Solar PV Policy Part 2: Net Billing

The broadcast is now starting. All attendees are in listen-only mode. Good day, everyone. Welcome to the International Solar Alliance
Expert Training Course. This is session six, focusing specifically
on net metering policies. This is a two-
part session, providing an in-depth look at both net metering and net billing. So, net
metering is part one and net billing is part two. Both net metering and net billing have
become more widespread. In recent years, we've seen a growing number
of jurisdictions around the world outside of
the U.S. and Europe developing net metering policies and net billing policies. A number
of island states around the world are starting to experiment or have been experimenting
with different variations on these policies. You'll see that there's a wide range of different
terms that are used and that the terminology itself sometimes gets confusing.

Sometimes
jurisdictions don't use the terms in the same way as another jurisdiction does. So,
sometimes when you hear net metering, it's actually a net fit or if you hear a net metering
policy, they're actually referring to what analysts would call a net billing policy. So,
there's some degree of – still of confusion and terminologically mix-up in this space. So, I encourage you to when you see a policy
– you know, if a country like Pakistan or Nepal or South Africa adopts or is said to
adopt a net metering policy, take a minute. Have a look at the design. Look at what it actually does and how the
policy works to be able to put it into context, because the different
terms and different policies actually mean different things. We're going to try to clarify that through
the course of this presentation, but I wanted to preface this with a quick
discussion of that. So, let's dive in. This training series is supported by the International
Solar Alliance, which is a recently launched initiative to
connect solar resource-rich countries around the
world and scale up the growth of solar power.

This training is also launched in
partnership with the Clean Energy Solution Center which is one of the leading technical
assistance and capacity-building institutions on clean energy and clean energy policy
around the word. This training, as I mentioned, is focused
– it's specifically on net metering and it's found within module one
out of this expert training course. You can see
the different topics and the different subjects included here. As I mentioned at the outset, this is part
one, which focuses specifically on net metering. In a separate session, you'll see – you'll
be able to look at and follow the training on net
billing. I've also made a few references throughout
these presentations to net fits, which are another policy hybrid that's emerging
in this space. So, a quick overview of the presentation. First, we'll look at the learning objective,
some of the key highlights, a brief discussion
of the historical context between net metering and rooftop solar policy. We'll cover the main body of the presentation. Then there will
be a brief conclusion. At the end, there is a quick knowledge check
with a series of questions based on the presentation.

So, first, the learning objectives. Obviously, to understand the rise of net metering,
how net metering works and why, and also to get
a sense of how net metering policies themselves have evolved over time and understand
some of the drivers behind that evolution. We'll look at how net metering has been adapted
in different jurisdictions around the world and we'll understand how
the rise of these so-called pro-sumers are electricity consumers who also produce their
own power, or a portion of their own power is starting to change the electricity sector. So, with that brief introduction, let's take
a quick look at the history behind net metering policies. In most parts of the world until the 1970s,
utilities effectively had a monopoly on power generation. In many countries in the world, that monopoly
remains effectively in place. But in jurisdictions across the U.S. as well
as in Europe and Canada and the U.K., a number of jurisdictions started to
loosen up that monopoly. Historically, there
were also exceptions made for large industrial customers. So, large industrial customers
like steel plants or auto manufacturing plants, pulp and paper mills were given the right
within an existing utility grid to generate their own electricity.

But that was kind of an
exception and it was a long – these were case by case self-consumption permissions. So, they were allowed to generate power. In some cases, even sell their excess power
to the incumbent utility. But this was by and large not possible for,
say, average household customers or small businesses primarily because
of economies of scale. What made it
possible for large industrial customers is that they had large on-site loads. They also had
higher need for reliable power supply. So, there was an incentive for them to set
up their own facilities either for primary power supply
or for backup power supply. They were
also able – they were large enough that they could make use of conventional generation
technologies. So, you could have a small onsite coal plant
or natural gas plant supplying the needs of that large industrial customer. In some cases, large customers also used hydro
dams. So, a number of mining operations,
a number of pulp and paper mills use a nearby hydro dam to supply their own power
needs.

