Solar Power, and Net Metering (Part 1)

Solar power in the United States is taking off quite vigorously, and installations of solar panels have begun to soar. This quarter, 53% of electricity coming from new installations this year is being generated by solar panels. From 2007, solar installations have gone up by 12 fold, and terms like ‘Gigawatts’ (one of which is enough to power 16 million 60-watt light bulbs continuously) are used on a quarterly basis to describe growth rather than as an end goal.

This isn’t an industry, however, that has pulled itself up by its bootstraps so to speak: alongside significant tax incentives offered on both the state and federal level, states, utilities and newly rising firms have come up with clever financing schemes and policies to help bolster solar growth in the hopes that this nascent industry will center its technological development, and thus jobs for said development in the United States: a move that China is fighting, quite literally, through state-sponsored espionage and cyber-attacks.

One of the most important demand-side benefits that has been developed in many states is what is known as ‘Net-Metering.’ What this policy does, is it allows those people who install solar panels on their home to effectively sell power that the system owner does not use, back to the utility at the rate the utility charges the customer. This power is then distributed back onto the powerlines, and used to feed electricity usage by the utilities’ other customers. This is a good model for a number of reasons, distributed generation leads to ‘cleaner’ electricity with less kilowatt loss since it travels shorter distances to reach homes than centralized generation does, meaning that a kilowatt generated on the neighbors house is more efficient at powering your home than that same kilowatt generated at a dam 30 miles away. Even so, many states are considering removing existing Net-Metering legislation, and while this would be a huge blow to the solar industry as a whole, there is a reasonable argument for doing so. In order to see why, the utility’s side must be analyzed as well.

If the primary cost of electricity came from its physical generation, no issue in this market would exist, but one of the reasons why the energy economics is so fascinating is because it is what economists call a ‘Natural Monopoly.’ Generally, monopolies are considered an inefficient use of resources, since they typically will sell goods at a higher price than if the market were competitive, and at a higher cost of production per unit as well. Natural monopolies are the exception to this rule, because they require extremely high ‘Fixed Costs’ that are incurred before any production begins. Think about it like this: there is some fixed amount of energy that everyone will consume even if energy is free, but we have the choice of producing that energy from multiple power plants, each the same cost to build but each of which have the capacity to provide all of those people energy. In addition, the cost of providing that energy is relatively low: maybe a cent per kilowatt-hour at most. You have the option of producing the energy across several plants each of which incurs a large, upfront cost, or utilizing one plant to produce the energy, albeit at a price slightly higher than if there wasn’t a monopoly in place. This counter intuitively makes a monopoly the most efficient model for providing power to all residents.

Net Metering interferes with this model because it takes advantage of the large fixed costs paid by the utility, and allows owners of solar panels to charge utilities the same price as the utility charges its customers even though the owners of the solar panels are not paying the high fixed costs to maintain and develop energy resources in the United States. This results in the utilities’ facing increasing losses as more and more individuals install solar arrays that produce more power than those individuals consume.

Next week, I’ll talk about the currently utilized solutions for this market problem, and how those solutions have created, different, but equally difficult problems of their own.

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