An energy revolution is happening atop homes in the United States, with one new rooftop solar system being installed every four minutes in 2013.

Great for the environment. Not so good for the U.S. electric companies that happen to be in solar energy hot spots.

U.S. policymakers encourage and subsidize solar installations by allowing solar households essentially to run their electric meters backwards if they generate enough energy to feed into the grid. Each month, those households pay utilities less, sometimes much less, for energy. (See related blog post: "Time to Break Free of Net-Metering; We Need a 'FIT' Policy for Renewable Energy to Soar.")

These so-called "net metering" policies are adding up to a headache for electric company officials, who are watching monthly utility income shrink as more and more solar panels crown the homes in their service areas. (Take the related quiz: "What You Don't Know About Solar Power.")

Many solar advocates see this as a positive demonstration that renewable technology is on its way to revolutionizing the deeply entrenched fossil-fueled energy system. But utilities argue that solar households are avoiding paying their fair share for the electric grid they still rely on, and the long-term investments the companies have made in power plants and the delivery grid. Solar rooftops represent "the largest near-term threat" to the utility business model, a "disruptive challenge," even though they still represent less than one percent of the U.S. retail electricity market, an industry study said earlier this year. (See related story: "Desert Storm: Battle Brews Over Obama Renewable Energy Plan.")

A backlash has begun in the leading U.S. solar markets, with utilities seeking to scale back net metering or increase what they charge solar households.

In California, the number one state for solar energy, a months-long lobbying battle raged until this fall, when lawmakers crafted a compromise. Sacramento preserved net metering for now, but directed the state's Public Utility Commission to come up with a new program by 2017 that ensures nonsolar customers don't get stuck with an unfair burden of paying for the grid. Next door in Arizona, regulators also deferred a showdown, voting in November to allow the state's largest utility to tack an additional fee, about $5 a month, on the bill of customers with new solar installations. It's far less than the $50 monthly surcharge Arizona Public Service originally sought.

And in Colorado, the state Public Utility Commission is weighing a request by the state's largest power provider, Xcel Energy, that the credits that solar households see on their utility bills for rooftop-generated energy be slashed in half. Hearings are scheduled for early February, with a decision sometime in the first half of the year. Skirmishes over the issue also have erupted in Louisiana and Idaho.

"Net metering allows consumers to build a system on their roofs that is enough to offset their electricity needs," said Bernadette Del Chiaro executive director of the California Solar Energy Industries Association (CALSEIA), the state's oldest and largest solar trade association. The organization's web site calls the overhaul now being weighed by the state PUC both "the greatest opportunity and threat to the solar industry." Net metering is "really critical for making solar make sense and work in a residential sector," said Del Chiaro.

But utilities argue that net metering enables solar customers to benefit from a reliable electric grid without paying for its use. "It's not about lost revenue . . . We want to make sure the grid is maintained, that it can be enhanced, and that cost shifting does not occur," said David Owens, executive vice president of business operations at the Edison Electric Institute (EEI), a Washington, D.C.-based association that represents investor-owned utilities. (See related story: "Post-Hurricane Sandy, Need for Backup Power Hits Home.")

Solar Boom

The net metering conflict has erupted because of one important development: Solar is now within the price range of far more customers. Since 2008, the price of the photovoltaic (PV) panels that convert sunlight to electricity has fallen by 75 percent, and solar installations have multiplied tenfold. Some homebuilders even include rooftop panels as a standard feature on new homes. Making solar even more affordable is the proliferation of solar leasing companies, which build and retain ownership of rooftop systems; customers can avoid making large upfront payments for installation, instead paying a monthly lease or power purchase fee. Two-thirds of solar installations in California in the past two years were done under lease agreements.

The third quarter of 2013 turned out to be the largest ever for residential PV installations in the United States, with the amount of additional new capacity up 35 percent over a year ago. This year is likely to be the first time in more than 15 years that the U.S. installs more solar capacity than Germany, the nation with the most installed solar capacity, according to GTM Research forecasts. That puts the U.S. third in the world in pace of solar installations, behind China and Japan.

In the United States, there were at least 302,000 "distributed" solar installations—essentially, systems on rooftops, not at power plants—installed across the United States in 2012, and the number could grow by a third in 2013, according to the Solar Electric Power Association (SEPA). More than 99.5 percent of those installations were net metered. Those solar systems add up to 3,440 megawatts of capacity, nearly as much as the largest nuclear power plant in the United States, Arizona's Palo Verde. But it still represents a tiny fraction of U.S. electric power plant capacity, 1.2 million megawatts spread through 19,023 generating stations.

Net metering policies, currently enacted in 43 states and encouraged by U.S. law, require utility companies to credit customers for solar energy they generate in excess of their own household or business needs. When a rooftop system delivers this extra energy to the grid, the customer is compensated with a bill credit, often at the same rate per kilowatt-hour that customers pay for power from the grid.

Just how quickly those solar credits could be adding up in California became clear earlier this year when the California Public Utility Commission published a controversial report concluding that by 2020, net metering could end up costing nonsolar customers at least $370 million annually, and—by one calculation—as much as $1.1 billion. (See related story: "Mojave Mirrors: World's Largest Solar Energy Ready to Shine.")

Adam Browning, executive director of the nonprofit Vote Solar Initiative, scoffs at the higher figure, which includes not only energy the solar households send to the grid, but the power they keep for their own use—energy that never touches the grid and has no impact on other ratepayers. "It's the functional equivalent of you turning off your lights and getting accused of raising everyone else's rates," Browning said.