This is also – if you go back in the beginning
of the electricity industry, this was also [someone clears throat] small onsite
production would supply directly the local loads. But it became much less common throughout
the 19 – essentially from the 1940s to the 1970s. It's only after the 1970s that we really started
to see this open up again. It's been driven by a number of different
factors, as we'll see. But one of the most
critical ones and what we're going to focus on mostly today is on the impact of solar,
and in particular, low-cost solar and how that's
really transformed this equation. The fact that solar can be produced at a competitive
price directly on someone's rooftop is a game-changer. It essentially undermines the traditional
justification that utilities had for their monopoly status.

One of the justifications underpinning a utility's
monopoly has always been that they could produce power
cheaper than everybody else and more reliably than everybody else. But the fact that solar is now starting to
become more cost effective and, in many cases, even cheaper
than the utility provided electricity supply and, in many cases, can even be more reliable
than the utility power supply, we see the market changing. Net metering policies are one part of that
change or essentially a signal of that shift.

They're one of the enabling policies that
enable customers to more effectively develop onsite sources of power
generation. It's important to keep in mind in this debate
that there are different benchmarks against which renewable energy technologies like solar,
for example, are competing. This often
gets mixed up in the whole debate around grid parity. So, here, in this graph, we tried to
show, essentially, the different benchmarks that renewable technologies bump up against
as they get cheaper and cheaper. So, you see here, the different lines refer
to the levelized cost of energy of different technologies. You have these bands which are just approximations
or ranges for the retail price on the first-hand, the LCOE of conventional technologies,
and, finally, the wholesale price range for wholesale or bulk power on the system. You can see that as renewables have
gotten cheaper, they've bumped, they're crashed through the retail price range in a
growing number of jurisdictions and they're increasingly now cheaper than even the
LCOE of new conventional generation technologies.

Even more recently, we're seeing
that renewable energy like solar is becoming even cheaper, in some cases, than the
wholesale market price. That's really a game-changer in its own right. So, it's important to keep this in mind to
understand the fundamental concept of cost competitiveness and how this plays out and
why this matters. So, in order for net
metering to function or to be attractive, solar or the distributed generation technology
has to at least be in this first range of the
retail price. So, as long as you're within the range of
the retail price, there can typically be a business case for rooftop solar. That business case
gets better and better the more economic – the cheaper solar becomes and the more retail
electricity prices increase. So, if you look at jurisdictions around the
world, there are some where electricity prices from the utility are actually going up quite
rapidly.

If you look at Australia, South Africa,
a number of jurisdictions through Latin America, many parts in Africa and Asia, power
rates are going up quite quickly. That is a further driver that makes solar
power even more attractive, even more economically competitive,
and is really driving the adoption of distributed solar. As the economics get better, we can expect
that trend to continue. As I pointed out, net metering for small customers
didn't really make economic sense, in most cases, in the 1980s and '90s, partly
because retail prices were lower, but also, critically, because renewable energy technologies
were more expensive. The first policy
that was introduced, the first net metering policy worldwide was established in Minnesota
in 1983 and it experienced comparatively little uptake. It was essentially a very modest –
a modest degree or renewable energy development occurred. This started to change,
however, as solar and other renewable energy costs have declined.

That's partly why
we've seen a growing amount of interest in net metering and other policies to govern
distributed generation around the world. So, now let's take a closer look at the policy
itself. How does net metering work and what
are the key design elements that make up a net metering policy? Net metering effectively
allows individuals or businesses with customer-sided generation to connect with the grid
and be credited for the excess power they feed into the system. So, this is where the
concept of the net metering comes in. The bill that you receive is actually based
on the net electricity consumption from the utility. So, what you normally consume minus what
you injected into the grid. Whatever is left is your net electricity bill. Most net metering policies operate on the
basis of bill credits. So, in other words, every
kilowatt hour you inject into the grid is counted and is banked as a kilowatt hour.

Then
you can carry that extra kilowatt hour that you may have produced on Tuesday of a given
week and use it to offset a kilowatt hour of consumption in the following days. So, you
can essentially bank that consumption and use it later. The basic formula behind net metering is very
simple. The compensation rate is equal to
the retail rate. So, if you are paying $0.15 per kilowatt hour,
then effectively you're getting a kilowatt hour of value for what
you inject into the grid. That means the value of
that kilowatt hour is based on the retail rate you pay. That's classic or traditional net
metering. It's important to underscore that net metering
does not involve a cash payment. It simple credits customer-sided generation
at a rate that is equal to the retail rate. So, there's no cash transfer. It's, in that sense, purely an accounting
mechanism that allows customers to use the grid to inject
their supply, their extra supply to the grid and
offset consumption during other future times.

