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Why Aren’t We Talking About Net Energy Metering for LEDs?

The fights over net energy metering have gotten loud and heated. For those of you who have missed the drama, here, in a nutshell, is what “net metering” means. Say I install enough solar panels on my roof to provide about half of my electricity over the course of a year. On a sunny afternoon, if I’ve turned off my Tivo and my refrigerator and dryer aren’t running, my system might be generating more electricity than my house is consuming.

Net metering means that my utility will credit me for the “extra” power my system generates at times like this and charge me based on the difference between my total consumption and my total solar production, i.e. my net consumption. I will be selling back to the grid during the sunny afternoons when my own consumption is low. (See Severin’s previous post on this.)

Will you neighbors admire your solar panels?
Will you neighbors admire your solar panels?

So, how does this apply to LEDs? From a purely technical perspective, it doesn’t. An LED would never bring a house below zero consumption so that it’s selling back to the grid. But the zero consumption threshold isn’t what all the fights are about. If my consumption without the solar panels puts me on the fourth tier, where my rates are as high as 36 cents per kWh, my solar system helps me avoid paying for some pretty expensive electricity. Even if I never go below zero, a solar system will keep me down on the lower tiers, paying only 13 cents per kWh. (On a side note, the solar installers who have approached me understand this and size their systems to avoid the expensive power but not the cheaper stuff.)

But, PG&E has fixed costs, which won’t disappear just because I install solar – it still has to run distribution wires to my house and pay for my meter. It’s paying property taxes and financing costs for its power plants no matter how much electricity they produce.

The basic problem is that utilities are collecting fixed costs – which by definition do not vary as a function of how many kWh customers consume – on a volumetric basis. So, every time someone installs  solar panels, the remaining ratepayers have to pay slightly more to cover those costs. Yes, my neighbors (and all of PG&E’s residential customers) would have to pay for my meter and my “share” of the distribution lines running down our street if I got a large solar system.

The opponents of net metering argue that it provides unfair incentives for people to install solar, which leave the rest of the users on the hook to cover the utilities’ fixed costs. They cite the “death spiral,” meaning that rates get higher for non-solar customers, which induces more of them to switch to solar. The more sophisticated opponents note that solar installations are generally on rich people’s houses, so net metering is regressively subsidizing the rich.

This brings us to the question posed in the title. Why isn’t anyone complaining (at least very loudly) about unfair cost shifting or the death spiral when I buy an LED bulb? Just like a solar system, my LED bulb will help me avoid the 36 cent power, and, given that some of that is collecting fixed costs, my neighbors will be left paying a tiny bit more – if not tomorrow, after PG&E’s next rate case.

My first guess was that we’re not talking about an energy efficiency death spiral since we’re still talking about the energy efficiency gap, which implies that customers are not investing in seemingly cost-effective energy efficiency measures. In other words, customers have been leaving the proverbial $20 bills on the sidewalk and bypassing energy efficiency opportunities, like replacing their incandescent bulbs with LEDs, even though the switch could save them money.

But, I did some rough calculations and concluded that annual energy savings from LEDs could be on par with or even larger than distributed solar, especially when you bring in commercial lighting. Very roughly, California added approximately 1,000 MW of solar in 2013. At an estimated capacity factor of 17%, that’s roughly 1,500 GWh of annual solar production. This report estimates nearly 1,000 GWh of annual savings from light bulb standards in California, climbing to 11,000 GWh by 2018.

Lots of potential?
Lots of potential?

And, we’re talking about potentially large amounts of money shifted across customers, as a large share of the typical utility’s costs is fixed. The California Public Utilities Commission put out a study on net energy metering that calculated that the typical solar customer paid bills that were 54% higher than the utility’s incremental cost of serving them before they installed solar and 12% less than the incremental cost of serving them after they installed solar. This is suggestive of just how much fixed costs are collected on a volumetric basis, particularly on the higher tiers.

So, I predict many more years of heated discussions about rate restructuring. I’d guess that we will look back with amusement at the contentious debates about whether to add a monthly fixed fee to PG&E rates, because the typical customer will be paying a much larger share of their bill as a fixed charge.

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Catherine Wolfram View All

Catherine Wolfram is Associate Dean for Academic Affairs and the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. ​She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.

Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.

She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.

48 thoughts on “Why Aren’t We Talking About Net Energy Metering for LEDs? Leave a comment

  1. Thank you for a fantastic and thought-provoking article.

    I wonder if this discrepancy arises due to perceived inequitability in access to rooftop solar when compared to Energy Efficiency. Most households, including renters can switch to LEDs and be more energy efficient to save money, but not many folk have the right kind of rooftop/location/capital to invest in solar.

    In any case, Net-metering capacity is severely underutilized in Michigan. With a net capacity under each utility being 1% of last year’s peak load, only 5% of that 1% is currently being utilized. Solar installer markets are nascent in MI, with only 1500 net-metered installations across the state [Source: Michigan ANnual Net Metering Report, 2014]. At the same time, the state actively mandates EE through Energy Optimization surcharges.

    I also wonder if EE retrofits/upgrades have as dramatic an effect on utility load profiles, as overproduction of solar does (I am thinking of the infamous Duck Curve).

    Again, thanks for a really good question and blog-post. This will keep me thinking for a while.

  2. Isn’t there a long term growth in demand for electricity for electric cars, where is that power going to come from? That would seem to be more than an offset to LEDs and other conservation as well as a lot of solar.

    • It is hoped that EV load will fill in the valleys that exist, whether the valley is in regard to generation at night or when there is spare capacity on the transmission grid or the distribution grid. But as the concern about the Duck Curve demonstrates, the valleys shift. In regard to the Duck Curve, the growth in solar will shift the high cost peak to the evening and push down the price for solar intense periods at noon. Already EV loads are forcing some utilities to look at the former valleys on their distribution system and install more distribution capacity. It also should result in real time pricing of the distribution wires as I said in “Dynamic Pricing: Using Smart Meters to Solve Electric Vehicles Related Distribution Overloads,” Metering International, Issue 3, 2010.

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