Compensation for Solar Energy

Net-metering and other energy compensation programs that offer a special rate for energy from renewable sources can be used to incentivize smart land use, including smaller-scale arrays, those located on preferred sites, and agrivoltaic or dual-use arrays designed to work with agriculture. These programs generally require that utilities distributing energy to consumers procure that energy using specific contract terms set by law, rather than negotiated by the utility.

Owners of solar arrays are compensated for the energy they generate through a variety of state-law mechanisms.

Policymakers can identify preferred categories of solar development and preferred locations for solar arrays by establishing thoughtful eligibility requirements and rate adjustors that modify compensation based on a project’s characteristics (like size, location, and design) within state laws governing compensation for solar energy.

Power Purchase Agreements

A power purchase agreement (“PPA”) is a contract between the developer of a solar array (or other source of distributed energy generation) and a customer desiring to purchase solar energy. The developer is usually responsible for the design, permitting, financing, and installation of the solar array on the customer’s property or off-site, at little upfront cost to the customer, and sells the generated electricity to the customer at a fixed long-term rate (often 10-25 years). The developer usually takes advantage of tax credits and other incentives, while the customer benefits from lower electricity costs.

However, not all states allow solar energy to be bought and sold under PPAs. When lawmakers and regulators have not taken steps to specifically allow PPAs, these contracts may violate electric utility regulation rules. Lawmakers should ensure that PPAs are available under state law to promote renewable energy development.

State laws governing PPAs may direct utilities to enter into PPAs with independent generators of renewable energy; they may set certain contract terms for PPAS, such as contract length; or, they may more broadly exempt certain independent generators of renewable energy from the definition of a regulated public utility.

Net Metering

Net metering programs allow owners of distributed generation solar installations (often residential rooftop and smaller ground-mounted installations) to receive credit on their electric bill for energy contributed to the grid when their solar panels generate more electricity than can be used on site. States net metering programs differ in approaches to “eligible project capacity, eligible technology, net metering credit retention, and REC ownership.” Net metering is essentially a retail transaction regulated by states and is not subject to FERC Regulation, as “no sale occurs under the Federal Power Act when an entity installs generation and accounts for its dealings with the utility through the practice of netting.” (94 FERC § 61,340, 62,263 (2001)). This removes the sale of net metered energy from the definition of “wholesale sales” of energy regulated by the federal government, and leaves states with significant leeway to design creative incentives for specific types of solar installations. This leeway also means that each state program defines its key terms differently.

Size or Type of Electric Service Provider

State laws allowing net metering do not necessarily require utilities to offer net metering to any, let alone all of their customers. Some states limit net metering obligations to investor owned utilities, while excluding municipal utilities and/or electric cooperatives from the requirement to provide net metering to eligible customers. Other states may require only large utilities to establish a net metering program.

Eligible Technology

Net metering programs define by law the sources of distributed energy eligible for enrollment. Solar energy is the most common source of net metered energy, but lawmakers may define additional eligible distributed energy generation technologies, including wind, biogas, and geothermal, among others. Net metering programs have also begun to include provisions incentivizing energy storage in addition to energy generation.

Eligible Customers

Net metering may only be available to customers in a given utility’s service area, and may be further limited to certain classes of customers, such as residential, or commercial users. Some states have established a special category within their net metering program for agricultural customers.

Program and Project Capacity

States are likely to impose both eligible project capacity limits and total net metering program capacity caps. Some states establish different project or program capacity limits for different eligible technologies. Net metering rules may also limit individual project capacity to relatively small-scale projects (i.e. less than 10 to 50 kilowatts in capacity), may include larger community or commercial-scale projects (i.e. 50-500 kilowatts in capacity), or may be available to projects of more than one megawatt. Eligible project capacity may also be defined in relation to the average electric load of the enrolled customer or customers, with or without an allowance for excess energy generation.

Metering and Compensation for Energy

State net metering programs differ in how costomers are compensated for excess electricity generation.