So, the core incentive is fundamentally
savings on your power bill. It's not to generate directly financial returns
or cashflows, so to speak. There is no transfer of money under net metering
policies. It's effectively just a
credit on your bill. This diagram published in a recent report
by NREL from some colleagues provides a snapshot of net energy metering. You can see here a quick diagram outlining
the basic mechanics. So, there's solar production through the wires. A bidirectional meter,
typically. In the beginning, there were also dual meters,
where you needed two different meters.

Now, most metering is done by a bidirectional
meter. Then you have the netting
between consumption and production. At the end of the month or at the end of the
billing cycle, the bill takes that into account. So, it will tabulate your consumption. It will
subtract your net grid injection and you will be paying the remainder. Now an interesting feature of net metering
and one of the main drivers in the growing number of jurisdictions for developing a customer-sided
solar system is actually that retail rates are going up over time. So, as you can see here, as retail rates go
up – in this case, this illustration at 2.5 percent per
year – the actual value of that solar goes up over
time as well because your future kilowatt hours are going to be worth even more than
the current ones.

That means every kilowatt hour you're consuming
yourself in future years is actually worth more and more as retail rates
go up. Over 60 countries around the world have adopted
some form of net metering. We've seen
quite dramatic shifts in the market driven by policies like net metering among others,
in combination with feed in tariffs and net billing
and, in Australia earlier, net fits. In some
regions, residential solar currently surpasses 200 percent of maximum daytime load on
certain feeders. We see this in jurisdictions like Hawaii and
even in certain feeders across Germany where high shares of solar during
the daytime actually are much greater than the residual load on those individual feeders. Germany currently has an estimated 1.65 million
individual solar systems, the vast majority of which are sited on households
and small businesses. In Queensland,
Australia, recent statistics show that over 30 percent of households have a solar PV
system. So, you can see a fundamental market transformation
is underway and in jurisdictions where the right regulatory conditions
are present and often where net metering or net metering-like policies are
available, households are really starting to get
in on the action. This is becoming increasingly economic and the price of solar goes down, driven by competition
among businesses and driven also by economies of scale in the solar sector as
well as by rising retail prices.

Such a large
uptake of distributed generation arguably signals a very fundamental shift in the power
industry. Many analysts think we are very much at the
beginning of this transformation. Net metering is most commonly used for rooftop
solar PV projects. Not exclusively, but
most commonly. So, typically, projects are under one megawatt
in size. It is, however, a
policy that can be used for larger scale projects, up to ten megawatts and in some cases
even larger, and it's also not explicitly or not exclusively for solar power. So, most net
metering policies in the United States, for example, allow multiple different technologies. So, they have a list of eligible technologies
and you're allowed to use any of those eligible technologies to self-supply a portion
of your own consumption. Now, in most cases, solar is becoming the
default choice of customers, partly because it's
easier, partly because it's cheaper, but also because it's more modular.

So, you can install
1.8 kilowatts if you want, or 7.2 kilowatts. The flexibility and modularity enables you
to really adapt your total system size to your
available roof space or available land space. That flexibility is a major asset. Net metering projects are typically connected
at the distribution level, though there are cases
where net metering is permitted at the transmission level or at higher voltage levels. As we saw a few moments ago, net metering
policies allow customers to bank their excess generation, so their net excess that
they provide to the grid typically up to 12 months. This isn't universal. Some jurisdictions allow longer. Some shorter. But the –
called the norm increasingly is 12 months. These excess credits in one month or billing
cycle can be used to offset credits in future months up to that 12-month period.

After 12
months, there's what's called the settlement period or sometimes called where the credits
are trued up. Where those credits are settled, effectively
the utility looks at the balance for the year and if you're in a net excess
position, if you have too much injection, in most
cases, as unfair as it sounds, most of those credits – in most cases, that extra solar
power that you've provided to your neighborhood
utility is effectively forfeited. You will not be
compensated. The reason why many utilities continue to
justify this as a policy design option is that it
encourages customers to design their systems at the right size.

