MANAGING THE FUTURE OF THE ELECTRICITY GRID: DISTRIBUTED GENERATION AND NET METERING

As distributed energy generation is becoming increasingly common, the debate on how a utility's customers should be compensated for the energy they sell back to the grid is intensifying. And net metering, the practice of compensating for such energy at the retail rate for electricity, is becoming the subject of intense political disagreement. Utilities argue that net metering fails to compensate them for grid construction and distribution costs and that it gives rise to regressive cost shifting among customers. Conversely, solar energy proponents argue that the compensation should be higher than the retail rate to account for other benefits that distributed generation systems provide, such as greenhouse gas emission reductions, improved air quality, and reduced utility spending on new capacity installations. This ongoing debate is leading to significant changes to net metering policies in many states. This Article provides a thorough analysis of benefits and costs of distributed generation. It also highlights the analytical flaws and missing elements in many of the competing positions and existing state policies. We propose an alternative approach that properly recognizes the respective contributions to the electric grid of utilities on the one hand and of distributed generators on the other. We show, however, that this policy is second-best as a result of certain constraints on how electricity can currently be priced. For the longer run, when these constraints might no longer be present, we discuss the need to consider net metering as part of a more comprehensive energy reform that would ensure the efficient integration of all types of distributed energy resources into the electricity grid. These reforms are needed to secure our Nation's clean energy future.