• Compensation may occur at an established retail or wholesale price or at a promotional price.
• Consumers may or may not be charged for certain fixed costs, even if they offset their entire electric consumption with solar generation.
• Compensation may consist of net metering bill credits alone or a per-kilowatt-hour dollar rate paid for excess generation.
• Some net metering programs allow excess credits to carry forward for a defined period of time if unused, and others put strict time limits on credit expiration.
• Consumers may or may not be able to “cash out” unused credits for a dollar payment amount.

It is worth noting the difference between “net metering” and “net billing,” as the terms are easily confused and policymakers should understand the distinction. Net metering originated as a service provided with a single meter that rolls forward when a customer uses more power than it generates and rolls backwards when the customer generates more power than it uses, thus erasing the customer’s prior usage. This means the kilowatt-hours the customer consumes from the grid are valued the same as kilowatt-hours the customer contributes to the grid. Net billing either uses two meters or a single sophisticated meter to separately track energy flows to and from the grid. This allows flexibility for setting different rates at which the utility and the customer exchange energy.

Project Location

A few states have begun to modify the rates paid for solar energy based on the location of the solar installation. Existing structures and cleared areas, like former parking lots, industrial areas, brownfields and redevelopment sites, and former landfills or mining areas should be considered by policymakers as prime candidates for solar project incentives.

REC Ownership

State net metering programs differ in how RECs generated by enrolled projects are allocated between consumer-generators and host utilities. REC ownership significantly impacts the financial implications of most solar projects and affects which parties can claim to use or consume solar energy.  Some states specify that RECs are to be retained by the consumer-generator, who may retain or sell the credits. Other states assign RECs generated by enrolled projects to the interconnecting utility. In this case, utilities may be required to retain the RECs for compliance with state renewable portfolio standard obligations, or may be allowed to sell the RECs into more profitable markets.

Community Solar and Group or “Virtual” Net Metering

Group or virtual net metering allows a group of customers to share the net metering credits generated from a single, larger solar array. Group members do not have to be connected to the generation source, which may be located on a host customer’s property or on another site. Group members share credits with others in the same electric service territory. Group net metering allows expanded participation in renewable energy, as it makes economies of scale available to save on regulatory compliance and system installation costs.

SPOTLIGHT: Virginia’s Net Metering Program

VA Code Ann. § 56-594 (2019)

Feed-in Tariffs

Feed-in tariffs are similar to net metering programs, except that the power generated by the solar array is contributed to the grid and not used to offset a customer-generator’s electricity consumption. A feed-in tariff establishes long-term standard contracts for generators of renewable energy, typically offering a specified rate set by law for every kilowatt-hour of electricity produced under a contract lasting 10-25 years. This provides financial certainty to renewable energy developers and investors, stimulating solar energy development.

State lawmakers can vary feed-in tariff rates to promote a preferred technology, project size, location, or other resource quality to align with specific policy goals. Feed-in tariffs are also similar to net metering programs in that the program details are likely to differ among states, including program definitions, eligible projects and technology, total program capacity, compensation for energy, and REC ownership. Some feed-in tariffs may provide a set dollar amount for per-kilowatt-hour compensation, while others request bids from potential developers, and others may establish a series of rate adjustors that change based on project characteristics, like solar array size, location, or design.

As the cost of solar infrastructure has decreased significantly, some states and even local governments have found that rates established through feed-in tariffs are overly generous, burdening utilities locked into long-term contracts. Policymakers can establish periodic reviews for feed-in-tariff contracts or set pre-established declines in feed-in tariff contract rates. This helps to provide a predictable regulatory framework, while leaving room for policy flexibility.

Value of Solar

A Value of Solar rate is not by itself a compensation mechanism for solar or renewable energy. Rather, it is a method of calculating compensation for renewable energy contributed to the grid by renewable generators, designed to capture the value of the renewable energy to both utilities and larger public policy goals, like ensuring that costs of renewable energy development are spread fairly among ratepayers. Net metering or other solar compensation mechanisms may consider the value of solar to the distribution grid and to public policy goals when setting energy compensation rates.

