Nevada’s bizarre decision to throttle its own solar industry, explained

Nevada is currently embroiled in an enormous controversy over rooftop solar power. With a recent decision, regulators have cut off the state's burgeoning solar industry at the knees, enraging customers and sending solar companies fleeing the state.

For the state's monopoly utility, it's a successful attempt to avoid competition. For the well-funded conservative groups fighting the spread of solar around the country, it's the first decisive victory. For most Nevadans, however, it represents an own goal, a senseless act of self-sabotage.

We'll walk through what happened and what it means for the future of solar — but first, for those with short attention spans, a tl;dr.

TL;DR

• Nevada's public utility commission has radically revised the state's net metering program, slashing payments to solar homeowners by half and raising fees, a move advocates say will destroy the state's fast-growing (and wildly popular) solar industry.
• The changes are retroactive, so existing solar homeowners are seeing their payments shrink. They are pissed.
• Three major solar companies have already announced they are pulling out of the state, costing it hundreds of jobs, with more to come.
• Solar companies, homeowners, and advocates have mobilized and pressured the state to reconsider the decision, but so far it has refused.
• Nevada is a crucial presidential swing state, and this decision could backfire against Republicans in 2016.

All right, let's start with what happened in the state over the past year.

(Shutterstock)

The Nevada PUC has kneecapped solar in the state and is sticking to it

In 1997, Nevada implemented net metering, a policy that requires utilities to compensate solar homeowners and businesses for the energy their panels generate, at the going retail rate for electricity. (More on that below.) The policy was tweaked several times in the ensuing years, expanding the types of customers eligible and the total amount of power permitted.

Partially as a result, Nevada has one of the fastest-growing residential solar markets in the United States. The industry now employs around 6,000 Nevadans (or so the industry says — hard numbers are difficult to come by).

As the number of solar customers grew, NV Energy, like many utilities across the country, started pushing back against it. To the utility, net metering just meant lost customers and lost revenue.

Allen J. Schaben/Los Angeles Times via Getty Images

Matters came to a head last year.

Solar advocates warned for months that the net metering "cap" would be reached in the summer — by law, net-metered solar can represent no more than 3 percent of peak load in the state. If the cap was hit and net metering payments dried up, thousands of solar jobs would be lost.

In May, the legislature passed Senate Bill 374, which contained an amendment by Sen. Patricia Farley (R) that punted the final decision on net metering over to the Nevada Public Utility Commission (PUCN).

When the cap was hit in August (causing solar installer Vivint Solar to back out of a planned expansion in the state), PUCN voted hastily to extend current payments through the end of the year.

Months of lobbying from both sides ensued. In December, PUCN shocked everyone by voting 3-0 to slash net metering payments by roughly half — paying solar customers the (lower) wholesale rate for surplus electricity rather than the retail rate — and raise fixed fees on solar customers by some 40 percent. Payments will ratchet down, and fixed fees ratchet up, gradually through 2020.

What's more, PUCN made the changes retroactive — it's not just new solar customers who will receive the lower payments but Nevada's 17,000 existing solar customers as well. In many cases, the lower payments undercut the economics of their investment decisions, leaving them, well, screwed.

[Clarification: The word "retroactive" has caused some confusion. The changes are not retroactive in the sense that anyone has to give back the higher fees they got before the decision; it only affects future fees. It's retroactive in the sense that it doesn't grandfather existing solar customers, changing the fee structure they originally depended on.]

Solar companies, customers, and advocates have rallied and appealed to PUCN to change its mind, or at least delay the new payment regime while the decision is reconsidered. But PUCN dug in its heels and stuck to its decision.

Nevada is under fire, and solar jobs are fleeing the state

Backlash was immediate. Hillary Clinton spoke out against the decision. Bernie Sanders called it "just about the dumbest thing I have ever heard." Martin O'Malley said PUCN is "sabotaging" the solar industry.

The solar industry in the state was outraged. Vivint CEO Greg Butterfield issued a statement saying the decision "will cost jobs, economic output, and consumer choice, while protecting the interests of an entrenched monopoly — NV Energy."

On January 6, SolarCity announced that it was eliminating more than 550 jobs in Nevada. Later that day, Gov. Brian Sandoval (R) reacted with a defensive statement, saying that SolarCity CEO Lyndon Rive should "respect the process and pursue his legal options, which include seeking reconsideration of the order or ultimately judicial review."

