Last year, 46 states considered changes to compensation for rooftop solar systems. Some of those proposed changes resulted in a contentious war of words between solar advocates and utilities.

Utilities are in a tough spot. They must now balance what their customers want -- which, increasingly, is solar -- with the cost of maintaining the grid.

While utilities need to ensure that customers are paying their share of the costs to access the grid, they also run the risk of angering customers if changes to net metering are too onerous. This can be bad for business.

So what’s the best course of action?

Net metering pays owners of residential and small commercial rooftop systems the retail rate for every kilowatt-hour of electricity fed back into the grid. It’s been a successful tool -- but it’s a very blunt one.

In several states, compromise approaches to accurately valuing solar and managing higher penetration levels are becoming more common, creating a model for successfully dealing with the growth of PV.

Quick action may not be best

When -- and how -- utilities get involved in a solar valuation process is inherently a business-model decision.

Rising rooftop-solar penetration levels have spurred utilities to reconsider how they compensate customer-sited generation in order to mitigate revenue loss and avoid undue cost-shifting. But sudden revisions to incentives that solar owners rely on for financing creates backlash. That’s what happened in Nevada when solar customers filed a class-action lawsuit against NV Energy after the state slashed its net metering program for all customers.

However, the stakeholders on different sides of the issue aren’t necessarily that far apart. A GTM Research survey found that 67 percent of regulators, utilities and solar industry respondents felt customer-sited solar should be compensated using value-of-solar tariffs that more accurately reflect grid costs and the avoided cost of building new infrastructure by 2020.  

Decision time is fast approaching. Senators Harry Reid and Angus King proposed legislation to preserve net metering nationwide, and the National Association of Regulatory Utility Commissioners is drafting a manual based on existing approaches and court decisions to guide future rate designs for rooftop solar.

“Utilities are taking a long-term view of how to participate in policy creation that’s sustainable, where customers don’t feel there’s a bait-and-switch,” said Jim Heidell, a utilities expert at PA Consulting.

“A litigated process is not necessarily the best way to come to a conclusion. The collaborative process often works and can lead to better solutions where all parties are in agreement,” said Heidell.

Maine meets all sides in the middle

Ironically, the most innovative collaborative approach to solar valuation is found in one of America’s smallest solar markets: Maine.

Earlier this year, Maine legislators introduced a bill to replace net metering in 2017 with a system where regulators periodically reset compensation levels applied to aggregated solar power sold into the wholesale market.

Solar owners would get market-based compensation. They’d also have an option to get grandfathered into the old net-metering system, while paying a larger share of transmission and distribution costs.

Utilities would benefit from wholesale market and renewable energy credit revenue while managing intermittency through project aggregation and targeting installations to the most valuable locations for each market segment.

Transparent pricing is key here, for solar owner and utility alike.

“The utility compact is providing reliable, affordable, safe, and more recently, clean electricity,” said Zach Pollock, an energy and utilities expert at PA Consulting. “By aggregating individual projects, they’re able to more accurately value those resources in terms of system planning while bringing in benefits and addressing environmental externalities.”

Maine’s compromise approach hasn’t convinced everyone, however. Even though all sides agree with the middle-ground proposal, Governor Paul LePage says he’ll veto the bill. If the legislation does fail, Maine’s Public Utilities Commission would decide future net-metering policy -- and a ruling made there could be less collaborative.

The Midwest’s move toward accurate solar valuation

Maine is not alone in the shift toward accurate solar valuation based on environmental and system benefits. Minnesota was the first state to set a value-of-solar (VOS) tariff including the value of delivered energy, generation and transmission capacity, line losses, and external environmental benefits -- many of distributed solar’s most important attributes.

“The long-term value of solar is a complicated calculation, but it needs to include all the values like energy generation, transmission and distribution capacity, the way solar offsets utility line losses, and internalizing various externalities like the social cost of carbon,” said Briana Kobor, program director of DG regulatory policy at Vote Solar.

The process included all relevant parties and granted investor-owned utilities the option of applying the VOS formula to customers instead of imposing retail-rate net metering. While the price may not have been ideal for any one side, regulators engaged all stakeholders and determined compensation in the fairest way possible.

Minnesota’s e21 Initiative is also bringing utilities and renewable energy advocates together to determine fair solar valuation and consider proposals for remaking utility business models.

“The regulatory process has historically been pretty cumbersome and asymmetrical. That’s what e21 is trying to target -- the undue burden and regulatory constraints created with the traditional rate-case process,” said Pollock.

A big proposal in America’s smallest solar state

The Midwest’s move toward greater transparency in solar valuation is spreading.  Proposed legislation in South Dakota -- which ranks last in the U.S. with just 2.4 megawatts of installed solar capacity -- could avoid future regulatory fights by better defining solar’s value to include all of the technology’s benefits and costs.

South Dakota currently reimburses solar owners at an avoided cost rate of 2.78 cents to 4.33 cents per kilowatt-hour, depending on the utility. Several additional values would be included under the new system, including unused energy, avoided transmission capacity, reduced line losses, and the value of generation added to high-demand locations on the grid.

This process would seek input from all stakeholders -- utilities, customers, and solar advocates alike -- and establish an acceptable value for solar generation ahead of rising demand. Unfortunately, South Dakota’s solar future will have to wait a bit longer, as the proposed bill was recently tabled until the next legislative session.   

Collaboration is key, but it takes time

These examples show a collaborative path forward, but one problem remains -- they’re all in nascent markets with low penetration levels.

Similar compromise efforts have emerged in other small-scale markets like Louisiana and Montana. And New Hampshire’s recent net-metering expansion directs regulators to develop new compensation guidelines after the new cap is reached.

But developed markets like California and Hawaii have made contentious net-metering changes without a VOS process that riled utility stakeholders. And while Massachusetts’ recent net-metering compromise expanded cap limits, it also cut compensation levels without a new valuation process.

As utilities start thinking more seriously about how to properly value solar, the best course of action is likely one that meets customers halfway.

“Customers should have the choice to consume as much or as little energy as they want from their utility,” said Kobor, pointing to Vote Solar’s “Guiding Principals” policy guide, developed with partners across the energy and consumer spectrum. “If you move beyond retail-rate net metering, the discussion should focus on energy exports.”

This approach has worked in Minnesota and would likely work in Maine, if approved. A collaborative approach to accurately valuing solar could even help re-establish a market in Arizona, where regulators are developing a standardized cost of service and a value-of-solar methodology to apply to future cases.

Ultimately, a successful approach to net-metering policy will likely require patience and collaboration. 

“You have less resistance to change if change comes slowly without suddenly taking rights away from people,” said Heidell. “It’s got to be gradual, and it takes a long time.”

This article is part of a Next Generation Utility series from PA Consulting. Find more news and analysis on the subject here.