A Value of Solar rate is calculated by studying, analyzing, and accounting for the benefits and costs of the solar system to the grid. Rates may be locked in for a fixed contract length or can be open to revision based on changes in solar energy value over time or based on market conditions at specific times and locations. Value of Solar rates may decrease the burden of solar development costs on rate payers, but do not expand solar growth as much as the above-market rates generally used in state net metering programs and feed-in tariffs.

Rate Adders, Subtractors, and Adjustors

Some states have established rate “adders” and “subtractors” within their compensation mechanisms for solar energy to encourage preferred project size, location, or design. For example, an additional $0.01-$0.06 per kilowatt-hour might be provided to small-scale solar arrays, low-income projects, community solar installations, projects located on structures or previously disturbed land, or those using solar tracker technology or incorporating battery storage.

Policymakers might subtract a per-kilowatt-hour amount from large-scale arrays or for projects located on greenfields. See the next section, “Options for Smart Farmland Solar Policy,” for information about using rate adders and subtractors to protect agricultural land and encourage farmer access to clean energy.

Other Per-kilowatt-hour Rate Incentives

States have established a variety of additional “performance-based incentives” for solar energy. Performance-based incentive payments depend on the energy output of a solar installation. Because these per-kilowatt-hour incentives are paid as energy is generated, they can provide an additional revenue stream to support solar projects over the long-term.

PURPA Qualifying Facilities

The federal Public Utility Regulatory Policy Act (PURPA) of 1978 required utilities to purchase the renewable energy generated by “qualifying facility” (QF) projects up to 80 MW in capacity at an “avoided cost” rate and to facilitate the interconnection of these projects to the grid. PURPA rates may be available for projects that do not otherwise qualify for other state energy procurement programs. The Energy Policy Act of 2005 amended PURPA to remove the mandatory purchase obligation on certain utilities for most QFs greater than 20 MW, but the obligation remains to purchase power from generators less than 20 MW.

If a solar array is a QF, it generally has the option of selling energy to a utility either at the utility’s avoided cost or at a negotiated rate. An “avoided cost” rate is the  “incremental cost to an electric utility of electric energy or capacity which, but for the purchase from the QF, such utility would generate itself or purchase from another source.” 18 C.F.R. § 292.101(b)(6). PURPA has been a significant driver of utility-scale solar projects, and is essential to the continued growth of solar.

Integrating renewable energy into agriculture supports farm viability, among other benefits.

Farmers and agricultural landowners can create additional income streams by leasing land to solar developers or participating directly in net metering programs and other compensation programs for solar development.

Solar energy can also support farm viability by significantly reducing the burden of a farm’s electric bills. When rules are established to incentivize agrivoltaic or dual-use projects, farmers can create dual income streams from a single parcel of land that remains in agricultural production while generating solar electricity. However, farmers and agricultural landowners may be excluded from participation in net metering and other special energy compensation programs when the rules fail to consider the specific needs of agricultural electric customers.

Demand for solar development

Like state Renewable Portfolio Standards, state compensation mechanisms for solar energy that provide an above-market rate incentive are likely to significantly increase the sheer amount of solar development occurring in a given area, increasing the risks to agricultural land and uses. Farmers and agricultural landowners may experience increased pressure to lease land for large-scale solar development. To address this pressure, lawmakers can include project siting conditions in solar compensation rate eligibility requirements or provide rate incentives to steer solar arrays away from farms and other greenfields.

