Silver Bellwether: The Effect of Nevada’s Recent Net Metering Reforms In and Outside the State

It was not that long ago that states were competing to win the roof-top solar race. Now, as evidenced by, among other examples, Wisconsin’s recently-approved net energy metering (NEM) fixed-charge increase and Hawaii’s shift toward post-net metering rate structures, it seems like many states are pulling back on the reins. Few states have pulled back harder on net metering than Nevada, where a set of recent orders has disrupted the state’s residential solar industry to a far greater extent than any other.

Following Nevada’s enactment of its net metering law in 1997, rooftop solar PV installations across the state steadily increased, eventually propelling the Silver State to become one of the largest residential solar markets in the country. Indeed, according to SEIA, Nevada nearly quadrupled its residential PV installations between the second and third quarters last year. However, like other utilities across the country, NV Energy, the state’s largest investor-owned utility, began pushing back as residential solar started eating into its own revenue streams. The brewing tension between solar net metering and utility interests led to a collision in 2015. In May, the legislature passed SB 347, which empowered the Nevada Public Utility Commission to set new net metering rates. Later in August, the state’s 235 MW net metering cap was maxed out, effectively halting new rooftop solar installations in the state, and setting the stage for further PUC action.

 

In late December, the PUC issued a groundbreaking Order to reform the state’s net energy metering regulations and begin closing the rate gap between net-metering and non-net metering customers – a gap that, as argued by the Commission, amounted to a roughly $15-$18 million in annual cost shifting. Under the Order, over the course of four years, NV Energywill be allowed to raise monthly fixed costs for net-metered single family residential properties over 200% and reduce the excess generation payback amount by about 75%. Additionally, and perhaps most surprisingly, the Commission’s Order applies both prospectively and retroactively — which would make Nevada the first state to reform its net metering regulations without any grandfathering provision.

 

The response from Nevada’s residential solar customers, third-party providers, and local installers, was swift. Seeing their anticipated rate-savings significantly undercut, if not eliminated, a group of ratepayers filed a class action lawsuit against NV Energy and some critics alleged the Order violated the Constitution’s contracts clause. In addition, Nevada’s two leading residential solar companies, Sunrun and SolarCity, announced that they were pulling out of the state entirely, which will likely result in thousands of job losses — not a pleasant prospect for a state with an already slow post-recession recovery.

After protests from over a thousand customers, disappointment from Governor Sandoval, and a request from the state’s Bureau of Consumer Protection, the PUC agreed to reexamine the Order at the end of January. A few weeks later, in the resulting Order on Reconsideration and Rehearing issued on February 12th, the PUC again rejected arguments to allow grandfathering. Cries of constitutional violations were also rebuffed as the Commission was quick to point out that NEM customers were never guaranteed favorable rates and that most people understand that “[a]ll investments come with risk,” Aside from extending the rollout to 12 years to avoid “rate shock” the December Order was otherwise largely unchanged.

 

Affected parties have 30 days to appeal the PUC’s decision in court, but solar advocates have already pledged to put the issue of net-metering compensation on the next ballot, and several are calling for a special legislative session to institute a temporary fix. Meanwhile, the aftereffects of the Commission’s decision are being felt by customers, the residential solar industry (SolarCity’s stock fell by 37 percent following the December Order), and other state regulators similarly contemplating net metering reforms.

 

The Commission’s Stance: A Step Forward or Backward?

On a larger scale, the Nevada Commission’s decision crystalizes the main criticism that utilities, scholars, and consumer advocates have been levying against net metering policies for years. Namely, that by off-setting their own generation needs and therefore contributing less to transmission and distribution fees that are charged on a volumetric basis, net metering customers are not pulling their weight to maintain the system, leaving non-net metering ratepayers to make up the difference. Although some assert that the more immediate threat from distributed generation is to the utilities themselves, regulators are becoming increasingly concerned that, at some point, the cost-shifting will result in unjust and unreasonable rates for those customers who are not self-generating. In the words of the Commission from its December Order:

Current rates for NEM ratepayers are not properly aligned with the costs to serve NEM ratepayers. The misalignment can be attributed in part to the NEM policies enacted by the Nevada Legislature prior to the passage of SB 374. As NEM system penetration increases the cost-shift will grow.

To remedy this unfairness, as noted earlier, the Commission ultimately decided on raising fixed costs and lowering excess generation credits from essentially the retail to the wholesale level for both new and existing NEM customers. Setting aside the questionable wisdom of the grandfathering decision, by focusing on a pricing scheme to capture solely the costs, as opposed to also the benefits, of distributed generation, the Commission chose, by its own estimation, the “simplest way to develop an equitable pricing structure.” Therein lies the problem.

 

In adopting a cost-centric view of net metering, the Commission was able to overlook the many system benefits from distributed generation, such as efficiency and avoided costs. In the case of Nevada, these benefits amount to $36 million over the life of net metering systems installed between 2004 and 2016, as explained in a July 2014 study that the PUC itself commissioned. According to the Commission in its December Order, though, any supposed benefits from net metering can only be considered, if at all, in resource planning processes, not in rate case proceedings, which analyze only costs borne by ratepayers.

However, the line between rate setting and resource planning is not always so definite. Public utility commissions routinely consider the “prudence” of utility resource proposals through their anticipated effects on rates. They also closely scrutinize whether utility rates truly reflect the actual costs borne by ratepayers – such as those for transmission and distribution services. Furthermore, the benefits of peak load shaving, avoided line-losses and generation costs are all ultimately reflected in some form in the rates that consumers pay. Lastly, if cross-subsidization through rates was never acceptable, then that would eliminate the primary tool through which regulators ensure affordable electricity access to low-income ratepayers.

 

Once all the numbers are crunched, it could be that the system benefits from net-metering and distributed generation do not fully balance-out the costs for these policies, which are borne primarily by non-net metering ratepayers. But wrestling with these tricky calculations and finding a balanced solution that recognizes both the costs and the benefits of net metering, as other states have done, is how PUCs fulfill their duty to regulate in the larger “public interest” and ensure “just and reasonable” rates for all ratepayers.

 

Learning from the Silver State

By opting for the “simplest” solution to this problem, the Nevada PUC missed an opportunity to move the state toward a sustainable energy future. Unfortunately, the combination of high fixed rates, low compensation, and retroactive application may not only deter net-metered residential solar development in the state, it may also push some customers toward grid defection, particularly if cost-effective storage technologies mature.

The confluence of increasing distributed generation penetration and declining utility revenues is not an issue that state legislatures and PUCs can put off addressing for much longer. In the larger scheme, modifying net metering regulations is only a piece of the comprehensive electric system reform efforts needed to make the grid smarter, cleaner, and more reliable. At a time when 27 states are reexamining their net metering regulations, Nevada could be a bellwether of what happens when net metering reform is considered in a vacuum without the bigger picture in mind.
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