Are Utilities Anti-Solar?

There's been a bunch of news articles recently about power companies coming into conflict with customers who install solar systems. In Hawaii, where solar power is substantially cheaper than the power company and has become very common, Hawaiian Electric Industries (the local utility) has stopped allowing some new solar systems to be connected to the grid. In Arizona, the power company lobbied (unsuccessfully) to start charging $600/year to customers who install solar. This Bloomberg article is a nice summary of what's been going on in both states.

It would be easy to conclude from this that power companies (or at least, the ones in Hawaii and Arizona) are against solar power. I think the reality is a lot more complicated: I think the power companies are not against solar power, but have let themselves get backed into a corner created by their business model, the net-metering laws in the U.S., and politics.

Traditionally, power companies have built and operated all aspects of the electrical system including power generation and distribution. As regulated monopolies (in the U.S.), power companies' prices are generally set by a governmental agency, which allows the utility to earn a specified return on equity. This formula is supposed to compensate the utility for spending the money to build the infrastructure and allow it a fair profit without taking advantage of its monopoly position.

This system mostly works, though it does have a few quirks. Because the utility's profits are based on the total investment, it's in the best interest of the utility to spend a lot of money on infrastructure and minimize operating costs. Buying power from a third party doesn't help the utility at all, since there's no money invested in that generating capacity. However, since most power companies' rates are directly set by the government--which is ultimately answerable to voters, who don't like to see their power bills go up--they have been somewhat restrained from simply building the most gold-plated power system possible.

Net metering has been around for about 30 years (Minnesota passed the first net metering law in 1983), and requires that utilities buy excess power generated by small customers. The details vary from state to state, but in Minnesota the requirement is that the power company pay full retail for the electricity it buys. In other words, your power bill is based on the "net" amount of power you bought from the utility, not the total amount you used.

Net metering was designed to encourage people to install small solar and wind power systems. It's effectively a subsidy for customers who might need to buy electricity at some times, but generate more power than they need at other times. It's a subsidy because retail electric rates combine the costs of both power generation and transmission into the price per kWh, and the net metering customer gets both the generation and the transmission costs netted out even though the customer is still using the grid to buy and sell electricity. Xcel Energy, our local power company, claims that 45% of our electricity costs are for transmission, so the net metering customer is effectively getting paid double the wholesale cost for excess power generated.

The beauty of net metering is that it encourages connecting small power sources to the grid (where the power can be used more efficiently) and appeals to everyone's sense of fairness. In fact, several power companies voluntarily started offering net metering back in the early 1980's before any states had passed laws requiring it. It has proven a very effective incentive for the adoption of solar power once the price of solar starts to get close to the retail price of electricity.

But as the cost of residential solar power has approached (and in some cases dropped below) the retail price of electricity, net metering has started to create problems for utilities. Net metering is only workable for the power company if a very small percentage of customers sell power back to the grid. If too many customers take advantage of net metering, the subsidy can start eating into the power company's profits (though the power companies prefer to say that "it's too expensive for the other customers," as though the net metering subsidy was somehow automatically added to other customers' bills). Too many net metering customers also takes a percentage of the generating capacity out of the control of the power company, which can create some real problems with keeping the grid functioning smoothly. Power grids, as implemented today, are simply not designed to account for thousands of small power plants constantly coming on- and off-line.

This is where the utilities start to get boxed in by the politics of the situation. Net metering is incredibly popular (at least among people who care about the politics of energy). It seems fair to the average consumer because the subsidy is well-hidden. And it is very effective at encouraging solar installations. But because the utilities can foresee a day when net metering and grid-tied solar will start causing them big problems, they want to get ahead of the issue.

Unfortunately, there is very little a power company can do to change net metering laws or put the brakes on solar installations without looking like the big bad bully out to squash the little guy and slow down the future of energy. And since power companies in the U.S. generally don't have the ability to set prices without government approval, it's going to be very hard for them to adjust to the new reality of widespread adoption of solar power.

At the end of the day, I don't think power companies are anti-solar. I think most power companies would be perfectly fine with generating a lot of their electricity from solar power, as long as they controlled the solar power plants and it was cost-competitive. But right now, solar is cost-effective at retail prices, and ordinary consumers are starting to adopt the technology en masse. This costs the power companies a lot of money and takes a lot of control out of their hands, and that's what they oppose.

What we need is a fundamental restructuring of our electricity markets, to create a system which is fair to everyone but still encourages people to invest in their own solar installations. This is something the power companies are going to fight, since it will likely take away a lot of their control and at least some of their profits. But the politics and the economics of the situation are against them long-term.