An intense political battle is playing out over rooftop solar power in Nevada, the latest skirmish in an ongoing war between power utilities and a species many of them have recently encountered for the first time ever: competitors.
At issue in Nevada, as in many of these fights, is a policy known as "net metering." The details differ from place to place, but the basic idea is simple: utilities have to buy rooftop solar power from customers who produce it, at current retail electric rates. If a customer generates as much power as he consumes, he can zero out his utility bill. Currently, 44 states and Washington, DC, have mandatory net metering, and utilities in three of the remaining states allow some form of it.
The program has been extremely popular in Nevada, where it's helped establish a thriving solar industry. According to the Solar Foundation, solar businesses employed 5,900 Nevadans in 2014 — more solar employees per capita than in any other state. And that's up several thousand, almost doubled, from 2013. Investment is flooding in as tech companies and data centers seek cleaner power in the sunny Western desert. (According to SEIA, $569 million was invested in Nevada solar installations in 2014, up 427 percent from 2013.)
Though net metering remains popular in Nevada, the state's primary utility — NV Energy, recently acquired by Warren Buffet’s Berkshire Hathaway Energy — is not a fan. It is now pressuring the state legislature to keep an artificially low cap on the program's size, which threatens to halt the growth in demand and stunt industry growth.
What's happening in Nevada is a stark case (more details in a moment), but it is not unique. Utilities have never been excited about net metering, but now that rooftop solar is getting so cheap, so fast, they see it as a serious threat. In alliance with fossil fuel interests, they are going after it:
Legislation to make net metering illegal or more costly has been introduced in nearly two dozen state houses since 2013. Some of the proposals were virtual copies of model legislation drafted two years ago by the American Legislative Exchange Council, or ALEC, a nonprofit organization with financial ties to billionaire industrialists Charles and David Koch.
Why utilities really hate buying rooftop solar power
Utilities are not like normal businesses in normal markets. They are monopolies, with sole access to customers in their territory. They make money by charging customers for electricity on a per-kWh basis. (This is known as a "volumetric" charge — the more customers use, the more they pay.)
Electricity rates are meant to cover not only the cost of the electricity itself ("variable costs"), but also a utility's "fixed costs" — its investments in the power plants, power lines, substations, and meters needed to provide power. Oh, and enough left over for profits.
What's to stop a monopoly from gouging its captive customers with extortionate rates? In the case of a utility, it has to justify its rates through a "rate case" before a public utility commission (PUC). The commission is supposed to ensure that the utility keeps power as reliable, cheap, and nondiscriminatory as possible, and that its profits are fair, not excessive.
Yes: state-sponsored monopolies charging state-sanctioned prices. Capitalism rules.
So now, imagine you are a utility. You made your rate case: you estimated demand over the next, say, two years; you estimated how much investment would be required to meet that demand; and you estimated a volumetric rate that would pay back those investments and leave a reasonable profit. The PUC signed off on your rate. For the next two years, you are golden.
But there's a problem. There are all sorts of interesting new technologies brewing on the customer side of the power meter, where you have no control. Not only are appliances getting more energy-efficient, but home energy management is getting smarter (with Nest thermometers, Tesla home batteries, and the like) and, worst of all, customers are starting to generate their own power (for now, mostly with solar panels, but other options are developing).
What do all these technologies have in common? They reduce the amount of power the customer buys from you, the utility. Insofar as a customer generates her own power, stores it, and manages it intelligently, that customer is going to need less power from the grid. She could even start producing more power than she consumes, in which case she'll need none of your grid power at all.
In short, these behind-the-meter innovations represent, collectively, a competitor — the first retail-side competition US utilities have faced, well, ever.
Normal businesses facing competition can cut prices. But as a utility, you already had your rate case — the prices you can charge have been set by your PUC. You chose a rate based on a particular projection of power demand, but now rooftop panels are reducing demand for grid power, faster than anyone expected. You're selling less power than you thought, so the rates you're charging aren't covering your fixed costs. You risk having those investments "stranded."
So now you have to schlep back to your PUC and ask them to let you raise rates, which makes them mad and makes your customers mad.