So, it's to encourage right-
sizing. So, in other words, the utility doesn't want
customers developing substantially over-dimensioned solar PV systems. They want you to roughly be able to offset
your own onsite consumption but not more. So, this reflects the traditional – the
logic that customer-sited generation should, from the
utility's perspective, be purely treated as demand reduction. That's another fundamental debate in the solar
sector, of what is the future of customer- sited generation. Should it only be treated as demand side – as
effectively demand reduction or should it be treated as a potentially
new and large source of power supply? We can see that there's a shift towards policies
like net fits, for example, which we'll see in session seven that actually adopt that
second logic, which is more about encouraging larger volumes of distributed power production
and tapping into the significant potential for new supply from customer-sited renewables
rather than seeing purely as demand reduction. But classic net metering is still based on
that logic of demand reduction. This chart shows roughly how this plays out
over the course of the day, as a schematic.

So, you can see in the early evening hours,
consumption is predominantly from the grid. As the sun rises, the power production from
the solar panels goes up and is actually greater than the household's electricity demand. That excess production is essentially
poured into the evening hours and offsets those evening hours on a one to one basis. If
you are in a significant net excess position, let's say if you go on vacation, then your
load is very low. Your net injection is very high. You will then be generating net extra – net
excess generation credits more than usual. That then gives you credits that you can use
in future months up to the settlement period. So, that's the basic mechanics. Now, one of the key differences here, pure
key terms is the rollover period. It specifically
refers to the time period over which these net excess generation credits are calculated. This is typically connected to the billing
cycle, but in some cases, it can be shorter or
even longer.

The different rollover period can have a fundamental
impact on the attractiveness of investing in a solar project. So, imagine, for example, if you had a
rollover period only of one day. That means all of your excess production,
for example, from 9:00 AM until 6:00 PM you need to consume
before midnight. Otherwise, it'll be
forfeited to the utility. That is the rollover period. That means that if you are under those
kinds of tight rules with a daily rollover, you would really try to design your solar
system to be as small as possible so that you never
have excess generation at the end of the day.

Otherwise, those excess credits would effectively
be lost or forfeited. Most jurisdictions build their rollover period
on a monthly basis. So, you're allowed to
carry over up to the end of the month, and then the netting is done. In many cases, that
monthly generation can be carried over up to 12 future calendar months or at least up
until the end of the calendar year. So, again, different design options have different
impacts on the bankability and attractiveness of investing in a customer-sited solar
project. The settlement period refers, as I pointed
out, to when excess generations are trued up or
settled from a financial standpoint. So, typically, after 12 months, the utility
will look at the balance over the course of the year and
will say, "Okay, you have this many excess credits. Here's how we're going to compensate you for
that." In most net metering
policies, we find ourselves under option A, where effectively your net excess credits
are forfeited, but a growing number of utilities,
often under pressure from customer and rate- payer advocates are pushing for fairer terms.

That's where we're starting to see a number
of policies across the U.S. and elsewhere, including in island states where excess
generation is starting to be credited or, in some cases, even remunerated. That means paid
for with a cash payment instead of just being cancelled. So, this is, again, part of the
ongoing evolution of net metering policies into these new policy hybrids. Broadly speaking, net metering policies have
a number of key design features. You have
a compensation mechanism, who is eligible, so who can actually participate, project size
caps, program size caps. In many cases, there's limits on the contract
duration, whether it's a five or ten-year contract which is
the case in many island regions.

In the U.S., most
commonly net metering is a 20-year agreement or even an unlimited agreement. It can
always be renewed. A range of other options, all of which make
up the package of net metering policies including things like grid
interconnection rules, metering standards, permitting fees, grid impact study fees which
are rare but do exist in certain cases for larger systems. So, all of these different components make
up a net metering policy. Over
time, net metering policies have gotten quite a bit more sophisticated in the process as
their evolution has gone on over time. This provides a quick overview of the United
States, which remains the largest and most diverse net metering market in the world.

You can see here the index at the bottom. NEG
refers to Net Excess Generation and it refers – you can see here the different colors
refer to how different states deal with the Net
Excess Generation, which is really the key issue
at the heart of net metering. You can see here; some states provide a full
credit at the retail rate. Some provide a Net Excess Generation credit
at less than the retail rate. For
example, the avoided cost rate. Then, there's some, even more conservative
states from a policy standpoint that actually offer no credit
at all for Net Excess Generation. So, you
can see it's a patchwork and there's a wide range of different approaches to this. As we pointed out a moment ago, a number of
jurisdictions are starting to pay for that Net Excess Generation including in the United
States.

