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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.


What is Renewable Energy? Hint: The Answer is Not as Simple as You Might Think.

Renewable energy.  What do you think of?  Wind turbines?  Solar panels?  Niagara Falls?  All reasonable answers but when it comes to Massachusetts the answer is entirely different.    In Massachusetts, the person or entity (a utility for instance) that purchases and retires the Renewable Energy Certificate (REC) associated with the megawatt hour (MWh) produced by an eligible renewable energy generator can claim that they have used a MWh of renewable energy.   Is there any sense to this ridiculously complicated statement or is this typical government bureacratese?  Actually there is a lot of sense to it and let’s see why.

Massachusetts has given a special priority to encouraging the construction of new renewable energy projects:  principally wind, solar, and small hydro projects.  They do this by allowing new renewable energy projects to produce RECs (Renewable Energy Certificates) at the same time they produce one MWh (MWh = 1000 kWh) of electricity.  In fact they can print one REC for each MWh produced for the first 10 years that they produce energy.  The wind turbine or small hydro project can sell the electricity they produce just as any fossil fuel or nuclear plant does but additionally they can also print and sell one Renewable Energy Certificate (REC) for each MWh of electricity they sell.   But who would want to buy a REC?

The answer is that utilities in Massachusetts want to buy RECs.  In fact they have to.   The government has required the Investor Owned Utilities (IOU’s) to buy an increasing number of RECs each year.  The number of REC’s the Massachusetts utilities have to buy each year is called the Renewable Portfolio Standard (RPS).   There are different classes of energy associated with the RPS but the Class 1 energy requirements are the most important.  These are the new renewable energy projects mentioned above.   RECs purchased by utilities to meet the RPS standard are called compliance RECs.

How is the price of RECs determined?  There are various factors involved.   First if the utility doesn’t purchase a sufficient number of RECs in a given year the government requires the utility to pay an Alternative Compliance Payment (ACP) which essentially puts a ceiling on the price of a REC.   The other main factor is simple supply and demand.  More RECs printed by energy generators  drive down the price of REC’s and more RECs that have to be purchased by utilities to meet their RPS drives up the price.

Not all RECs are created equal.   The state has placed a special priority to increase solar generation and so has created a solar carve-out in the state RPS which requires utilities to purchase an yearly increasing number of a special category of RECs called solar RECs or SRECs.    Because the alternative compliance payment for SRECs is higher and because they are in higher demand the price of SRECs is considerably higher than the price of a regular REC.

There is a market for RECs and SRECs much like a stock or bond market  where they can bought, sold, and traded.  Utilities try to buy them at the lowest price and generators try to sell them at the highest price.   But at some point the IOU’s have to “retire” the REC to get credit with the state for “owning” the right to call the MWh of energy associated with the REC renewable and to meet the requirements of the RPS.   When the REC is retired it is registered in a special database and can no longer be traded.

You might ask why is the system so complicated.  The answer is that there is a competitive energy market that underlies the entire power system.  Every hour there are auctions where generators of electricity sell MWh of their electricity and utilities buy them.  In these auctions coal generators, natural gas generators, nuclear generators, and wind generators all have to bid against each other as equals.  Of course society might value clean wind more than dirty coal energy but in the hourly auctions where they bid against each other there is no easy to make a distinction about where the energy comes from.

There are two solutions to this problem.  You might make the dirty fossil fuel generators pay extra for their “dirtiness” or you might allow the clean generators an extra payment for their “greenness.”  In fact, both solutions are used.  The first solution is the Regional Greenhouse Gas Initiative (RGGI).  Because of RGGI  fossil fuel generators have to pay a certain amount for each ton of carbon dioxide they produce.  The second solution is the RPS/REC system.  Clean generators get an extra payment (the REC) for each MWh of electricity they produce.

After the clean generators get paid extra for their “greenness” (the REC) or the dirty generators pay extra for their “dirtiness” the energy is no longer considered “green” or “dirty”  and they compete as simply “null energy” in the competitive energy market.  Energy from a wind or solar generator without the REC or SREC is not considered “renewable” or “green.”  It is the REC or SREC that gives the energy its “greenness,” not the energy itself.

