Monthly Archives: July 2016

Solar isn’t the cause of high electricity costs – It’s the outmoded utility business model

This piece was published in Commonwealth Magazine on March 29, 2016

 

Like many utilities across the country, National Grid blames high electricity costs on net metering while claiming to protect ratepayers. But that’s not the real reason utilities object to this highly successful policy that enables ratepayers to take control of their own energy future and use independently owned electricity generation to reduce and stabilize their utility costs.

In fact, it isn’t net metering or the way we compensate solar generators, but the inadvisable way that we compensate utilities that is the primary cause of our escalating electricity bills.

Electricity costs are high in large part because of our outmoded utility business model. Though obscured by all sorts of technical and regulatory complexity, the basic utility business model is really very simple. Regulation and rate-setting for utilities is designed in a way that encourages utility investment in distribution system improvements. The more utilities can persuade regulators to allow them to invest, the more they earn. That basic driver of utility revenue in our regulatory system is the fundamental reason that everyone’s electricity bills are so high.

In his commentary in CommonWealth, Ed White, senior vice president at National Grid, implies that the utility is not concerned with reduced electrical demand that would result from large-scale solar deployment. He references electric rate decoupling, which uncouples a utility’s profits from its sales of electricity and instead provides utility revenue based on meeting service goals approved by regulators. He suggests that “National Grid and our fellow utilities have led programs that have made Massachusetts No. 1 in the nation in energy efficiency.” What he doesn’t mention is that, unlike with net metering, utilities earn a good financial return for their role in energy efficiency programs.

Even with decoupling, solar projects connected directly to the distribution system reduce the key drivers of utility revenue. The real problem with local solar for utilities is not a reduction in the sales of electricity, but rather a reduction in the need for additional distribution system investments.

Local solar generation tied directly to the distribution system also reduces peak demand and the long-term need for the utilities’ very profitable transmission services, which are governed by entirely different regulators and rules. National Grid and Eversource own about 80 percent of the New England transmission system, which costs ratepayers twice as much as any other transmission system in the country.

Numerous studies have shown independently owned, locally connected solar generation provides value for all ratepayers that significantly exceeds costs to ratepayers, with benefits like reduced need for distribution system investment and transmission services. Even the Massachusetts Net Metering Task Force that National Grid and Eversource took part in has confirmed that. Reducing these costs to ratepayers means reduced profits for utilities.

White suggests that: “The bottom line is that we support efficient investments of our customers’ dollars.” But unlike competitive businesses in which cutting costs and delivering services more efficiently is rewarded with higher profits, the monopoly utility compensation model encourages more utility spending in order to increase their shareholder revenue. The utilities’ real objection to net metering is not an altruistic defense of ratepayers, but protection of their own financial interests. The real bottom line is the bottom line on National Grid’s income statement.

Utilities have been granted monopoly status in the distribution business in return for providing critical services maintaining wires, transformers, and other infrastructure that would be inefficient and unwieldy to deliver through multiple providers. Legislators and regulators should assure that markets for other energy services that are better delivered through competitive providers are not restrained or distorted by the financial interest of monopolies.

The 1997 Massachusetts electric utility restructuring act required distribution utilities to get out of the electricity generation business. Restructuring was intended to lower electricity costs, reduce long term risk to ratepayers, keep monopoly utilities from distorting energy markets by unfairly competing with independent generators, and encourage utilities to become less resistant to innovative solutions.

The upcoming omnibus energy bill provides legislators with an opportunity to address the real cause of high energy bills. Legislators should require the Department of Public Utilities to finish the work started under the electric utility restructuring act and rethink the role of monopoly distribution utilities. Leading states, including New York and California, have already started this important work.

Rather than the inflexible centralized utility system we have today, utility distribution should be reconfigured as an open platform enabling independent service providers to competitively sell energy, efficiency, demand response, energy storage, and other innovative services to help ratepayers stabilize and reduce their utility costs.

Former New England Electric System CEO John Rowe suggested in 1989 that if we want utilities to change, “the rat must smell the cheese.” We should be paying utilities less for business as usual and reward them much better for transforming their systems to enable all kinds of transactions between independent energy services providers and their customers. Appropriate mechanisms for the utilities to earn a reasonable return on facilitating and integrating third-party and customer-driven energy solutions should be developed. Let’s reward the utilities for moving into the future rather than clinging to a sclerotic old business model that stifles innovation.

Once utility incentives are properly aligned, they will have no reason to object to fair and reasonable compensation for independently owned distributed energy resources. In the near term, legislators should eliminate the caps on net metering, leave net metering compensation formulas as they are, and focus regulators attention on the real reasons that Massachusetts’ electricity costs are high.

 

Meet the Author

 

Fred Unger is president of Heartwood Group, a clean energy development company. He has coordinated development of about 10 megawatts of solar and wind projects in Massachusetts, most of which reduce and stabilize electricity costs for affordable housing communities.

Advertisements

Leave a comment

Filed under Uncategorized