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Research & Commentary: Indiana Should End Net Metering

February 8, 2017

Proposal Would Turn Indiana To "Buy All, Sell All" System

A bill has been introduced in the Indiana Senate that would end the state’s net-metering program by 2027. Households with their own electricity generation source, also called “distributed generation,” can sell the excess, unused electricity they generate back to their utility company’s grid. The utility company can then re-sell this electricity to other customers. Distributed generation usually comes in the form of rooftop solar panels. Net metering is the billing mechanism that measures this excess electricity. Under current law, excess electricity is sold back at the retail-price rate.

The proposal would change this, turning Indiana to a “buy all, sell all” system. This means distributed generation customers would sell all their produced energy to their utility provider at the wholesale rate and then buy back electricity at the retail rate. The current retail-price rate for electricity in Indiana is around 11 cents per kilowatt hour, while the wholesale rate is around 3 cents per kilowatt hour. No existing solar customers would be grandfathered in under this proposal.

[An amended version of the bill scraps the "buy all, sell all" provision and instead specifies that a utility provider shall purchase only the excess energy produced by distributed generation customers. The purchase price for this excess electricity will be 125 percent of the average annual wholesale market price. Further changes would also end the program by 2022 instead of 2027 and would grandfather existing solar customers for ten years.]

The NC Clean Technology Center (NCCTC) at North Carolina State University reports 28 states considered or enacted 73 changes to net-metering policies in 2016, up from 42 actions in 25 states in 2015. According to NCCTC, “considering changes to net metering credit rates was one of the biggest solar policy trends” of the year.

Because utilities pay significantly more to purchase customers’ excess electricity than they can charge when reselling to other customers, they are calling for more-balanced rates for net metering. Currently, because utilities must pay the retail price for electricity instead of the wholesale price, it means distributed generation customers are getting reimbursed not only for the electricity they provide but also for the costs associated with building and maintaining the electric grid. As a December 2013 paper from the Harvard Business Law Review Online noted, “net metering causes a re-allocation of transmission, distribution, and reliability costs to those customers who do not own distributed generation.”

Such cost-shifting impedes social equity, because rooftop solar owners have generally higher incomes than others, so lower-income ratepayers end up paying extra to subsidize higher-income customers. Thus, net metering is just another welfare program for the upper-middle class.  

A California Public Utilities Commission study found customers who have installed net-metering systems going back to 1999 have an average median household income of $91,210, significantly higher than the state’s median income of $54,283 and the median income ($67,823) in investor-owned utilities service territories.

Although owners of rooftop solar panels should be paid for the electricity they sell back to the grid, they should be paid at the same rate conventional sources are paid, reflecting the true wholesale cost of electricity. It is particularly unfair for solar owners to be paid for the costs of maintaining the grid because the intermittency of solar power actually increases those costs. Moreover, these maintenance costs are shifted to the owners of homes without solar panels, unfairly raising their monthly bills. State net-metering programs should be reduced and ultimately brought to an end, as should all energy subsidies. This would create a truly free, consumer-friendly energy market where all utilities and small-scale power providers are given the right to compete for customers.

The following documents provide more information on net metering.

Ten Principles of Energy Policy
https://www.heartland.org/publications-resources/publications/ten-principles-of-energy-policy
In this Legislative Principles booklet, Heartland Institute President Joseph Bast identifies the ten most important energy issues facing the nation and outlines the energy policy actions that will lead to the highest, most efficient production at the lowest cost to consumers.

Ten State Solutions to Emerging Issues
https://www.heartland.org/publications-resources/publications/ten-state-solutions-to-emerging-issues
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2016 and beyond in the areas of budget and taxes, education, energy and environment, health care, and constitutional reform. The solutions identified are proven reform ideas that have garnered significant support among the states and with legislators.

Net Metering 101
http://www.instituteforenergyresearch.org/2014/01/14/net-metering-101/
The Institute for Energy Research provides an instructive explanation about the fundamentals of net metering, net-metering policies, and renewable energy.

The 50 States of Solar (Q4 2016 Quarterly Report & Annual Review)
https://nccleantech.ncsu.edu/wp-content/uploads/Q42016_ExecSummary_v.3.pdf
The purpose of this report by the NC Clean Energy Technology Center is to catalog the proposed and enacted legislative changes to regulatory policy and rate design affecting the value proposition of distributed solar photovoltaics during 2016, with an emphasis on the residential sector.

The High Cost of Rooftop Solar Subsidies
https://www.heartland.org/publications-resources/publications/the-high-cost-of-rooftop-solar-subsidies?source=policybot
This report from Arduin, Laffer, & Moore Econometric argues state net-metering programs, implemented to encourage solar power use, threaten the reliability of electrical grid systems by imposing additional operating stresses on grids that were built to supply a one-way power flow from centralized generators to users; distributed solar power requires a decentralized, two-way power flow. Current electrical grids were not built to handle this type of power delivery. In addition, the retail price paid under states’ net-metering schemes is much higher than the price grid operators would reasonably pay to obtain electric power in the wholesale power market, wasting scarce resources.

Residential Solar: Myth vs. Fact
https://www.heartland.org/publications-resources/publications/residential-solar-myth-vs-fact
This study by the Institute for Energy Research explores several myths surrounding solar power, including the false beliefs roof-top solar is cost-effective, better allows utilities to manage their peak loads, and the view residential solar has achieved “grid parity” in many parts of the United States. The study also shows that without large subsidies, solar energy fails to make economic sense and creates problems for utilities trying to manage the electric grid.

Isaac Orr: Net Metering
https://www.heartland.org/multimedia/podcasts/isaac-orr-net-metering
In this edition of the Heartland Daily Podcast, Isaac Orr, research fellow at The Heartland Institute, discusses the Champagne wishes and caviar dreams espoused by net-metering proponents.

The Reliability of Renewable Energy: Solar
https://www.heartland.org/publications-resources/publications/the-reliability-of-renewable-energy-solar
This study from the Institute of Political Economy at Utah State University shows solar power is inefficient and unreliable because the Sun is not always available and because it cannot consistently meet electricity demand, which means it must rely on backup power sources. The study notes solar power is the most expensive source of power in the United States and requires significant tax dollars to maintain production. The study’s authors say these high costs come with limited environmental benefits.

The Regulatory Challenge of Distributed Generation
https://www.heartland.org/publications-resources/publications/the-regulatory-challenge-of-distributed-generation
This December 2013 paper from Harvard Business Law Review Online summarizes much of the latest research on distributed generation and net metering. Net metering is described as a “controversial regulatory practice,” mainly because of the huge subsidy it creates for distributed generators, which the author says is “over and above the tax subsidy provided to all renewable generation.”

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Environment & Climate News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s state government relations manager, at nmakla@heartland.org or 312/377-4000.

Author
Tim Benson joined The Heartland Institute in September 2015 as a policy analyst in the Government Relations Department.
TBenson@heartland.org