What kind of energy qualifies for RECs?  That is a political decision.  In Massachusetts these are mostly new (post 1997) solar, wind, and small hydro projects.  Energy from Niagara Falls doesn’t qualify.  This is because it has been around for a long time and the project is paid for.    The RPS/REC system is designed to encourage the construction of new renewable energy projects.  It is sort of like the patent drug system.  Additional money is given for a fixed length of time to help pay for capital intensive projects.  Once a renewable energy project is paid for the cost of running it is generally small and it can pay for itself.  Getting them built however requires a large initial capital investment and the RPS/REC system supports that.

The RPS for 2015 is 10%.  That means an IOU must buy RECs from new renewable energy generators to cover 10% of their total energy sales.  The RPS increases by 1% yearly until it is 15% in 2020.  Note that it is only new renewable energy generators that can qualify to print class 1 RECs.  This is because the state wants to encourage the construction of new renewable energy sources.   Again buying energy from Niagara Falls is good in that it doesn’t pollute but it doesn’t stimulate the construction of new sources of renewable energy and so the owners of the Niagara Falls power project cannot print RECs (also only small hydro projects meet the criteria of the state RPS requirements).

There is an additional market for RECs.  These are entities that simply want to support the production of renewable energy.  A lot of these entities are individuals.  Individuals can buy RECs as part of programs run by organizations such as Moms Out Front or Mass Energy or Belmont Light’s Green Choice.   Businesses may also want to buy RECs as may municipal utilities like Belmont Light—which are not part of the state RPS and are not required to buy RECs.   In these cases the individuals, businesses, and municipal utilities buy RECs not driven by state requirements but driven by their own conscience and values instead.

So does Belmont Light buy RECs and SRECs.  No.  Why not?  Because we, the owner/regulator of our utility choose not to.  Why not?  Perhaps that is a discussion we should be having.


To summarize a qualifying renewable energy generator (for example a wind turbine owner or solar panel host) may print a REC at the same time it produces one MWh of electricity and both may be sold; however only the purchaser of the REC may claim they are using renewable energy.   Energy from a wind turbine or solar host that is purchased or used without the accompanying REC is not considered renewable.  It is the REC that confers the renewable or clean attribute to the energy.  This is explained in more detail by the Environmental Protection Agency statement on Renewable Energy Certificates here.

Let’s take a look at how this plays out by examining the wind turbines constructed by the town of Hull.  The town of Hull has 2 wind turbines that produce electricity for their municipal light department and which is sold to residents in Hull to meet their electricity needs.  The town also prints a REC for each MWh of electricity produced and sells the REC to whomever wants to buy it—most likely NSTAR or National Grid or another utility which is required by state regulations to purchase a certain amount of renewable electricity to meet its Renewable Portfolio Standard.   In this case the electricity used by Hull residents that comes from the wind turbine is not considered renewable.  The right to call the energy renewable goes to the utility or other entity that purchases and retires the REC.   It is this system of energy plus REC that allows renewable energy projects like wind turbines and solar panel arrays to be financially worthwhile for their owners.

It is interesting to note this renewable energy system requires two things for it to be successful.  It requires a public that is willing to require its utilities to pay subsidies for renewable energy—ultimately leading to higher electricity prices for ratepayers—and entrepreneurs willing to take advantage of the both the subsidies as well as the ability to sell electricity to build renewable energy generation facilities.

In short RECs are production subsidies for renewable energy paid for by utilities because the state requires them to or by individuals, businesses, and municipal utilities because they feel it is the right thing to do.


How much does Belmont Light pollute and what can Belmont do about it?

When it comes to Climate Change the main pollutant to consider is carbon dioxide and in New England the major source of carbon dioxide from electricity production is natural gas.  While natural gas produces less than half the carbon dioxide per kWh of energy as coal, natural gas in New England is a much larger energy source.  In fact in 2012, which is the most recent year that Belmont Light has published its energy sources, natural gas supplied 44.6% of our electricity and coal supplied 2.7% of our electricity.  So while world-wide coal is a much greater source of greenhouse gasses, in New England natural gas is a much greater problem.  In much of the world replacing coal as an energy source with natural gas would contribute to decreasing greenhouse gas production.  In New England, however, our job will be replacing natural gas as an energy source with wind, solar, hydro, and—depending on your viewpoint— nuclear sources.  (Nuclear energy will be discussed in other posts.)  As former Secretary of Energy and Nobel Prize winner, Steven Chu, said, “Natural gas is part of the problem and part of the solution.”  In New England, however—at least in terms of electricity production–it is the major problem.

