1 MANAGING the FUTURE of the ELECTRICITY GRID: DISTRIBUTED GENERATION and NET METERING Richard L. Revesz* and B
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MANAGING THE FUTURE OF THE ELECTRICITY GRID: DISTRIBUTED GENERATION AND NET METERING Richard L. Revesz* and Burcin Unel** INTRODUCTION ................................................................................................................................................. 2 I. HISTORY OF THE NET METERING DEBATE ......................................................................................................... 11 A. PURPA and Its Progeny...................................................................................................................... 12 B. State Renewable Portfolio Standards ............................................................................................... 17 C. Net Metering Policies ........................................................................................................................ 21 D. Current State Reconsideration of Net Metering Policies ................................................................... 27 II. EVALUATING THE CONTRIBUTIONS OF DISTRIBUTED GENERATION TO THE ELECTRIC GRID ........................................ 33 A. Benefits of Distributed Generation .................................................................................................... 33 B. Costs .................................................................................................................................................. 34 III. CONSIDERING THE SOCIAL BENEFITS OF DISTRIBUTED GENERATION .................................................................... 38 A. Incorporating Climate Change Benefits ............................................................................................ 40 1. Quantifying Avoided Emissions ...................................................................................................... 41 2. Valuing Avoided Emissions: the Social Cost of Carbon .................................................................. 42 3. Interaction with other Regulatory Approaches .............................................................................. 43 B. Other Social Benefits ......................................................................................................................... 49 1. Conventional Pollutants ................................................................................................................. 49 2. Other Environmental Benefits ........................................................................................................ 49 3. Social Resiliency Benefits ............................................................................................................... 50 IV. EVALUATING CURRENT PRICING APPROACHES ................................................................................................. 50 A. Net Metering ..................................................................................................................................... 50 1. Shortcomings of Having a Bundled Flat Volumetric Rate Underlying Net Metering ..................... 53 2. Temporal Variations and Production and Transmission Constraints ............................................. 55 3. Demand Variations and Distribution Constraints .......................................................................... 56 B. Fixed Charges .................................................................................................................................... 57 * Lawrence King Professor of Law and Dean Emeritus, New York University School of Law. The generous financial support of the Filomen D’Agostino and Max E. Greenberg Fund at NYU Law School is grateful acknowledged. Paul‐ Gabriel Morales and Nathan Taylor provided exceptional research assistance. ** Senior Economist, Institute of Policy Integrity, New York University School of Law 1 C. Caps of Various Kinds: Not Carrying Forward Credits, Percentage Constraints ................................ 58 V. TOWARD AN AVOIDED COST/SOCIAL BENEFIT APPROACH TO PRICING ................................................................. 59 A. Identifying the Socially Optimal Approach ........................................................................................ 59 B. Legal Basis and State Practice ........................................................................................................... 61 1. FERC Regulation and Decisions ...................................................................................................... 61 2. State Approaches to Avoided Cost Rates ....................................................................................... 64 3. State Approaches to Incorporating Social & Environmental Benefits ............................................ 67 4. Historical Antecedents ................................................................................................................... 70 VI. THE PROMISE OF TIME‐ AND DEMAND‐VARIANT PRICING ................................................................................. 71 A. Valuing Distributed Generation with Time‐ and Demand‐Variant Pricing ........................................ 74 B. Incorporating Externalities into Dynamic Pricing .............................................................................. 77 CONCLUSION .................................................................................................................................................. 78 INTRODUCTION “Distributed generation” is a term used to describe electricity that is produced, typically in some quantities, at or near the location where it is used.1 Distributed generation systems can rely on a variety of energy sources, such as solar, wind, fuel cells, and combined heat and power.2 Distributed solar energy is produced by photovoltaic cells, popularly referred to as solar panels, which can be placed on rooftops or mounted on the ground. 3 Over 90% of the current distributed generation in the United States is solar,4 and the number of installations is increasing rapidly.5 For example, in the state of New York, solar generation has grown 300 percent between 2011 and 2014.6 1 Distributed Solar, SOLAR ENERGY INDUS.INDUSTRIES ASS'N, http://www.seia.org/policy/distributed‐solar (last visited Aug. 20, 2015). 2 AM. PUB. POWER ASS'N, DISTRIBUTED GENERATION: AN OVERVIEW OF RECENT POLICY AND MARKET DEVELOPMENTS 3 (2013), available at http://www.publicpower.org/files/PDFs/Distributed%20Generation‐ Nov2013.pdf.http://www.publicpower.org/files/PDFs/Distributed%20Generation‐Nov2013.pdf. 3 Id., at 20. 4 See Id.., at 17‐18. 5 INTERSTATE RENEWABLE ENERGY COUNCIL, TRENDS SHAPING OUR CLEAN ENERGY FUTURE 25 (2014), available at http://www.irecusa.org/2014/10/trends‐shaping‐our‐clean‐energy‐future‐2014/. 6 Press Release, N.Y. State Energy Research and Development Auth., Governor Cuomo Announces Solar Growth of More Than 300 Percent from 2011 to 2014 in New York State (July 6, 2015), http://www.nyserda.ny.gov/About/Newsroom/2015‐Announcements/2015‐07‐06‐Governor‐Announces‐Solar‐ Growth‐of‐More‐than‐300‐Percent. 2 Some distributed generation systems are isolated, in that they are not connected to a utility’s power grid, but most are “grid‐tied,” which means that they are connected to the grid.7 Customers with connected distributed generation systems can buy power from their electric utility when they are not producing enough electricity to meet their needs and can also sell power back to the utility company when their systems are producing more electricity than they need.8 This possibility raises the important question of how these customers should be compensated for the electricity they send to the grid. That question has two critically significant policy implications. First, it plays a key role in determining the economic feasibility of clean electricity relative to electricity produced by fossil fuels. Unlike electricity produced from solar, wind, or hydro sources, electricity produced from fossil fuels gives rise to large quantities of both pollutants that affect public health and of greenhouse gases that lead to climate change.9 Second, distributed generation has benefits for the resiliency of the electric grid, by providing a more diversified portfolio of energy sources than would a scheme that relied exclusively on electricity produced by large power plants.10 The serious electric outage in New York City during Superstorm Sandy, which caused enormous economic dislocations, provides a telling example of the negative consequences of the lack of diversification.11 President Obama’s energy policy initiatives seek to accelerate the nationwide deployment of clean energy, such as solar power.12 For example, the Obama Administration recently announced that it had secured more than $4 billion in private sector commitments through its Clean Energy Investment Initiative aimed at the long‐term investment in clean energy innovation such as smart grid infrastructure and advanced battery solutions.13 Moreover, in August 2015, President Obama announced an additional 7 Today, over ninety‐five percent of solar installations are grid tied. Net Metering, SUNLIGHT ELECTRIC, http://www.sunlightelectric.com/netmetering.php (last visited July, 20, 2014). 8 EDISON ELEC. INST., Policy Brief: Straight Talk About Net Metering 1‐2, available at http://www.eei.org/issuesandpolicy/generation/NetMetering/Documents/Straight%20Talk%20About%20Net%Me tering.pdf (last visited July 20, 2015) [hereinafter Straight Talk]. 9 U.S. EPA, SOURCES OF GREENHOUSE GAS EMISSIONS, http://www.epa.gov/climatechange/ghgemissions/sources/electricity.html