Net metering has been vital for the distributed generation industry in the United States. This policy, which allows distributed generators to sell electricity back into the grid, is becoming a primary point of contention between the electric utilities and distributed generation companies. As distributed generation companies sell energy products that are intermittent in nature, e.g. wind turbines and solar modules, net metering has become a core part of these companies' business models. With distributed generation gaining a tremendous amount of momentum, electric utilities are waging an increasingly intense campaign to end net meter.
The outcome of net metering battles will have a huge impact on the future growth of distributed generation companies. Rooftop solar companies, in particular, have much as stake as these companies have the largest distributed generation businesses. With major utilities across the states increasingly starting to oppose net metering, distributed generation companies like SolarCity (SCTY) and Sunrun (NASDAQ:RUN) will be faced with mounting pressures. Major electric utilities like Pacific Gas & Electric (NYSE:PCG), Edison International (NYSE:EIX), and Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) owned NV Energy are at the forefront of the push to end current net metering policies.
Here is a graphic explaining net metering. It is clear why eliminating or reducing net metering policies would cripple the distributed generation industry.
The Battle Intensifies
Net metering battles have significantly ramped up recently, with the three largest California utilities asking to eliminate the state's current net metering policy. In addition, NV Energy unexpectedly stated that it has reached the 235 MW limit for distributed solar. As many distributed generation companies have been led to believe that the limit would not be met for some time, this has caused a great deal of confusion and anger. In fact, some even suspect dishonest motives, with Vivint Solar (NYSE:VSLR) stating that "Many of the public conversations don't ring true form our perspective," and that "There's something funny happening here."
As NV Energy's abrupt limit has caused Vivint Solar to pull out of Nevada just weeks after it set up operations, Vivint Solar's anger is justified. The intensifying net metering battle is clearly taking a toll on distributed generation companies, whether it be from supposed misunderstandings or blatant attempts to eliminate current net metering policies. While the situation looks extremely daunting on the side of distributed generation companies, as utilities boast comparatively unlimited resources to pump into lobbyists, distributed generation companies are faring surprisingly well.
Anti-Distributed Campaign Has Been Surprisingly Ineffective
Distributed generation companies like SolarCity, Vivint Solar, and Sunrun will likely outperform as many investors are underestimating these companies' ability to counter the electric utilities. In the vast majority of cases, the distributed generation companies have won net metering battles across the states. Despite the fact that SolarCity(which leads the policy battle against the electric utilities) only employs ~30 individuals for policy-related issues, the company has rather effectively countered the utilities' growing anti-distributed campaign over the past few years.
While the net metering push back will undoubtedly grow larger in the coming years, distributed generation is gaining political support. In fact, even senator Harry Reid and presidential hopeful Hillary Clinton have come out in public support of distributed generation. Harry Reid specifically critized NV Energy and its handling of rooftop solar, which clearly shows that distributed solar is gaining political clout. Distributed generation companies like SolarCity, Vivint Solar, and Sunrun have gained enough momentum and influence to effectively counter the growing anti-distributed campaign.
Distributed Generation Will Eventually Prevail
The distributed generation industry has continued to grow at a tremendous rate despite the increasingly fierce electric utility push back. Companies like SolarCity, Vivint Solar, and Sunrun have continued to grow at breakneck speeds despite large utilities like Pacific Gas & Electric constantly trying to set up roadblocks. While the net metering battle will likely only become more intense moving forward, many analysts are overestimating the harm that such a battle will do to distributed generation companies.
As it will ultimately be up to third parties to decide the final policy outcomes, the playing field is somewhat more even between the utilities and distributed generation companies. In fact, it is becoming increasingly clear that electric utilities' stricter net metering proposals are an attempt to eliminate competition rather than to help out their customers as they claim. With nearly all third party studies showing that distributed generation systems are an overwhelming net benefit to the grid, it is no wonder why distributed generation companies have won the vast majority of net metering cases so far.
The situation will likely be no different moving forward as commissions and regulators become increasingly educated on the actual economics of distributed generation. While the electric utility campaign against net metering will certainly force distributed generation companies like SolarCity to waste time/effort on the policy front, this utility push back is not anywhere near the existential threat that many think it to be. While the net metering battle will not die down anytime soon, the distributed generation companies should eventually come out on top.
Given the magnitude of the distributed generation threat to electric utilities, it is understandable why these utilities are doing everything in their power to eliminate/reduce pro-distributed policies like net metering. In fact, the Edison Electric Institute even gathered the top CEO's of electric utilities to specifically discuss the dangers that distributed generation poses to their business model. Any unbiased third party can clearly see that the electric utilities' push back is nothing more than self-preservation as opposed to consumer protection. Distributed generation companies like SolarCity and Sunrun should outperform moving forward despite the increasing backlash against the distributed generation movement.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.