Sandoval also noted that he has "called for the Nevada Consumer Advocate to engage in the case, which it has done." (On December 24, the Nevada Bureau of Consumer Protection filed a motion with PUCN to block the ruling, saying it was "not consistent with the Governor's stated objectives.") He stressed that any direct intervention in PUCN's decision would be illegal and later told a reporter that Rive's attacks are "propaganda."

(Photo by Max Whittaker/Getty Images)

The next day, on January 7, Sunrun announced that it was ceasing all operations in Nevada, taking hundreds of jobs with it.

Sen. Farley, author of the amendment handing PUCN the decision, now says she is "absolutely concerned" about the loss of jobs and that solar customers who "relied on the old rate structure ... should have a remedy."

For now, the only route open to solar fans is legal. Sure enough, January 12 saw the filing of the first class-action suit against NV Energy.

So that's what's happening. But what's the fight really about, anyway? Let's briefly take a look at the policy at the center of the storm.

Net metering: not as boring as it sounds

Net metering is one of many energy policies that sounds like it was named by a left-brained engineer, thus ensuring that it will bore and repel all normal people. But it's actually pretty clever.

The question net metering answers is simple: How can we get people to generate their own energy without a bunch of expensive new infrastructure and monitoring programs? How can we make it easy for private individuals to invest in renewables?

Well, everyone already has a power meter. In the vast majority of cases, it's an electromechanical meter — that little spinning wheel in the box outside your house that the meter guy comes by and squints at periodically.

(Shutterstock)

So the idea behind net metering is this: A customer installs solar panels and an inverter that allows the power to make its way onto the grid; when the customer is producing more than she is using, the meter wheel spins backward; at the end of the month the utility adds up the spinning and the reverse spinning, and the customer pays for her net usage of utility electricity.

If she's produced more than she's consumed, her bill is negative; the utility pays her the retail rate for her excess power. This is known as net metering's parity principle (the key feature of the policy and the center of the dispute).

The surplus power a solar customer generates spills over into the nearest residence or building with demand, rarely more than 1,000 meters or so. When that customer receives the surplus energy, his meter wheel spins, ensuring that the consumption is tracked and the utility gets paid for it.

Thus, all the solar customer's generated electricity is tracked, accounted for, and remunerated — without any new infrastructure or bureaucracy. All it requires is the trusty old meter. Easy!

(There's a three-part history of net metering here, here, and here, if you want to go deeper.)

The case against net metering

Net metering caught on throughout the 1980s and '90s; as of March 2015, 44 states and Washington, DC, have some version in place, either passed through the legislature or implemented by the PUC.

As rooftop solar spread and accelerated, the utility industry started worrying. Every KWh of electricity that customers generate themselves represents a KWh they are not buying from their utility, a straightforward loss of revenue.

In January 2013, the Edison Electric Institute (the trade group for US investor-owned utilities) released a widely discussed analysis that warned of a vicious cycle ahead for utilities. It goes like this:

1. Customers install solar (and soon, batteries to store the energy) and give the utility less money.
2. The utility still has the same fixed costs to pay off (the grid and other infrastructure, mostly), so it has to boost rates on non-solar customers to cover them.
3. As rates rise on non-solar customers, they have greater incentive to go solar.
4. Return to 1.

That's the much-ballyhooed "death spiral" that utilities fear above all else.

(Edison Electric Institute)

So this is the case made by utilities (and conservative groups like Americans for Prosperity) against net metering: Solar customers use the grid — for power when it's dark, for backup, to send power to neighbors — but do not pay their fair share of the fixed costs of maintaining the grid. That forces utilities to raise rates on everyone else, known as "cost shifting."

In other words, utilities say, net metering is a subsidy to solar customers at the expense of other ratepayers.

The case for net metering

Solar advocates reply that utilities are exaggerating the costs and undercounting the benefits of distributed solar energy — which they have every incentive to do, because distributed solar reduces their profits.

The benefits of distributed solar power come mainly from what it avoids. It reduces:

• Carbon emissions
• Local pollutants
• Grid infrastructure costs (because the energy is generated where it will be consumed, it doesn't require transmission and distribution over power lines)
• "Line loss" (power lost during transmission)
• The cost of wholesale electricity (by "shaving" the midday peak of demand, solar reduces the need for expensive "peaker" power)
• The cost of meeting state renewable energy mandates and Clean Power Plan requirements

Adding up all the costs and benefits of distributed solar is a difficult and somewhat subjective undertaking. Methodologically, it's still a bit of a mess. As this review of studies notes, "some benefits and costs may be difficult or impossible to quantify, and some accrue to different stakeholders." Costs and benefits also vary from place to place, depending on local conditions.

