatory residential demand charge in effect, but several utilities have proposed such a rate design over the past few years.
However, as of press time, no utilities commission has approved an investor-owned utility’s request for a mandatory residential demand charge (at least in recent years), whether for all residential customers or solar customers only. Most of the proposals put forward have ended in settlement agreements, in which residential demand charges are approved only as optional or pilot tariffs.
More recently, states have shown movement toward broad policy or electric system investigations in lieu of individual policy modifications. New York’s Reforming the Energy Vision process is one of the most prominent examples, where stakeholders are currently engaged in a multi-year, multi-faceted reform of the state’s electric distribution system, encompassing technical, policy and regulatory issues.
While a broader investigation is generally more resource-intensive, several states are opting for this approach in order to synchronize reforms across the electricity sector. The U.S. electric system as a whole is currently undergoing a period of great transition, and it is likely that more states undertake cross-cutting technical and policy evaluations.
Although changes to existing solar policies are frequently assumed to be harmful to the solar industry, several states are in fact taking steps to grow their local solar markets. For instance, South Carolina adopted its first NEM legislation a few years ago, and at least five states have enacted statewide community solar legislation since 2015. At least three states have expanded third-party power purchase agreement legality since 2015, and others have authorized leasing.
While these efforts tend to be fewer in number than proposals put forward with a negative financial impact on the industry, they should not be overlooked, as these types of changes have significant potential to grow state markets.
Finally, although these ongoing policy discussions frequently highlight the differences in stakeholders’ visions for the future, important areas of commonality do exist, and more efforts to engage stakeholders and reach compromise are bearing fruit.
Several examples of successful stakeholder compromise have emerged within the last year. In Colorado, a settlement agreement replaced a controversial grid access charge in Xcel Energy’s rate request with a move toward time-of-use rates. Similarly, a compromise proposal filed in Arizona Public Service’s rate case allows for several customer rate options, including demand tariff options, without making demand charges a mandatory feature for residential customers. In New Hampshire, regulators recently worked to incorporate the common elements of two separate settlement agreements into their NEM successor tariff decision while finding middle ground in the areas of non-consensus.
Stakeholder efforts have not always proven to be successful, though – at least not immediately. In Maine, following a stakeholder proceeding to develop an alternative to NEM, the governor twice vetoed proposed compromise legislation, and the Public Utilities Commission adopted distributed generation compensation rules that diverged significantly from those recommended by the stakeholder group. However, as noted earlier, these decisions are not necessarily etched in stone, and in some places – such as Nevada – compromise approaches have proven successful after initial policy changes were made.
As distributed solar costs continue to fall and installations rise, we expect distributed solar policy and rate design to keep evolving and at a rapid pace. That makes this final trend of successful stakeholder compromise a particularly heartening one, as this policy evolution will have – and is already having – a key role in shaping the country’s distributed solar market and in influencing the broader energy transition under way.
Autumn Proudlove is the manager of policy research at the North Carolina Clean Energy Technology Center. She leads the center’s “50 States of Solar” and “50 States of Grid Modernization” publications.