Opportunities for Reduced Electricity Costs

While farms of any size can benefit financially from solar energy, “farm businesses” are poised to drastically reduce electricity costs if a beneficial compensation mechanism for solar energy is available. The U.S. Department of Agriculture defines a “farm business” as a farm where the primary operator spends the majority of time on agricultural production, or, if the operator is largely employed off-farm, the farm operation has over $350,000 in annual gross-cash income. While only 41% of U.S. farms are “farm businesses,” they account for 93% of the country’s agricultural production value and 90% of fuel and electricity consumption. Electricity costs average about 1-6% of total expenses for farm businesses, which also represents the farm’s potential savings if a solar array meeting or exceeding this electric demand were installed. Solar development policies should leave room for farms of all sizes to benefit from the electricity cost savings and potential income realized from solar energy.

Customer Class Exclusions

The scale of farms and types agricultural production differ widely across the country. Depending on the distribution utility or electric service provider serving the farm, the available rate schedules, and the farmer’s electricity uses, the farmer might pay farm, residential, commercial, or industrial retail prices.Unless policymakers have considered agricultural customers, they may be excluded from participating in state net metering programs that are limited to a particular rate class or customer type.

Electric Service Provider Exemptions

Many states only require large or investor-owned utilities to establish net metering programs and other per-kilowatt-hour compensation rates for solar energy. And many farmers and agricultural landowners are served by Rural Electric Cooperatives, which are likely to be excluded from the obligation to offer net metering to their customers or to establish other standard contracts for purchasing solar energy, even if the cooperative chooses to offer solar incentive programs.

The Rural Electrification Act of 1936 promoted Rural Electric Cooperatives with the goal of bringing affordable electrical power to rural areas across the country. Cooperatives are controlled by a board of directors elected by their customer-members, rather than beholden to shareholders like traditional investor-owned utilities. While the democratic process in these cooperatives  may allow interested members to advocate for smart solar incentives, their exemption from state requirements for solar energy compensation can leave farmers excluded from participation.

Project Capacity and Siting Limitations

Project capacity size limitations and locational siting restrictions found within state energy compensation rules can exclude agricultural landowners from installing even solar arrays intended to serve an on-site electric load. Lawmakers should be careful not to create barriers to solar arrays that support farm sustainability and viability. For example, a broad prohibition on siting solar arrays on any agricultural land denies farmers access to clean energy.

Group or Virtual Net Metering

Group net metering, also known as community solar, allows multiple customers to benefit from a single, larger solar array and divide the net metering benefits among the group participants. Similarly, virtual net metering allows a customer or customers to benefit from a remote solar array not physically connected to the customer’s electric meter. Such policies are beneficial both for the protection of agricultural land and for increasing farmer access to clean energy. Becoming a group member allows an agricultural landowner to participate in solar energy generation without siting an array on the farm property. Alternatively, it could allow a designated parcel of ideally marginal farmland to host a solar array serving several farms in the area, while preserving productive land.

Meter Aggregation

Traditional net metering generally applies to a single solar array associated with a single customer meter, while group net metering generally applies to a single solar array serving multiple customers all with separate accounts and meters. While farms may benefit from either policy, they are often limited by a “one customer, one meter” rule. This means a farm often cannot offset electricity consumed from more than one meter, even if all of the electricity is associated with the same farm business.

“Meter aggregation” policies are important for accommodating agricultural businesses that may meter electricity at multiple locations on the same farm. These policies allow a single customer to offset electrical use from multiple meters, without needing additional “group” members. For example, a farmer could use net metering credits generated from a single renewable energy system to offset the load from multiple meters on the farmer’s same property or adjacent farm properties.

Solar arrays are compensated for the energy they generate through a variety of state-law mechanisms, including net metering programs, feed-in tariffs, value of solar tariffs, and other per-kilowatt-hour payments designed by regulators. Lawmakers can identify preferred categories of solar development and preferred sites for solar arrays within program eligibility requirements and can change the rates paid for energy based on project characteristics that minimize impacts to agriculture.

→ Create solar rate incentives that specifically include agricultural customers.

States should create a special category within energy compensation incentive programs for agricultural customers to ensure they are not precluded from participation.

