Price Regulations Complicate Net Metering and Solar Energy

By Logan Shewmaker

As in four other states, all electricity for residential use in Florida must be purchased from franchised utility companies. However, solar energy advocates are trying to change this by allowing private purchase agreements between residents and solar companies in order to expand rooftop solar power production in the Sunshine State. Crucial to this initiative is a policy called “net metering”. Expanding consumer choice is commendable, but because of numerous subsidies and price regulations at play in this market, such a policy could also have a negative impact on non-solar energy users.

Solar photovoltaic (PV) energy systems have become more affordable thanks to changing consumer preferences, but costs to consumers have also fallen because of government subsidies. These subsidies are making residents more likely to install solar power than they otherwise would be. A common government incentive for rooftop solar is a process called “net energy metering” (NEM). At midday, rooftop PV systems often produce more electricity than households use. This excess electricity is sent back into the electrical grid. NEM customers get a billing credit based on the amount of excess electricity they produced.

But what price should utility companies pay households for this customer-produced solar energy? Rather than allow market forces to determine prices based on supply and demand, the Florida Public Service Commission (FPSC) currently regulates prices. According to Rules chapter 25-17, utility companies must pay retail prices for solar power their users produce. The problem is that retail rates include the cost of transportation and distribution, but those are services that the utility provides, not the consumer. Utility companies are concerned about the potential impacts on the electricity transmission network, or “the grid,” and warn that encouraging solar energy production may come at the expense of non-solar customers. Prices for non-NEM customers may rise to make up for lower revenues.

Several economic studies analyze the potential effects of NEM on consumers and utilities, but their results vary widely. A study by the Vermont Public Service Department found that aggregate net costs to non-NEM customers over twenty years would be “close to zero.” In contrast, a study by the California Public Utilities Commission predicted that non-NEM customers would have to pay an additional 20 cents for every kWh produced by NEM customers (based on systems installed in 2012), because of the price regulations that require utilities to buy NEM customers’ power at retail rates.

The economic research on this topic is not in complete agreement, but some evidence confirms utility companies’ claims, suggesting that NEM customers will benefit at the expense of non-NEM customers and the grid’s long-term maintenance provided by legacy utilities. Those who can’t afford to install solar panels could be left with a higher utility bill. Changes in price regulations are necessary to prevent this cross-subsidization. Utilities organizations, such as the Edison Electric Institute, would like to see customer-generated electricity sold to utilities at wholesale prices, rather than retail.

The Florida Public Service Commission  should consider modifying its price regulations regarding net metering since current practices may result in unfair cost sharing and skewed economic incentives. The environmental goals of net metering proponents may be laudable, but the policy’s potential effect on residents who can’t afford to install solar merits consideration.

About DeVoe Moore Center

The DeVoe L. Moore Center is conducts economic research and policy analysis focused on state and local policy issues and is located in the College of Social Sciences and Public Policy at Florida State University in Tallahassee. As an educational institution the DMC provides professional research experience to undergraduate and master’s students through an extensive program of internships and independent study, preparing them for a future in public policy, economic development, public sector accountability and entrepreneurship.
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