Understanding Rates and Tariffs for Solar Energy Compensation
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.
For example, North Carolina allows an exclusion from the definition of “public utility” for consumers who self-finance on-site solar arrays, but prohibit PPAs between a customer and a solar developer, finding that they would function as impermissible public utilities. NC WARN, Docket No. SP-100, SUB 31, at 31, 2016 WL 1572367, at *31 (Order Issuing Declaratory Ruling).
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.
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.
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.
Program “caps can be expressed in different ways, such as a percent of historical peak demand, a percent of electricity sales, or in absolute megawatts of capacity.”— Tim Woolf, et al., Show Me the Numbers: A Framework for Balanced Distributed Solar Policies , Synapse Energy Economics
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.
For example, in Oregon, excess generation credits roll over to a low-income assistance program if they remain unused annually in March. OR. Admin. R. 860-39-55(2).
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.
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.
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.
For example, New York’s “Value Stack” tariff for renewable energy compensation specifies that RECs generated by participating customers are transferred to the utility by default. The utility uses the RECs for compliance with state Renewable Portfolio Standard obligations and customers are compensated for the REC value. Customers may choose to retain their RECs, but then are compensated at a lower rate that excludes the environmental value of the RECs.
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
“Net energy metering means measuring the difference, over the net metering period, between (i) electricity supplied to an eligible customer-generator or eligible agricultural customer-generator from the electric grid and (ii) the electricity generated and fed back to the electric grid by the eligible customer-generator or eligible agricultural customer-generator.”
The state’s investor-owned utilities (Dominion and Appalachian power) and electric cooperatives are obligated to follow the rules set out in §56-594 while participation is optional for smaller municipal utilities
Solar power, wind power, and aerobic or anaerobic digester gas.
Residential and commercial customers are both eligible to enroll.
Residential systems are limited to 20 kilowatts in capacity, while non-residential systems may be as large as one megawatt. Systems are sized to not exceed a customer’s annual electricity consumption.
Virginia created a special net metering category for Agricultural Customers, who are limited to 500 kW of aggregated project capacity. While other customers are limited to enrolling a single meter associated with their individual customer account, agricultural customers may “aggregate” meters, or use multiple meters that are located at separate but contiguous sites.
Each utility is obligated to net meter up to one percent of the utility’s peak-load from previous year.
Customers are compensated at a one-to-one retail rate for the excess solar energy they contribute to the electric grid. However, if a customer generates too much solar over the course of a 12-month period, the customer can roll over the credit or receive a payment at the avoided cost rate.
Residential customers with systems larger than 10 kilowatts must pay standby charges, even if they consumed no net energy from the electric grid.
Customer-generators own any renewable energy certificates associated with their solar array. When customers enroll in net metering, they have a one-time option to sell RECs associated with their solar array to its energy supplier and be compensated at regulated rate that reflects the value of the RECs.such renewable energy certificates. Customers are not prevented from keeping or otherwise selling their RECs.
Virtual net metering is not allowed in Virginia.
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.
For example, Vermont’s Standard Offer Program is a feed-in tariff open to renewable energy projects up to 2.2 megawatts in capacity, with a cumulative program cap of 127.5 megawatts through 2022. New projects are solicited annually through Requests for Proposals, with generators bidding for a contract, subject to a price cap. In 2019, the price cap for solar projects was $0.13 per kilowatt-hour. RECs generated by standard offer projects are transferred to the interconnecting utility, and may be sold out-of-state in REC markets. 30 V.S.A. § 8005a (2019). The Standard Offer Program is implemented through Public Utility Commission Orders in Dockets 7523, 7533, 7780, 7873, and 7874.
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.
When solar arrays are compensated at above retail or full retail rates for energy contributed to the grid, it reduces utility revenues and may lead to general rate increases, which can shift costs to customers that aren’t using or directly benefitting from the solar energy. However, cost-shifting may not significantly affect non-participating customers until the percentage of electricity coming from solar, or solar penetration, reaches 4%-9%.
For example, the city of Gainesville, Florida offered a feed-in tariff for solar PV systems. “The aggressively high tariff drove installation of 18.5 MW of solar capacity at 259 sites. The Gainesville City Commission approved its suspension in 2014 ‘to help control upward rate pressures.’” (Herman Trabish, RIP FITS: As US Feed-in Tariffs Fade, Adopting Elements Could Spur Solar Growth, Utility Dive (July 18, 2016)).
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.
For example, Connecticut requires utilities to solicit Zero-emissions Renewable Energy Credits (ZRECs) under 15-year contracts from customer-generators up to one megawatt in capacity that emit no greenhouse gases, including solar installations. Generators earn one ZREC for each megawatt hour of energy produced, with different payment rates for small (< 100 kW) Medium (100 – 250 kW) and large (250 kW – 1 MW) ZREC projects. C.G.S.A. § 16-244r (2019).