→ Allow agricultural net metering customers to aggregate meters.

States should designate by law that the consumption and generation of multiple agricultural electric meters associated with the same farm business may be aggregated into a single customer account. This allows farms to offset more electricity consumption with solar energy generation. Further, when eligible project capacity size is determined by the average annual electric load of the customer, this calculation should use an average from aggregated meters associated with the farm business to more accurately represent a farm’s electricity needs, rather than forcing a customer to choose a single meter.

Compare: Meter Aggregation Policies

→ Provide for group or virtual net metering for agricultural customers.

Lawmakers should ensure that agricultural customers can participate in group or virtual net metering so that farmers can benefit from solar energy sited remotely rather than sited on productive agricultural land.

→ Establish rate eligibility requirements based on project size and location.

Lawmakers should consider limiting the eligibility for solar compensation programs to smaller-scale projects and those in preferred locations. They can also establish different eligibility requirements for small and large-scale projects.  Lawmakers should consider the following policy options:

• Set aside a portion of total program capacity for residential-scale arrays, and arrays sited on structures, or exempt these arrays from program capacity caps.
• Establish energy compensation programs that are available to residential and small-scale solar projects, community or shared solar projects, and specifically available to agricultural customers.
• Increase eligible project capacity limits for agricultural customers to accomodate the farm’s electric load.
• Establish separate tariffs and energy compensation rules for small and large-scale solar arrays.
• Limit program eligibility to projects located on preferred site-types.
• Tie eligible project capacity for net metering enrollment to customers’ associated electric load, instead of or in addition to a flat project capacity limit.
• Where possible, streamline and combine the project permitting and siting approval process with the energy compensation program application and enrollment process.

COMPARE: Rate Eligibility Requirements 

→ Adjust rates based on project size, location or design.

Lawmakers should consider varying the compensation offered to different solar generators based on project characteristics. Lawmakers should consider the following policy options:

• Establish different solar compensation rates for small and large-scale projects.
• Establish special rates based on project location or site-type.
• Use rate adders and subtractors based on system size, location, and design within net-metering and other per-kilowatt-hour compensation programs.
• Create a rate incentive specifically for agrivoltaic or dual use solar arrays.
• Create rate incentives for solar project characteristics like solar tracker hardware, energy storage components, or maintenance of pollinator habitat.

Compare: Massachusetts SMART Tariff

The Solar Massachusetts Renewable Target (SMART) Tariff is a feed-in tariff with a declining rate offered for each “block” of solar generation capacity deployed through the program. Small projects up to 25 kilowatts in capacity receive a 10-year fixed price term and larger projects receive a 20-year fixed price term. The maximum eligible project size is 5 megawatts. It defines eligible projects by creating categories of “Solar Tariff Generation Units” subject to different eligibility requirements and compensation mechanisms. Projects must obtain a Certificate of Qualification for program eligibility approval. The SMART program recently underwent a regulatory review after filling the first 400 MW of program capacity, and modified program requirements based on stakeholder feedback.

The SMART incentive levels decline by prescribed amounts over up to eight blocks per utility territory, with set-aside amounts in each block for projects up to 25 kW in capacity, projects between 25 and 500 kW, and low-income or community shared solar. After establishing a project’s “base compensation rate,” the Massachusetts SMART Tariff uses a variety of rate “adders” and “subtractors” to change the per kilowatt-hour rate paid for solar energy based on the arrays size, location, design, as well as characteristics of the off-takers, or users of the solar electricity. M.G.L. c. 25A, § 6, 225 C.M.R. 20. Emergency Regulations, filed April 14, 2020.

→ Use digital tools to facilitate tariff implementation and consumer understanding.

As state rules for solar energy compensation take into account more and more factors that may affect the ultimate per-kilowatt-hour rate, tariff formulas for rate calculation become increasingly complicated. To support transparency and improve stakeholder understanding of compensation programs, lawmakers should encourage or require the use of digital tools and explanatory resources.