All that said, most studies have found that the impact of solar customers on non-solar customers is a) relatively small, and b) usually net positive.

Shutterstock

(Again, though, even if total benefits outweigh costs, they certainly don't outweigh costs from the utility's perspective. Many of the benefits are social; the lost revenue is all too concentrated.)

What the Nevada loss means for net metering

As it happens, PUCN commissioned one of those studies, just last year. Here it is. It finds that by 2016, researchers "expect that non-participants are very nearly neutral and will experience neither a large benefit nor a cost due to new (net metering) installations."

In other words: Cost shifting is negligible in Nevada.

(Shutterstock)

PUCN now says that study is out of date, since NV Energy has almost seven times as many net-metered customers as it did when the study was conducted. But it didn't explain why the basic conclusions would have changed. Nor did it commission a new study. It just accepted NV Energy's (extremely self-interested) cost estimates.

[Update: PUCN staff say that the study contained outdated assumptions about the price of utility-scale solar power; if updated, even the old study would show some cost shifting. They also said they requested updated information during their deliberations, but solar companies provided none.]

In other words, what happened in Nevada was by all indications a raw exercise of power and influence on the part of the utility and conservative groups. It didn't hurt that Sandoval and the majority in the legislature are Republicans.

That it all comes down to political power shouldn't be surprising. The fact is in most of these skirmishes over net metering, there are two self-interested parties battling — utilities and conservative business groups on one side, solar companies and advocates on the other — and the side with the most power wins. Such is politics.

(Photo by Jerod Harris/Getty Images for DIRECTV)

From a broader perspective, though, the news for solar advocates is still mostly good. In the vast majority of net metering fights so far, the solar side has proven more powerful; utilities have lost almost all these battles. This is a rare case when progressives boast the most intense, fired-up constituency.

From a wonk's perspective, the whole war is somewhat lamentable. Economists like Severin Borenstein are right that net metering is a somewhat blunt instrument. It could be improved in any number of ways, or replaced with better-designed policies that more closely track the real value of solar to the grid.

Like many clean energy policies, net metering is something of a kludge, a mix of historical happenstance, path dependence, and political economy. It's not something an economist would sketch on a blank piece of paper.

In some ways it's similar to Medicare, Medicaid, and Social Security. Progressives know there are ways to improve those programs. But they also know that conservatives will use any opportunity to destroy them, so they find it's safer just to protect them as they are. They are much better than nothing.

So too with net metering. It's a suboptimal policy, but it works, and it's already on the books, so solar advocates are suspicious of any efforts at reform. The results in Nevada are only going to reinforce that posture.

What the Nevada loss means for Nevada politics

Nevada is a crucial presidential swing state — indeed, Politico calls it "super-swingy." Republicans have managed to capture the governorship and a majority in the legislature, but the state voted for Obama in 2008 and 2012 and boasts a rising population of Hispanics, which is likely to tilt the political balance further.

(U.Va. Center for Politics)

So Nevada Republicans are in a pickle. To keep their state in play, they badly need to appeal to moderates and independents. That makes this solar decision a potential political catastrophe.

According to a 2014 national poll by CleanEdge, 67 percent of Republicans and 72 percent of independents support tax incentives for solar power. Some 87 percent of Americans say renewable energy is important for the nation's future, and solar was the top pick of every single demographic group.

The poll found that solid majorities oppose utility efforts to charge extra fees to solar homeowners, and — this is significant — opposition to such efforts is "stronger among rural dwellers and Republicans than city residents and Democrats." In fact, 66 percent of Republicans oppose such efforts.

What's worse, a poll of Nevadans conducted by Moore Information found that support for existing net metering policies is overwhelming, as is opposition to the changes proposed by NV Energy. Some 73 percent of registered Nevada Republicans support the previous rules and oppose the changes.

So just at a time when the Nevada GOP need to be broadening its appeal, it is instead signaling its allegiance to monopoly utilities and fossil fuels, alienating swing voters and even its own moderates.

As I've argued many times, clean energy is a wedge issue that favors Democrats. It divides Republicans, putting their hardcore base (and fossil fuel money) on one side and their more moderate and independent-leaning voters on the other side.

Gov. Sandoval has walked right into this trap. PUCN's decision may benefit the utility in the short run, but it threatens to tarnish the GOP's image in Nevada, a crucial shift in a state that could help determine the 2016 presidential election.

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