Worse? As more and more customers defect partially or entirely to solar power (and batteries, etc.), you're selling less and less of your product, so to get the same amount of profit you have to charge higher and higher rates. But as you charge higher rates, you drive more people to solar, leaving fewer customers behind. Wash, rinse, repeat. It's a vicious cycle, which the industry itself warned could lead to a "death spiral."
Why utilities say they want to squash net metering
Faced with this dire situation, many utilities are working to eliminate net metering, or at least impose extra fees on customers who take advantage of it. "We don't like competition" is not a great public-facing argument, however, so they've had to develop a more sophisticated case.
The case utilities make to legislators and regulators is as follows: customers who reduce or eliminate their utility bills are no longer paying the fixed costs for the grid that they are, in most cases, still using. (Fully off-grid systems are still a tiny minority.) As they pay less in fixed costs, other customers — the ones unable or unwilling to install rooftop solar, usually poorer customers — pay more. This "cost shifting" is, utilities say, an unfair subsidy of solar customers by non-solar customers.
Utilities are just trying to protect their customers, in other words. Or so they say.
The case for net metering
Solar advocates respond that solar rooftop power creates benefits that outweigh the lost utility revenue. Customers with solar rooftops reduce the need for new investments in power plants and power lines, thereby reducing fixed costs. And because solar tends to be most intense during periods of highest demand, they specifically reduce the demand for "peak power," the most expensive kind, thereby reducing costs for other grid-connected customers.
Which to say nothing of the social benefits brought about by diversifying and decentralizing the grid, reducing CO2 emissions, and spurring innovation in the solar industry.
Advocates are supported by a host of studies. Analysis done on net metering in California, Arizona, Missouri, Mississippi, Vermont, and Hawaii has found that under almost all scenarios, net metering represents a modest net benefit to rate payers (solar and non-solar alike) or, at worst, a wash. In almost no case has net metering been found to represent, as utilities charge, a net cost to ratepayers.
The fight in Nevada
All this serves as context for what's going on in Nevada. Right now, the state's net metering program is capped at 3 percent of the utility's total peak load. At the rate it's growing, the program will hit that cap soon, possibly as early as this summer. If the cap stays in place, new demand will evaporate, and the state's solar industry, which has been hiring like crazy and planning for growth, will leave for greener pastures.
Are NV Energy's fears about net metering valid? As it happens, the Nevada PUC did an extensive study of net metering not long ago. Overall, the study authors found, "we do not estimate a substantial cost shift." Determining net costs and benefits is highly sensitive to various assumptions, the study concluded, but in any case the impact is likely to be very small. (The study didn't examine some aspects, like water use, that would have further strengthened the case for solar.)
NV Energy had full input into the study, but now disputes it, saying that solar has gotten so much cheaper (!) that the study underestimates its impact. Nonetheless, barring a redo, this is the independent study for the state, and it has found that NV Energy is, in a word, wrong.
Having lost the argument, the utility has now turned to brute-force lobbying. (One of Gov. Brian Sandoval's top policy advisers used to lobby for the company.) And it seems to be working. On Sunday, the Nevada Senate voted through a bill that would kick the decision about raising the cap — and whether to impose additional fees — over to the PUC. Even if the PUC decides in favor of lifting the cap, the delay will wreak havoc on the state's solar industry.
As the newly formed Nevada Coalition To Protect Ratepayers — a group of solar and tech businesses fighting to raise the cap — has pointed out, the bill never had a public hearing. Despite activists marching outside, all deliberations went on behind closed doors.
The bigger picture
It's too soon to say whether Nevada's flourishing solar industry can dodge this bullet, or whether the big utility will win this round.
But make no mistake: for utilities, these are rear-guard battles. The behind-the-meter genie is already out of the bottle, steadily luring away utility customers, and prices are only falling. There is simply no way utilities will be able to lobby enough to stop it. At best, a utility can hope to slow the growth of those industries in its own state, which might help the utility but is not great economic policy.
A collision is coming, between an outmoded utility industry, working with a business and regulatory model designed for the early 20th century, and a host of new technologies that put power in customer hands. The reckoning can be delayed, but not for long. Pretty soon, legislators and regulators are going to have to grapple with deeper reforms than a fee here or a cap there. The utility model needs a deep rethink.