Photo by Quazie on Flickr.

What are Solar Tariffs and What is Net Metering?

Photo by Quazie on Flickr.
Photo by Quazie on Flickr.

A solar tariff is the pricing schedule a utility uses to pay a residential solar host for the electricity her panels produce.  Net metering is one kind of solar tariff.  To make sense of the various tariffs that are used you must understand two things: 1. wholesale and retail pricing of electricity and 2. The energy flows between the solar host and the utility.
First let’s take a very simplified look at the pricing of electricity. The cost of electricity is divided into 2 components: a generation component which is the cost of the actual production of electricity by the generation source (usually a power plant or a renewable energy facility) and a distribution/transmission component which is the cost of moving the electricity from the generation source to the customer’s home across the wires that compose the electric grid. The generation component of the price is also called the wholesale price. The total price of electricity (generation component plus distribution component) is called the retail price. For instance a unit of electricity (typically the units used are kilowatt hours—abbreviated kWh) might cost $0.19 with a generation cost of $0.09 and a distribution/transmission cost of $0.10.  In this case, then, the retail price of electricity is $0.19 per kWh and the wholesale (or generation) cost is $0.09 per kWh.

The generation cost is derived from the purchases of energy by utilities from energy generators (fossil fuel plants, wind turbines, nuclear plants etc).  The market where energy is bought and sold is run by an government-authorized non-profit organization called the Independent System Operator of New England or ISO-NE.   Throughout the day there are auctions for kWh of electricity and a price is set by basic supply and demand.  The clearing price for each auction at a specific location within New England  is called the Real Time Locational Marginal Price or RTLMP.  Hourly reports for RTLMP for locations throughout New England are available at the ISO NE website as are daily and monthly averages.

In some solar tariffs the utility buys electricity from the solar host at “avoided cost”—-that is the price the utility could have bought the electricity on the wholesale market run by ISO-NE.  The avoided cost then is the  very same RTLMP discussed above—the hourly auction clearing price for a kWh of electricity.

RTLMP varies throughout the day and is generally higher during the day than at night because demand for electricity is higher during the day than at night.  It also varies throughout the year and is higher in the winter because the dominant electrical energy source in New England is natural gas and electricity generators have to compete with heat generators for natural gas supplies in the winter.  While there is abundant natural gas in the United States since fracking became a common extraction method, natural gas in New England is expensive because of limited pipeline capacity to deliver to New England the natural gas that has been extracted in Pennsylvania and other states.

In 2014 average monthly RTLMP varied from over 16 cents in January to about 3 cents in August.  The yearly average of the monthly RTLMP in 2014 was about 6.5 cents.  Since Belmont Light is using average monthly RTLMP as the rate it will pay solar hosts for their electricity production I will use 7 cents as the price for calculations below because it is an approximate yearly average of the monthly RTLMP values.

It should be noted that the generation cost listed in your bill from Belmont Light  is about 9 cents.  This is substantially greater than the average yearly LMP.  The reason for this is partly because the generation  line item does not only include the Locational Marginal Price but also Capacity Payments.  Capacity Payments are payments from the utility to ISO NE to account for the cost of maintaining generation plants on standby to meet sudden increases in demand.  This cost is in turn passed on to the consumer and is included in the generation line item.  For the purposes of this discussion Capacity Payments will be ignored.

There is one other distinction to be made.  Transmission costs are the costs of delivering electricity from the generation plant to the substations outside of the local distribution areas.  Transmission lines are the large high-voltage lines one sees held up by large metal structures.  Distribution costs are the costs of delivering the electricity from the substations to the customer on the smaller, lower voltage, lines that often travel on wooden telephone poles.  Belmont Light manages the distribution, but not the transmission, of electricity.

Now let’s look at the energy flows between solar host and the utility as shown in the picture below.  A is the kWh the solar host produces and uses on premises each month; B is the kWh the solar host sells to the utility each month during those sunny times when the solar panels produce more energy than the home can use; and C is the kWh the utility sells to the solar host each month at night or on cloudy days when the solar panels are not producing enough energy for the needs of the home.




The monthly electricity bill for a solar host will then be the total monthly value of electricity sold to the utility subtracted from the total monthly value of electricity purchased from the utility.  Let’s see how this works for each of the tariffs below.


Net metering: In net metering the solar host sells excess electricity to the utility at retail (B units at $0.19/kWh) and buys electricity back from the utility at retail (C units at $0.19/kWh). The total monthly bill then is C – B multiplied by the retail price of a unit electricity or (C-B) x $0.19. There is no reason to break down the retail price into component parts (generation and distribution) because all pricing is done at retail. The electricity made and used on premises (A) can be ignored because no electricity and therefore no money is exchanged between solar host and utility. In net metering the electricity meter runs one direction when electricity flows from utility to solar host and the other direction when electricity flows from solar host to utility. The electricity production at the end of the month is “netted.” If more electricity flows from host to utility in a given month the solar host gets a retail credit by the utility against the next month’s bill and if more electricity flows from utility to host in a given month the host pays the net cost of the electricity at the retail rate.
Net purchase and sale (Phase 2): In this tariff the solar host sells excess electricity to the utility at the wholesale price and buys electricity back from the utility at the retail price. Electricity produced and used on premises (A) is ignored as in net metering. The bill then is C x $0.19/kWh minus  B x 0.07/kWh. There can be no netting of electricity production because electricity going from host to utility is priced at a different rate than electricity going from utility to host.  Two electricity meters are needed—one to measure   the flows in each direction.  This tariff is also called Grid I/O.  Note that the payment from Solar Host to the utility does not have to be the wholesale generation cost.  It can be any price different than the retail price.  Belmont’s new tariff of 11 cents/kWh is a Grid I/O tariff.  It is derived from generation cost plus transmission costs (but does not include distribution costs).
Wholesale net metering (Phase 3): In this tariff the solar host has to sell all the electricity the panels produce (A + B in the diagram above) at wholesale and buy all electricity the host uses (A + C) at wholesale. The total bill then would be (A + C) x $0.19  minus  (A + B) x $0.07.  It does seem strange but, yes, the solar host in this tariff pays for the distribution of electricity produced and used on premises.
The actual calculations are worked out here.

Another tariff that has been used elsewhere in the country starts with net metering but adds in a monthly fee based on the size of the home owner’s solar array to help defray the costs of “using the grid as a battery.” This is the basis of one of the Sustainable Belmont (SB) tariff proposals.
Yet another refinement is to start again with net metering but in months in which the solar host sells more energy to the utility than it buys from the utility the monthly excess is paid at wholesale and not retail.  Since this happens only during sunny months and the excess energy even in those months is generally small, the yearly price difference between this tariff and net-metering is relatively small.  But this tariff does discourage the deployment of excessively large solar arrays since if more energy is sold to a utility in a given month than is bought the excess energy is sold at the much lower wholesale price and not the retail price.

There are also a whole other set of tariffs used in other places in the country called Value of Solar (VOS) tariffs. These tariffs, like wholesale net metering (Phase 3), use total solar production to calculate a price for solar electricity but add in other values for the solar production besides strict avoided cost values.


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