On February 16, 2022

The problems with net metering

By Annette Smith

Editor’s note: Annette Smith is the executive director of Vermonters for a Clean Environment, a non-profit that believes Vermont’s economic growth depends on its environmental health. It was founded in 1999 by citizens in southwestern Vermont who joined together to deal with an inappropriate industrial development project.

When it comes to building and owning electric generation facilities, Vermont is different from other New England states. Other states deregulated electricity markets. Utilities were required to sell off their generation assets and become solely “poles & wires” distribution companies; power plants are now built and owned by what are called merchant developers.

In Vermont, utilities can still build and operate power generating facilities – for example Green Mountain Power’s Lowell Wind project, and Vermont Electric Co-op’s 5MW solar project in Grand Isle. The utilities’ rate of return on investments is regulated by the Public Utility Commission.

Merchant developers can also construct and own electric generating facilities in Vermont. The difference between them and utilities is causing conflict.

Vermont has been a leader in developing emissions-free power, especially net-metered solar electricity since 1998. The program flourished, though not without unintended consequences. Today, Vermont’s utilities point to the high cost of net-metered solar which raises costs for other customers (i.e. ratepayers), and projects built far from load. Project developers claim that reduced net-metering rates result in job losses.

The Public Utility Commission (PUC) has been engaged in an update of the net-metering rule since 2019, with workshops and comments from a long list of interested parties: Green Mountain Power, Vermont Electric Co-op (VEC), Washington Electric Co-op, municipal utilities represented by Vermont Public Power Supply Authority (VPPSA), individual merchant developers, and the trade association Renewable Energy Vermont. The Department of Public Service (DPS) and Agency of Natural Resources are parties to the rule update. Vermonters for a Clean Environment participates as an advocacy organization. We primarily provide perspective about how communities are affected by individual net metering projects.

Without exception, the utilities and DPS are arguing for reductions or no changes in net-metering rates. Merchant developers want higher rates. Why is there a disconnect?

Vermont’s utilities can build solar electric plants at a lower cost than merchant developers.

VEC told the PUC in rule comments, “It is irrational for ratepayers to pay more for a resource with the exact same carbon-reduction attributes as another solar resource that can be acquired at a lower cost.”

Renewable industry advocates allege that reductions in net-metering rates make it difficult, if not impossible, to earn a return on investment.

At the last rule workshop, PUC chair Anthony Roisman responded to merchant developers and explained the primary difference between how utilities are regulated and how merchant developers are regulated.

“The utilities,” Roisman said, “present to us all their costs, and explain why they are reasonable costs, and then they say we want a rate return of whatever, 8, 9, whatever percent. And we evaluate that and make a judgment. You’re essentially asking us to do the same thing…but we don’t have the input data on what it cost to buy the panels. What does it cost to get them to the location? What is labor costing? If you’re buying land or leasing land, what is that running?”

In follow-up comments, VPPSA noted “there is very little transparency around the actual economics of net metering installations in Vermont. Vermonters should have the ability to access in-state renewables at the lowest feasible cost and not be required to ensure a profit margin for industry.”

DPS further pointed out that “new renewable resources are being built in Vermont at substantially lower cost than under the net-metering business model … With 75% of net-metered generation being exported directly to the grid, and not used onsite, the current net-metering model is more comparable to a merchant generation model than a true ‘net’ metering model, where on-site generation truly offsets on-site demand. Shifting costs to non-net-metered customers cannot go on indefinitely. Overpaying for net-metering helps support jobs, but these are effectively compelled donations by Vermonters to for-profit companies.”

One such Vermont merchant development company has 35 people on staff. As regulated entities, utilities disclose salaries to the PUC. Merchant developers do not.

The financing of larger (150 – 500 kW) net-metered projects also lacks transparency. Those developments require significant investment from individuals with offsetting income. Using equity financing, the investor puts up cash (20%) and finances the rest. The merchant developer builds the project and gets paid the full project amount upon completion. The investor offsets the investment with accelerated depreciation and an investment tax credit, lowering their income tax bill significantly in year one (i.e. not paying the IRS). The investor can sell their interest after five years; or after the loan is paid off (usually 10 years) the project generates more profit for the wealthy individual.

When you hear claims from renewable energy advocates about state policies curtailing jobs or slowing development, remember the lack of transparency around net-metered merchant energy development; it is enriching some people at the expense of others. Ratepayers are the losers, while the profits of merchant developers are unknown.

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