Why Nevada's Net Metering Decision Is Flawed

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Includes: RUN, SCTY, VSLR
by: Oliver Davies

Summary

The Nevada regulator's net metering decision has hurt the rooftop solar industry nationwide.

Its decision is flawed.

Over the long term, I expect flawed decisions like these to eventually help the distributed solar industry.

Introduction

The recent Nevada net metering decision has cast a cloud over the distributed solar industry. When regulators decided against shielding existing solar customers from this punitive net metering program, they put rooftop solar financiers on alert. Suddenly, questions arose about what might happen if other states followed Nevada's suit. Understandably, the market started to question the discount rate applied to cash flows generated from distributed solar leases. Stocks like SolarCity (NASDAQ:SCTY), Sunrun (NASDAQ:RUN), and Vivint (NYSE:VSLR) have suffered as a result.

While this net metering debacle has undoubtedly hurt the rooftop solar industry in the short term, by shining a spotlight on the inadequacies of the regulatory process, it may well help in the long term. To understand why, let's walk through the PUC's order.

Valueless solar

The Nevada PUC starts by describing the different value streams provided by distributed solar:

"The NEM ratepayers' net excess energy is set at a value that captures the variables that make up the possible value/detriment of NEM during each general rate case. The Commission will set a value during each future general rate case by using a methodology that considers both the positive and negative effects of: 1) avoided energy; 2) energy losses/line losses; 3) avoided capacity; 4) ancillary services; 5) transmission and distribution capacity; 6) avoided criteria pollutant costs; 7) avoided carbon dioxide emission cost; 8) fuel hedging; 9) utility integration and interconnection costs; 10) utility administration costs; and 11) environmental costs."

It then decides that it will set the price of net excess energy based on only the first two criteria, whose value is just over 2.5 cents per kwh, which is far below the retail rate of 12.5 cents.

"These variables must be known and measurable positive and negative effects internal to the utility; these variables cannot be speculative or unquantified. For other than the avoided energy and energy losses/line losses, there is insufficient time or data in this proceeding to assign a value to the other nine variables, but other information can be vetted in future general rate cases."

You read that right. The Nevada PUC has decided to end an entire industry simply because it hasn't yet had time to properly analyze the value of distributed solar.

"Ending a subsidy"

In light of this admission, recent comments and actions by the Nevada commissioners sound increasingly irrational. These regulators have repeatedly said they are making the right decision because they need to end the subsidy non-net metering customers are paying to net metering customers. But how can they make this conclusion when they have yet to figure out the value of distributed solar? While it is certainly true that solar customers tend not to pay their fair share of fixed costs, it is also true solar generation can benefit the grid by shaving peak load. This reduction in peak can save ratepayers a substantial amount of money, and as a result, offset the fixed-cost solar customers avoid. The problem is these potential benefits are included in criteria 3 and 5 above - value streams the PUC doesn't have time to study. Until the commission has properly measured the full benefit of rooftop solar, it does not have the basis to decide whether rooftop solar customers are being subsidized.

These unelected officials are making decisions on behalf of the ratepayers. Something tells me that ratepayers wouldn't want to cause the unemployment of thousands of people until time had been taken to analyze whether, after all things considered, there is in fact a subsidy.

As if desperate to immortalize its logical failure, the commission has decided to introduce a new rule in its latest draft order, highlighting this apparent subsidy:

"In an effort to provide transparency regarding the costs of the NEM subsidy that all residential and small commercial non-NEM ratepayers will pay over the next 12 years, NV Energy is directed to include a separate line item entitled "NET ENERGY METERING SUBSIDY" on all non-NEM ratepayers' monthly electric bills. NV Energy will include the line item calculations for approval in the 2016 SPPC GRC and 2017 NPV GRC and every subsequent GRC until the NEM1 ratepayers have transitioned to NEM2 rates on January 1, 2028."

That's right: all non-net metering customers will be told about this "subsidy" on their utility bills. Take that rooftop solar.

What's really going on here?

I believe the prejudice driving this inconsistent behavior is that the commission and its staff have already decided that utility-scale solar offers ratepayers a better cost benefit ratio than rooftop solar. In the draft order, constant references are made to how cheap utility-scale PPAs show how solar can be deployed without ratepayer subsidy. There are also public remarks about how the E3 study showing that rooftop solar provides a benefit to the grid is wrong because it uses outdated utility-scale solar costs (see article). The point it fails to mention is that this study assumes rooftop solar avoids zero distribution costs, which is the key value stream that differentiates distributed solar from utility scale.

The problem is that the Nevada PUC, by its own admission, has yet to even perform an analysis. So how is it in the position to make such a decision about the relative strengths of rooftop and utility-scale solar? It isn't.

Conclusion

The commission and its staff are either dumb or arrogant. If they haven't noticed the logical inconsistency of ending an industry when they haven't even found the time to conduct a proper study of solar value streams, then they are dumb. If, on the other hand, the true explanation is that they believe they already have sufficient knowledge to make that decision, then they are arrogant. Neither explanation covers them in glory.

The Nevada commission spends a large part of the latest draft order complaining about how solar advocates have cast doubt over the regulatory process. Frankly, it has no reason to be mad. Its actions to date have done nothing to increase faith in its ability to regulate.

Given the behavior of the commission and its staff, how can rooftop solar customers be sure that a fair and just value will be set for the 11 value criteria described above? They can't. What customer is going to sign up to a rooftop solar system whose price could change every three years based on the whims of the commission? They won't.

In Nevada, thousands of people are now unemployed, and thousands of solar customers underwater, precisely because the power to make decisions is concentrated in the hands of the few. Distributed energy provides the chance to shift away from the current flawed model. This benefit, while often ignored, is priceless.

Disclosure: I am/we are long SCTY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.