As net metering garners more public discussion, its ability to encourage customer adoption of distributed solar generation is often discussed as a “new” or “emerging” challenge to the traditional utility business model. While the scale and scope of net metering may be reaching new heights, it is important to note that the right to self-generate has been somewhat quietly enshrined as a part of United States energy policy for over 30 years.
When Congress enacted the Public Utilities Regulatory Policy Act of 1978 (PURPA), it set the course of decades of national policy regarding the development of alternative forms of generation. While traditionally thought of in the context of the global oil crisis and the aim of reducing national reliance on fossil-based fuels, PURPA has also had a profound impact on the emerging movement toward a more distributed grid: i.e., a grid where generation is located closer to load than under the central station model that has dominated the past century.
Net metering rightfully gets credit for driving growth of customer adoption of solar, and for redefining the traditional roles of customer and utility in relation to the grid, but PURPA should get its due for laying the foundation for this paradigm shift. Indeed, PURPA can be seen as an early, federal “bill of rights” for those who wish to self-generate and still receive service from a utility’s grid. Perhaps just as significant is the fact that PURPA provides Qualifying Facilities (QFs)—a classification that includes solar photovoltaic (PV) facilities—protection against discriminatory treatment in their purchases from and sales to utilities.
While federal law does not provide for net metering, it does provide that, at a minimum, the interconnected utility must allow customers to self-generate and that the utility may be compelled to purchase any electrical output that is exported to the grid from the customer’s QF. The emergence of net metering into the mainstream of American policy, some two decades after PURPA’s enactment, can be viewed as a natural outgrowth of this foundational federal policy.
The distinction between a PURPA sales arrangement and state-level net metering is important. Under PURPA, utilities compensate QFs for exported electricity based on the incremental cost that the utility would have incurred to provide that some unit of electricity. This is known as “avoided cost.” Avoided cost rates have been historically insufficient to spur significant growth of distributed solar, though there are exceptions where other policy supports are in place at the state level (e.g., North Carolina has a solar tax credit and a renewable portfolio standard featuring a solar carve-out sufficient to drive solar growth under PURPA). Tremendous recent declines in the cost of DG solar are also starting to change this equation, with avoided cost rates more closely matching solar development costs in some states and some times of the year.
Net metering, on the other hand, does not necessarily involve the sale of exported electricity at all. Rather, net metering gives customers retail rate credit for system production against their consumption from the grid over an applicable billing period. A sale only occurs at the end of the state’s defined billing period (e.g., end of month, end of year or indefinite rollover), and then the excess generation must be sold in compliance with PURPA. In this way, the only real “compensation” that customers receive is a lower electricity bill.
Despite these differences, net metering looks like a logical evolution from the federal PURPA policy of encouraging self-generation to meet the goal of reducing reliance on depletable, fossil-fuel resources. Indeed, FERC’s order adopting rules to implement PURPA (Order 69) addressed commenters’ suggestion that “net energy billing” might be an appropriate implementation of PURPA. FERC observed that it was possible that “netting” could constitute an appropriate proxy for avoided cost, particularly where retail rates were based on marginal costs and the customer was taking service under time-of-day rates (i.e., rates that charge customers a higher charge for consumption during defined on-peak periods when the cost of producing additional power is generally much higher). Ultimately, Order 69 recognized that this was primarily an issue of state jurisdiction and FERC deferred to the states on “whether to institute net energy billing.”
While PURPA and net metering both uphold to the principle of self-generation, they should be understood as distinct policies. Respectively, they are separate, state and federal iterations of a collective national policy of encouraging renewable energy development and reducing reliance on fossil-fired generation. PURPA represents the federally mandated bare minimum in terms of compensation that a QF must receive. Net metering, on the other hand, represents a state policy-driven program that is dependent on retail rate design—which is a solely the domain of the states—to derive just compensation.
From a best practices perspective, however, it is worth considering what PURPA has to say in regards to discriminatory charges on QFs. While a net metering system might not need to be a QF to participate in the state net metering program, all solar photovoltaic facilities under 1 MW would qualify as QFs, even without taking formal action to file for recognition with FERC. Just as Freeing the Grid recognizes states for a best practice for providing safe harbor—and ensuring that net metering systems do not face any additional charges—PURPA provides a minimum protection that rates for sales to QFs should be just and reasonable and should not discriminate against QFs, as compared to other customers that did not install QF generation. As the focus on customer’s ability to reduce purchases from utilities through net metering continues to build intensity, PURPA may have some lessons for us yet.