There are some regions now, for
example, in Nevada and in some of the eastern states where it's actually possible to get
paid at the end of the year at the utility's avoided cost rate. So, you can actually choose to
get paid a cash payment. So, every month you pay your power bill and
if you have Net Excess credits at the end of the year, the
utility will buy those at the avoided cost rate. Now the problem is, in most cases, the avoided
cost rate is calculated to be very low, typically under $0.10, often under or in the
$0.05 range.

So, nobody's getting rich here
off of the avoided cost-based payment, at least not yet. Now in most cases, it is a
fundamental shift, however, in that it recognizes customers who are out there with
rooftops and producing power have a right to be not only compensated, have a right to
be remunerated, actually receive a cash payment
for their Net Excess Generation. That, in
itself, is a fundamental, and some would argue, a fundamentally positive shift. Here's a quick overview of net metering in
the E.U. Some different schemes here. Things
have changed a little bit since this EPIA data. But you can see here a bit of a snapshot of
how different jurisdictions are structuring their policies. Europe is much like the U.S.

Also, a patchwork. Every jurisdiction has different rules and
often very different treatment of things like tax treatment, bill
structures, project size caps. You can see in the
case of Belgium, it's limited at the voltage level. A range of different approaches. Here's a table showing snapshot of net metering
policies around the world. This gives you
a broader sense of some of the landscape. As you can see under Latin America, many
different islands have variations on net metering. You can see, also, even some
jurisdictions in Africa and the Middle East are starting to move in this direction as
well. In the process, residential PV is starting
to become a major source of new power supply. These are just data from the E.U. But you can see here in some markets, the
residential slice or the residential segment is quite
substantial and growing.

So, in Germany, in
particular, we're talking in the 10,000-megawatt range of customer-sited residential PV. So, not even including the business or commercial
sector. Now, let's take a closer look at how this
actually works in practice. Obviously, power
demand is dynamic and changes every day. Every time you flick on a lightbulb or turn
on or off your air conditioning unit or pop the
toaster down or the tea kettle on, your electricity demand profile changes. It's spikey. So, it's going up and down all the time
based on the different loads in your household. Now, solar power output also changes
dynamically over time. So, if there's cloud cover or any other factors,
the solar output will fluctuate and may not perfectly match
the arc, or the sort of parabolic form outlined here.

This is sort of an idealized case, but it
gives you an idea of how this works in practice. So, we have here a real load curve from an
actual office building and their peak is somewhere around nine and a half kilowatts. This shows a one-week profile. So, you can
see here seven bumps for seven days of solar PV output and then what would be the net
result in terms of net grid injection. So, under this sketch, net grid injection
is only there on Saturday and Sunday. All other days of the week, the building,
the office building is consuming all of its own solar with no net
grid injection. Now why is that? Offices often close on the weekend or close,
in particular, on Sundays. So, that means the power demand is lower which
leads to the situation where if you have a very sunny Sunday, there's no load onsite,
there's significant net excess generation.

This
is why net metering is so critical for customers like this because without net metering and
without a battery bank, obviously, this Sunday generation is lost. It would be essentially
wasted solar power. So, with a net metering structure, the customer
can connect to the grid, inject that excess on Sunday into the
system and be compensated for it, and use those credits then to offset their consumption
during the rest of the week. So, you can see
in that sense a win/win both for the solar customer as well as for society. The next example here shows a supermarket. This is a real supermarket curve from an
actual supermarket. You can see the demand profile is fairly consistent
over time, more consistent even than the office building with
somewhat lower but not much lower consumption on Sunday.

So, under this case with this particular supermarket
load, if they installed a 300-kilowatt solar system, even
then the supermarket would be consuming all of the solar because they have air conditioning
and chillers for their freezers and refrigeration units as well as basic lighting
and other pumps and functions, air circulation. All of those systems are still functioning
on the weekend even if no customers are there. So, the load is a bit lower but not much,
which means supermarkets are actually very well-positioned to invest in commercial net
metering projects because during most times they'll actually be consuming most of the
power themselves. That's why we're actually
seeing a growing number of supermarkets do so even without net metering policies in
place because they dimension the system purely to supply their own needs and not inject
– without even needing to inject any – to – any electricity to the grid.