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.
For example, National Grid, the largest electric distribution utility in Rhode Island, notes on its website, “Distributed generation facilities, which are not eligible for Net Metering Services, may alternatively register as Qualifying Facilities in order to sell excess power to National Grid at wholesale rates.” It directs interested customers to a separate tariff establishing a power purchase rate for Qualifying Facilities.
- Owen Zinamen, et al., Grid-Connected Distributed Generation: Compensation Mechanism Basics, National Renewable Energy Laboratory, Oct. 2017 (https://www.nrel.gov/docs/fy18osti/68469.pdf).
- Douglas A. Codiga, Hot Topics in Hawaii Solar Energy, Haw. B.J., May 2013, at 4.
- Jesse Heibel and Jocelyn Durcay, State Policies for Power Purchase Agreements, National Conference of State Legislators, July 10, 2015, https://www.ncsl.org/research/energy/state-policies-for-purchase-agreements.aspx.
- Solar Energy Industries Association, Solar Power Purchase Agreements, https://www.seia.org/research-resources/solar-power-purchase-agreements (Accessed: May 3, 2020).
- See the map developed by Solar Power Rocks for a map illustrating the availability of PPAs by state: https://www.solarpowerrocks.com/solar-lease-map/.
- North Carolina allows an exclusion from the definition of “public utility” for consumers who self-finance on-site solar arrays, but prohibit PPAs between a customer and a solar developer, finding that they would function as impermissible public utilities. NC WARN, Docket No. SP-100, SUB 31, at 31, 2016 WL 1572367, at *31 (Order Issuing Declaratory Ruling).
- State Net Metering Policies, National Conference of State Legislators, Nov. 20, 2017 (http://www.ncsl.org/research/energy/net-metering-policy-overview-and-state-legislative-updates.aspx).
- Jason Keyes, Thad Culley, Jurisdictional Implications of New Net Metering Programs, IREC Memo, May 22, 2012 (https://pjm.com/~/media/committees-groups/task-forces/nemstf/20120525/20120525-memorandum-from-j-keyes-and-t-culley.ashx) and 94 FERC § 61,340, 62,263 (2001)
- The Energy Policy Act of 2005 added a federal standard for the consideration of net metering by states and utilities in PURPA section 111(d)(11). It states: “Each electric utility shall make available upon request net metering service to any electric consumer that the electric utility serves. For the purposes of this paragraph, the term ‘net metering service’ means service to an electric consumer under which electric energy generated by that electric consumer from an eligible on-site generating facility and delivered to the local distribution facilities may be used to offset electric energy provided by the electric utility to the electric consumer during the applicable billing period.”
- Heather Payne, A Tale of Two Solar Installations: How Electricity Regulations Impact Distributed Generation, 38 U. Haw. L. Rev. 135, 147 (2016).
- Program “caps can be expressed in different ways, such as a percent of historical peak demand, a percent of electricity sales, or in absolute megawatts of capacity.” Tim Woolf, et al., Show Me the Numbers: A Framework for Balanced Distributed Solar Policies, Synampse Energy Economics, Inc, prepared for Consumers Union, Nov. 10, 2016, at FN 8 (https://www.synapse-energy.com/sites/default/files/Show-Me-the-Numbers-16-058_0.pdf).
- Kenneth Rose, Karl Meeusen, Reference Manual and Procedures for Implementation of the “PURPA Standards” in the Energy Policy Act of 2005, Mar. 22, 2006, at 37.
- Richard M. Hluchan, Here Comes the Sun Land Use Laws Affecting the Development of Solar Energy Facilities in New Jersey, N.J. Law., June 2011, at 31, 32.
- NY Public Service Commission, Case 15-E-0751, In the Matter of the Value of Distributed Energy Resources, Order Regarding Value Stack Compensation, April 18, 2019 (https://www.nyserda.ny.gov/All-Programs/Programs/NY-Sun/Contractors/Value-of-Distributed-Energy-Resources/Value-Stack-Resources)
- NY Public Service Commission, Cases 15-E-0751 and 15-E-0082, In the Matter of the Value of Distributed Energy Resources, Order Regarding Value Stack Compensation, Order on Net Energy Metering Transition, Phase One of Value of Distributed Energy Resources, and Related Matters, March 9, 2017.
- Energy Information Administration, Feed-in Tariff: A Policy Tool Encouraging Deployment of Renewable Energy Technologies, May 20, 2013 (https://www.eia.gov/todayinenergy/detail.php?id=11471) (Accessed March 1, 2020).