CALSEIA's Del Chiaro agreed. "If you were to put an energy-efficient refrigerator in your home, and you cut down your refrigerators' electricity usage in half, would that be a cost to your neighbor? Of course not," she said.

Cost Shifting

Utilities argue, though, that solar rooftops don't remove load from the system exactly as energy-efficient appliances do; the utility must still be ready and able to provide power to that household or business if the sun isn't shining. And utilities say that neighbors without solar rooftops will end up footing an unfairly large share of the bill for maintaining that electricity system without net metering reform. Owens noted that the money customers pay to the utilities is not only used to maintain wires and other equipment necessary to ensure 24/7 electricity for customers, but also to modernize the grid. (See related story: "'Flexible' Power Plants Sway to Keep Up With Renewables.")

"As these technologies evolve . . . we have to make sure they operate correctly with the existing equipment . . . Sensors and monitors are important investments in the grid to permit these technologies to evolve," he said. (See related blog post: "As U.S. Plans $7 Billion Effort to Electrify Africa, It Faces Challenges at Home.")

And if utilities are forced to raise their electricity rates to make up for the money being lost from solar households, the bulk of the costs associated with maintaining and improving the grid will get shifted to middle- and lower-income families, Owens said.

"That cost shifting is not something that's beneficial to the public interest," he added.

The California Public Utility Commission's net metering report provided evidence that bolstered that argument; it showed most Golden State homeowners who have solar systems are high energy users with an average household income of $91,000—well above California's state average of $54,000.

Those figures included Californians who installed solar as far back as 1999, and that profile may be changing as solar costs have gone down. A recent analysis by the Center for American Progress concluded that in Arizona, California, and New Jersey, rooftop solar installations are overwhelmingly occurring in middle-class neighborhoods that have median incomes from $40,000 to $90,000. But whatever the income differences between solar and nonsolar households, utilities argue that someone will need to bear the costs of long-term investments in power plants and the grid that state regulators approved years ago.

The new law passed in California "begins to address the issue of cost shifting, and it acknowledges that there is an infrastructure called the grid that must be paid for," Owens said.

But a battle is ahead on the details. One idea being considered in California is to charge solar customers a monthly fee, similar to what Arizona regulators did. Another proposal would allow utilities to pay a wholesale rate for electricity generated by rooftop solar systems, which can be several times lower than the retail rate.

That's similar to the proposal by Colorado's Xcel Energy, which has asked state regulators to reduce the net metering rate from 10.5 cents per kilowatt-hour to 4.6 cents. "Times have changed" since the early days when solar needed help getting off the ground, Xcel says.

Solar advocates agree that times are changing, but they say utilities are the ones that are failing to adapt. "Paying only 3.5 to 4.5 cents per kilowatt-hour for electricity generated at the point of usage inside a distribution network at peak period times of day is simply highway robbery," Browning said.

Rather than raising rates, utilities need to rethink their business model, Browning said.

"What we're looking at here is a total potential transformation of the energy business," he added. "There's a regulatory compact that gives utilities a monopoly to serve the public good. The public good is a renewable future, and either they adapt to these new realities, or they'll go the way of the dinosaurs."

SEPA is in a unique position, with members including both utilities and companies in the solar industry, and it has tried to seek a middle ground. Eran Mahrer, SEPA's executive vice president for research and strategy, notes that on the one hand, utilities believe net metering fails to put a proper value on the grid that solar households continue to rely on, for power when it's nighttime or cloudy, and to help manage excess power they produce during the day. On the other hand, the solar industry says utilities are failing to see the premium value of the renewable energy they provide, Mahrer says. "It's clean. It helps meet policy objectives," he says. "It lightens the burden on transmission. It reduces operating costs. It very likely delays the need to make new investments because the solar energy peaks in the middle of the day at the peak time for consumption."

SEPA's view is that electricity rates, as currently designed, don't show clearly either the value of the electric grid, or the value of solar energy, and aren't very transparent about other system costs and benefits. Because rooftop solar is going to be playing an increasingly important role in the energy mix, SEPA argues that utilities and other stakeholders need to collaborate on a new approach for utility billing to reflect the evolving power system. "Through collaboration the two industries can work to maximize the grid value of the solar resource while also continuing to drive down the costs," says Mahrer.

The result may be utility bills that look very different than today's. Some experts, for example, have noted that "time-of-day pricing"—charging more for electricity used in peak daytime hours, and less at low usage hours—is more friendly to solar energy than today's flat-rate structure. And few other nations use net metering as a way to incentivize solar. Other leading solar energy nations, such as Germany and Japan, instead use feed-in tariffs, which set an above-market price for renewable power based on its higher cost and perceived higher value, giving consumers an opportunity to make money from their investment (as opposed to just gaining a break on their utility bill). Household electricity prices average 55 cents per kilowatt-hour in Germany, compared to 13 cents in the United States.

U.S. Energy Secretary Ernest Moniz says the net metering dispute is an important milestone for renewable energy. "Without taking sides in the argument, [the net metering disputes are] one indication that this is 'revolution now,'" he said at a Washington forum on energy security earlier this fall. "These things are all coming to a clash, and challenging business models. That to me is a pretty good definition that these are technologies whose time is really here and now."

Marianne Lavelle also contributed to this report.

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