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Research & Commentary: Kentucky Should Reform Net Metering

February 12, 2018

Proposal Would Grandfather Current Solar Users Until 2043

Kentucky is considering a proposal that, if passed, would significantly reform the state’s net-metering program, which was established in 2004. Under current Kentucky law, 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 grandfather in current solar users in the Bluegrass State at the retail rate until 2043, but anyone installing a solar system after July 15, 2018, would be reimbursed at the wholesale-priced rate for electricity. Should a grandfathered net metering customer sell his or her home, the new owners would be reimbursed at the wholesale rate. The current retail-price rate for electricity in Kentucky is about 8.5 cents per kilowatt hour, while the wholesale rate is around 3 cents per kilowatt hour. 

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 about net metering.

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 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.

Ten State Solutions to Emerging Issues
https://www.heartland.org/publications-resources/publications/ten-state-solutions-to-emerging-issues-2018
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2018 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.

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.”

The 50 States of Solar (Q4 2017 Quarterly Report & 2017 Annual Review)
https://nccleantech.ncsu.edu/wp-content/uploads/Q4-17_SolarExecSummary_Final.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.

 

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.

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