Reforming Net Metering Would Restore Fairness for Energy Consumers

Federal and state policymakers have created a dizzying variety of tax credits, rebates, grants and other incentive programs to encourage residential rooftop solar systems. At the state level, one policy has spread rapidly: net metering. 

The basic concept behind net metering is simple: Homeowners who generate electricity from rooftop solar panels are able to sell any excess energy they produce to their utility company. That way, the energy doesn’t go to waste, and homeowners reduce their electricity bills.

While the idea of net metering is attractive, its practical implementation proves harmful to consumers, according to a new report by the American Consumer Institute.

Most net metering customers are credited for the power they sell to electric utilities at the full retail rate (which includes the costs of generating, transporting and delivering power), even though electric utilities buying this power must still incur the costs of maintaining the poles, wires, meters and other equipment needed to deliver the power to their other customers.

When homeowners are compensated at rates beyond what their energy is worth, utilities are forced to increase prices on the other customers to offset the higher costs. Before reforms were enacted in Arizona, non-solar customers paid between $9 million to $10 million per year to cover the cost of net metering customers. Similarly, a study by the Nevada Public Utilities Commission found that payments to net metering customers at the retail rate shifted costs onto other ratepayers, thereby creating a $623 annual subsidy for each residential net metering customer in Southern Nevada and a $471 annual subsidy to residential customers in Northern Nevada.

To make matters worse, net metering subsidies disproportionately flow from low-income households to those with higher income. The median income of those with solar systems was $91,210, 49 percent more than the average household income in the United States.

This is objectively unfair given that households with earnings of less than $15,000 spend 17 times more of their income on electricity bills than households earning more than $200,000. A California Public Service Commission report found net metering customers earned 68 percent higher incomes than other customers in the state.

Thus, the implicit subsidy inherent in many net metering programs pushes recovery of these costs to those that can least afford it. Essentially, net metering at retail prices represents welfare for the rich.

The growth of subsidies through net metering has also fueled a cottage industry of solar installation companies using fraudulent practices to convince homeowners to lease rooftop solar panels. Contrary to popular belief, the third-party ownership model — dominated by two companies, Vivint Solar and SolarCity — accounts for most of the residential installations. The leases appear very attractive — offering zero-money-down installations, no maintenance costs, reduced electricity bills, and low payments — but the contracts often bear little resemblance to salespeople’s lofty promises.

A number of solar companies have been caught inflating future energy savings, downplaying insurance expenses and failing to disclose the escalation of future lease payments. Consumer protection agencies and law enforcement officials are working to counter these scams, but too many policymakers are ignoring their root cause: the lucrative opportunities net metering creates for unscrupulous businesses.

A fairer approach to net metering, and one that has been adopted by a number of states, would be to compensate net metering customers, not based on the retail rate, but based on a wholesale price reflecting the cost that electric utilities would save by buying energy directly from solar residents.

Solar power is an important part of our energy future, but misguided net metering policies distort the market, transfer wealth from the neediest Americans to the most wealthy and incentivize fraudulent business practices that victimize consumers. The basic solution is simple: States should adopt fair, market-driven rates to compensate net metering customers. 

Steve Pociask is president of the American Consumer Institute, a nonprofit educational and research organization.

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