This is because
supermarkets have what we call a high self-consumption ratio. Most of the power they
produce can effectively be consumed in real time onsite. Now, taking a step back, you
can see how this plays out over the course of the day. So, you can see here the
contribution of solar over the entire electricity demand profile of a particular jurisdiction. Now, let's take a look at some advantages
and challenges with net metering before we wrap up. First, net metering is obviously positive
in so far as it allows customers to develop onsite generation and connect to the
grid.

As we saw at the beginning, in the
past, net metering customer-sited generation was not allowed. Monopoly – utilities had a
monopoly over generation and it was effectively illegal to connect to the grid. That
remains the case in certain jurisdictions in the world where the rules allowing you
to connect a self-generation system to the grid
are not – simply do not exist. So, net
metering in that sense is definitely a step in that right direction. Another advantage is that it provides a simple
compensation formula if you know essentially what your retail rate is and,
if you develop a solar system, you know effectively what your compensation is going
to be, and you also have a sense of how your power rate has been changing over time. In most cases, going up over time. That gives
you a good basis to make your investment decision. Net metering is easy to understand,
although there are a number of nuances and it gets quite more advanced.

Net metering
policies get quite sophisticated. They're typically easy to understand and typically
easy to participate in. Another advantage is the decreasing PV costs
are now making net metering increasingly attractive. As we saw in the 1980s and '90s, it was not
particularly attractive, and we saw very little development. But now, things are really starting to pick
up and customers can effectively use the grid as a battery, export
their surplus, and avoid the need to invest in
costly storage. So, that's another significant benefit effectively
provided by the public or utility-owned grid. Net metering can also be easily combined with
new business models and often is. So,
business models like leasing, virtual net metering, community solar. These different
options are – there's a special training session in this ISA Clean Energy Solution
Center training session specifically looking at these
new business models.

So, you can have a
closer look there and see how to better understand how those business models are
currently developing. Now, some challenges. Net metering is typically limited to small
and medium-sized projects. Under two megawatts is emerging as a common
size cap. This arguably
artificially limits the project's size. I was recently working quite closely with
a government in Southeast Asia where a large
clothing facility was looking to install six and a half megawatts of solar PV on their
roof, on their various rooftops of their various facilities all connected. They couldn't connect under the net metering
program because the cap was at one megawatt. So, they had enough to build a six and a half
megawatt project but were constrained by this artificial
limit.

So, this points to one potential
challenge. The second is that the compensation rate is
arguably arbitrary. The retail rate has no
relationship to the cost of customer-sited generation and it also has no bearing on the
actual value of solar to the grid. So, using the retail rate is a bit arbitrary. In that sense, it's
also arbitrary in so far as different residential customers fall into different classes and
different commercial customers fall into different rate classes and different industrial
customers, the same. So, if you had all of these different customers
participating under a net metering scheme, they would be getting a different rate effectively
for their Net Excess Generation because it's effectively connected to the price they
pay for power.

So, that is one reason why some
jurisdictions are starting to differentiate between different project sizes. So, they have a
net metering policy for projects under 100 kilowatts, for example, and they have other
kinds of policies like net billing or net fits for projects above 100 kilowatts or above
a megawatt that allow more interesting and more
favorable conditions for projects developed at that size. Another common criticism is that net metering
is mostly for the rich or mostly for wealthy households or large companies. This is another issue that has led to some
jurisdictions establishing additional policies like low-interest loans or supporting
community solar or low-income solar specifically to allow customers who may not be the
wealthiest to still participate in solar.

That's becoming increasingly attractive now
that solar is often cheaper than the utility bill. So, we have a unique opportunity where lower
income households can actually be encouraged to go solar and reduce their monthly
power bill, which gives them more disposable income to spend on other things. Another challenge is that higher value, as
we pointed out, is awarded to certain customers. So, residential customers get a certain rate
and commercial customers get another. That arguably has no basis in the economics
of solar or in utility economics. That comes back to the point around the rate
being a bit arbitrary. A further challenge is that the value of Net
Excess Generation goes up over time as electricity prices increase which may create
revenue issues for the utility in the future. However, the revenue of solar or the value
of solar to the grid may, in fact, decline as the
share of solar grows.