- The Vermont Standard Offer Program is implemented through Public Utility Commission Orders in Dockets 7523, 7533, 7780, 7873, and 7874; 30 V.S.A. § 8005a (2019) See also, PUC Case No. 19-4466-INV, Order Re: 2020 Standard Offer Program, Mar. 4, 2020 (https://vermontstandardoffer.com/wp-content/uploads/2020/03/2020-RFP-FINAL-ORDER-3-4-20.pdf).
- A recent analysis concluded “the solar electricity price falls 30-40% for every doubling in deployment of solar generation capacity.” Jean Haggerty, Sunny Regions Could See One Cent Solar within a Decade, PV Magazine, May 19, 2020 (https://www.pv-magazine.com/2020/05/19/sunny-regions-could-see-one-cent-solar-within-a-decade/)
- The city of Gainesville, Florida offered a feed-in tariff for solar PV systems. “The aggressively high tariff drove installation of 18.5 MW of solar capacity at 259 sites. The Gainesville City Commission approved its suspension in 2014 ‘to help control upward rate pressures.’” Herman Trabish, RIP FITS: As US Feed-in Tariffs Fade, Adopting Elements Could Spur Solar Growth, Utility Dive, July 18, 2016 (https://www.utilitydive.com/news/rip-fits-as-us-feed-in-tariffs-fade-adopting-elements-could-spur-solar-gr/422727/)
- Clean Energy Solutions Center, Policy Briefs: Feed-in Tariffs, https://cleanenergysolutions.org/instruments/feed-tariffs (Accessed April 15, 2020).
- When solar arrays are compensated at above retail or full retail rates for energy contributed to the grid, it reduces utility revenues and may lead to general rate increases, which can shift costs to customers that aren’t using or directly benefitting from the solar energy. However, cost-shifting may not significantly affect non-participating customers until the percentage of electricity coming from solar, or solar penetration, reaches 4%-9%. Jackson Salovaara, Just and Reasonable Rooftop Solar: A Proposal for Net Metering Reform, 7 Ariz. J. Envtl. L. & Pol’y 56, 2017 at 83-84 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3363011).
- Catherine Lane, Is Minnesota’s Value of Solar Tariff the Future of Solar, SolarReviews.com, Updated May 15, 2020 (https://www.solarreviews.com/blog/minnesotas-value-of-solar-tariff)
- Mike Taylor, et al., Value of Solar: Program Design and Implementation Considerations, National Renewable Energy Laboratory, March 2015, at 43 (https://www.nrel.gov/docs/fy15osti/62361.pdf).
- Tian Tian, et al., Midmarket Solar Policies in the United States: A Guide for Midsized Solar Customers, National Renewable Energy Laboratory, Sept. 2016, at 20 (https://www.nrel.gov/docs/fy16osti/66905.pdf).
- Public Utility Regulatory Policy Act (PURPA), P.L. 95-617 (1978) codified at 16 U.S.C. § 796(17) – (22) and § 824a-3 (2005); 18 C.F.R. § 131.80; 18 C.F.R. Part 292; Federal Energy Regulatory Commission Order No. 732, 2010.
- Net metering was initially invented as a way for utilities to fulfill PURPAS purchase obligations. Kenneth Rose, Karl Meeusen, Reference Manual and Procedures for Implementation of the “PURPA Standards” in the Energy Policy Act of 2005, Mar. 22, 2006, at FN 31.
- 18 C.F.R. § 292.101(b)(6); PURPA Qualifying Facilities, Federal Energy Regulatory Commission, (https://www.ferc.gov/industries/electric/gen-info/qual-fac.asp (Accessed March 10, 2020).
- Colin Smith, What Drives Utility Solar Growth in a Post-ITC-Extension World? GreenTech Media, Mar. 24, 2016 (https://www.greentechmedia.com/articles/read/What-Drives-Utility-Solar-Growth-in-a-Post-ITC-Extension-World).
- Solar Energy Industries Association, The Public Utility Regulatory Policy Act of 1978: PURPA 101, Oct. 18, 2017 (https://www.seia.org/sites/default/files/2018-02/PURPA%202017.10.10.pdf).
- National Grid, Distributed Generation, Net Metering in Rhode Island, https://ngus.force.com/s/article/Net-Metering-in-Rhode-Island (accessed March 15, 2020).
- Rhode Island Public Utilities Commission, RIPUC No. 2221, The Naragansett Electric Company Qualifying Facilities Power Purchase Rate, April 3, 2020 (effective May 1, 2020)(https://www.nationalgridus.com/media/pdfs/billing-payments/tariffs/ri/qf-rate-052020.pdf)