How should we proceed in calculating the damages done by emissions produced in the procurement of energy by Belmont Light?  The monetization of damages done by CO2 pollution is called the social cost of carbon and is given in dollars per metric ton of CO2 emissions.  It is a crucial step in driving  climate change policy.  The number is often given as a range since it involves the prediction of damages done in the future and so is uncertain.  A middle-of-the-road value used by the Environmental Protection Agency is $37/metric ton.  Many environmental groups think the number to use should be much higher.   Ways of calculating the social cost of carbon will be considered in another post but for now let’s use EPA’s $37/ton value.

Next we need to know how many tons of CO2 emissions are produced in a year procuring electricity for Belmont Light. By taking a look at its annual report we find that Belmont Light sells about 130 million kWh of electricity in a year.  About 50% of this electricity comes from natural gas.  (I am doubling the 2.7% from coal and adding it to the 44.6% from natural gas to get “natural gas equivalents.”)  50% of 130 million is 65 million kWh of electricity from natural gas generators.  Natural gas turbines produce about 0.8 to 1.2 lbs of CO2 for each kWh produced.  We’ll use 1 lb to make the math simple.  That means 65 million lbs or about 30 metric tons of CO2 are produced each year to provide Belmont Light with its electricity needs.

Using $37/metric ton for the social cost of carbon we come up with $1,100,000 worth of damages to future generations by a year’s worth of procurement of electricity by Belmont Light.

These natural gas generators, however, did pay about $4.50/metric ton CO2 for permits to pollute under the Regional Greenhouse Gas Initiative.  This would cover about $140,000 of the damages leaving $950,000 of uncovered damages.

How can we understand this number?  It means that future generations will have to pay $950,000 to clean up the climate change damage caused by the CO2 emissions from the procurement of a years worth of Belmont Light’s electricity.   The Municipal Light Advisory Board often considers issues like this in terms of cross-subsidies; using this language one could consider this $950,000 a cross-subsidy from future generations to fossil fuel electricity generators.   The fossil fuel generators create the pollution that causes the damages and should pay for it.  The future generations who have to deal with the damages of climate change will end up paying for it. That is the cross-subsidy.

Climate Change policy options are discussed in a separate post but for now we can consider a few of the things we in Belmont can do to respond to the damages our energy procurement causes and keeping this $950,000 figure in mind will serve as a guide.

The primary way ratepayers in the rest of state account for this cross-subsidy is by paying incentives to new clean energy generation sources helping to slowly decarbonize the economy.  Some people think of these incentive payments as negative taxes.   This incentive system involving Renewable Energy Certificates is discussed here.  The  amount of money it would cost Belmont Light to pay the same amount of clean energy incentives as the Investor Owned Utilities is discussed here.  It is worth noting that we could meet the Massachusetts RPS standard and still not completely account for the cross-subsidies to fossil fuel plants.

Besides directly incentivizing renewable energy by buying RECs we can encourage clean energy by buying energy from renewable sources in ways that encourage their construction.  This is the idea behind the net metering solar tariff.  Net metering may or may not be an completely accurate way of valuing solar electricity but it is definitely easy for potential solar hosts to understand and it has been an important way of encouraging residential solar across the United States.

It turns out that at low solar penetrations—when only a small amount of energy comes from residential solar—accurate valuation of solar is not that important.  That is because any possible cross-subsidy that might occur from a possible overvaluation of solar is tiny compared to the $950,000 cross-subsidy going to fossil fuel plants.  There are currently 20 homes with solar panels in Belmont producing about 150,000 kWh of electricity per year.  If there were, for instance, a 10 cents per kWh cross-subsidy the annual cross-subsidy would come to $15,000—small potatoes compared to the nearly $1,000,000 of cross-subsidies going to fossil fuel plants.