So, there's a number of jurisdictions now
particularly in the U.S. looking at what are called value of solar
tariffs where they try to determine what the actual value of solar power is to the utility
grid and they use that analysis to inform the
actual rate. That moves net metering away from classic
net metering towards a hybrid policy like a net fit or what's sometimes
called the value of solar tariff policy. So, we're
seeing some innovation going on there. A further challenge is that in islands, in
particular with high retail tariffs like Hawaii and
the Caribbean, Pacific Islands where power rates are often over $0.35 or $0.40 a kilowatt
hour, compensation at the full retail rate as implied under classic or traditional net
metering may actually be considered overcompensation. If the levelized cost of solar is
only $0.12 and you're able to offset your utility bill which is at $0.40, offering the
full traditional net metering may actually be resulting
in overcompensation. That's an
argument that utilities, particularly in the Caribbean but also in the Pacific Islands
region have started to make and apply.

That's one of the further drivers towards
different policies like net billing. Further challenges; I pointed out briefly
that net metering can affect utility cost recovery. So, if utility revenues go down, this can
negatively impact utilities' revenues because they're selling fewer kilowatt hours. It may lead to cross-subsidization issues
between customer with solar and those without solar. There's a whole host of debates and analyses
and regulatory hearings specifically looking at this issue of whether there is cross-
subsidization between customers. A further concern is around tax treatment
as well as the treatment of fixed bill charges. So, in the bill, are you allowed to also erase,
for example, your grid related fees in the bill
or only the energy-related components of your electricity bill? So, there's a lot of nuances
there that, again, more sophisticated net metering policies have really had to grapple
with. Another challenge is that because there's
no cash payment, as we saw at the beginning, net metering is arguably less bankable and
certainly less bankable than a feed-in tariff which is the policy that's been predominantly
used to drive the rooftop development here in countries like Germany.

That remains a challenge for the bankability
of net metering because banks, in general, are hesitant to
finance or to issue loans for net metering projects. Which means in turn that it's only wealthier
households who have enough disposable income to actually invest in a
net metering project, further limiting the pool of
potential customers. Finally, subsidies remain a real part of many
and most electricity systems which makes customer-sited generated artificially less
attractive. So, if the retail rate is subsidized,
which it is, again, heavily in most parts of the world, it actually distorts the real
cost of competitiveness of the market and makes solar
look less cost competitive than it actually would be without subsidies.

So, that's why there's an increasingly loud
call for reducing subsidies to provide a more level playing
field and allow more distributed generation like
solar, in particular, to be able to compete on fair terms. Now, there are some key decision points that
need to be taken into consideration with net metering policies. I've provided a list of some of them here. This is more oriented at some
of you in the audience who may be specifically working on net metering design or who
are looking to develop or adjust your own policy. These are some of the key questions
that need to be answered in any net metering framework. There are many more, but this
provides a sort of basic set of key decision points.

Now, let's look at the future. We have a few minutes left so I'd like to
give you a sense of where this debate and discussion is going. As we've discussed, the cost of solar PV
continue their downward march. These are numbers here from the U.S. showing
the breakdown between different solar costs for
residential and commercial-scale system on the left. You can see that numbers continue to come
down. By international standards,
even the numbers here are in fact higher than they are even in many other – in many
countries particularly in the Asia Pacific region as well as in Europe where significantly
lower installed costs are now achievable at the residential and commercial levels.

So, you can see here, the rapid decline down
below $2.00 a watt and now we're seeing even projects being installed for less than
$1.00 a watt for commercial-scale rooftop systems. So, this is really – this fundamental shift
is making – really risks – is going to redefine the overall cost competitiveness
of customer-sited generation in the years ahead. I think there's a strong case to be made that
we are just at the beginning of this transformation. As I've pointed out and using numbers now
here to really illustrate the case, the current retail price in many jurisdictions is quite
high. These aren't even some of the highest in
the world. But you can see here, framed in Euro sense,
the different retail prices on average for the standard residential customer. Then you can see, in the middle row,
approximate cost of solar on your rooftop. So, ranging from 9 to – well, even in Australia
from 6.5 up to $0.13 per kilowatt hour. On the far right, you can see here the percentage
of that as a share of the retail rate. So, solar is much cheaper than the retail
rate. That,
again, drives – is a key part, a key factor in driving the economics.

In response to this increasing competitiveness,
net metering policies have started to evolve. We've seen a couple of examples. We've talked briefly about that. I encourage
you, if you want to understand this evolution even better, to look at the part two of this
session, session six, on net billing, as well as session seven, specifically on net fits
that will give you a more in-depth look at how
these policies are evolving over time and give
you a sense of what the future of net metering-type policies are going to look or could
potentially look like. We sometime talk about first generation, second
generation, and third generation net metering policies.

So, although these have different names, many
people consider them all a form of net metering. I've put their sort of – the actual terms
up top. So, you can see
first generation net metering. Second generation is what's commonly called
net billing. What I've called here third generation is
referring to a net fit. You can see that under – as things go on,
the net fit offers a cash payment, in particular, and it is a signal that distributed generation
can be considered as a new and potentially major source of new power supply. That's really where a growing number of jurisdictions
are starting to look.

So, there's policies recently being – recently
adopted in jurisdictions like Senegal, in parts of South Africa, parts
of – in Vietnam as well as in some Pacific Island states that are really moving in this
net fit direction and are starting to implement policies that allow self-consumption but that
also pay users a cash payment for their Net Excess Generation. So, again, this is an exciting and very dynamic
space. So, a few quick words on trends. There broadly is a trend towards moving away
from net metering because retail prices continue to
go up and solar prices continue to go down. So,
the argument that this is overcompensating solar users is growing. That's why some
jurisdictions are shifting towards net billing, as we'll see in part two of this session. There's a movement towards cash settlement
for Net Excess Generation instead of simply bill credits, as I pointed out.

So, moving more in the direction of net fits. There is a
movement also towards incorporating time of use rates into net metering policies or
making it even either voluntary or mandatory to engage in a time of use rate structure
if you're net metering customers. In most cases, this remains voluntary, but
that's a sign of where things are potentially going. There are also some jurisdictions like California
that are exploring location-specific net metering compensation structures or rates. That's another interesting development. We're
seeing ring-fencing becoming more common which is making certain components of the
power bill non-bypassable or non-erasable. We're also seeing the differentiation of a
policy design for solar, in particular, by size category. So, we're seeing certain policies
for projects under 100 kilowatts, for example, different policies from 100 kilowatts to 1
megawatt and further – other policies for projects 1 megawatt up to 5 or 10 megawatts. That's another sign of, again, the increasing
sophisticatedness of the policy landscape to
deal with distributed generation. Finally, we're seeing the use of new technologies
and new innovations like block chain and peer-to-peer power sharing as well as
new business models like solar leasing and community solar to help further unlock customer-sited
power generation.

Again, I think
we really are just at the beginning of these changes. Now, a few words summarizing a little bit
some of the points that we've touched on here to provide an indication of why net metering
is changing and why it's becoming less appropriate in certain contexts. It arguably overcompensates some PV system
owners. It
tends to be most attractive for customers in the highest tariff classes which means
it erodes revenue from the most profitable utility
customers first. This is one concern that a
lot of utilities are worried about and are actively trying to find solutions for. The net
metering rate is arguably arbitrary, as we saw, and there's this issue of cross-
subsidization. So, all of these factors are starting to drive
changes in net metering policies. Now a few concluding remarks. Most analysts agree that the genie is out
of the bottle. Solar is now cheap and increasingly considered
one of if not the lowest cost source of new power supply in jurisdictions around the
world. It's also increasingly below the retail
price that most customers pay. So, long as that fundamental relationship
remains the case, it's likely that solar will continue to remain
a very attractive and it will become an increasingly attractive option for households
and businesses to develop.

This may be one
of the harbingers, one of the trends that really starts to lead us to a much more distributed
and fundamentally, hopefully, much cleaner and more renewable, much more sustainable
power system in the long run. That said, there are a number of challenges
that remain around grid integration, around stability, around power system equity and
governing the rise of such pro-sumers and such
net metering customers is positioned to become one of the main challenges that utilities
have to deal with in the years ahead. But at the same time, for the solar sector,
it's a tremendous opportunity and a very exciting
time as policies continue to evolve and as the
landscape continues to shift in favor of more solar on rooftops.

So, with that, thank you
very much for your attention. There's a list here for some future reading,
a number of articles and recent analyses and reports that
have been published and a question and answer series at the end
to test your knowledge. Thank you very much. Wishing you all a
great day..

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