The sunshine of other people’s money: The truth about 'net metering'

Adam Housley reports from Playa Vista, California


Politics is the art of wealth redistribution, an eternal truth illustrated well by the various machinations employed by bureaucrats and politicians to force goods and services uncompetitive but favored politically upon the market, despite adverse economic pressures.

One central recipient of this largesse is expensive electricity---wind and solar power in particular---the costs of which are far higher than those of such conventional electricity sources as coal and natural gas. 

This political interference results in a large array of policies used by government to support energy technologies that cannot survive market competition. A prominent example is “net metering,” an important system of shifting the costs of photovoltaic solar systems onto the consumers of electricity generally, with deeply adverse implications for costs and for the future reliability of the electric grid.


How does net metering work?

Power consumers who install solar panels--again, large subsidies are paid for such installations---receive a credit for the power that they produce but do not consume. The excess electricity is transferred into the power grid for use by other consumers, and the owners of the solar systems receive a credit for the excess power, paying only for their “net” electricity consumption.

So: What problems are created by net metering? First, in most jurisdictions, the credit paid for the excess solar power is far higher than the cost of alternative electricity sources, usually from utilities or from the spot power market. 

Consumers without such solar installations have to finance that credit, that is, the excessively expensive electricity, so that overall power prices are forced above the level that would prevail in the absence of the net metering system. 

This problem is exacerbated by the tax and other incentives to install solar systems: The combination of the installation subsidies and the excessive prices paid for the power fed into the grid means that more solar capacity is installed than otherwise would be the case, more expensive power is fed into the grid, and prices are forced up, in principle in a sort of upward spiral process.

There is the further matter that reliability is a hugely valuable attribute of power systems; no one likes blackouts. Electricity bills reflect the cost of that reliability in the form of “capacity” charges, that is, the part of the bill covering the cost of the physical system and its spare capacity, before fuel expenses and other such generation costs. 

People who install solar systems benefit from the reliability provided by the grid---they consume conventional power at night and at other times that the sun fails to shine---but because they pay only for their “net” power consumption, they get a free ride on the cost of the generation equipment and other capital that yield the reliability upon which they depend. Except the free ride is not free: Other consumers have to pay for it.

Over the long run--not necessarily a long period of time--the higher costs and prices mean that investment in maintenance and new generating capital will fall, and with it reliability and the economic benefits of inexpensive power. Only costs will rise, not a salutary outcome.

Net metering receives strong political support in substantial part because it is useful politically. All subsidies--direct, indirect, explicit, or hidden--must be financed by someone, be it taxpayers, ratepayers, or the beneficiaries of other government programs. 

Political incentives to hide the costs of such policies are powerful--it is better for bureaucrats and politicians that the losers not know that they are losing--and net metering serves that end beautifully.

A recent study of net metering in California found that the median income of households installing such systems is $91,210, while the comparable figure for all households in the relevant geographic areas is $67,821, a difference of over a third. Some part of the subsidies must be captured by the producers of the solar systems, whether in the U.S. or overseas, but it is difficult to avoid the conclusion that net metering forces those with relatively lower incomes to subsidize those with incomes relatively higher.

Is a regressive wealth transfer an appropriate outcome for public policy?

As with most other goods and services, those consuming them should pay the attendant costs. Hiding those costs and shifting them onto others is deeply perverse, and corrosive of the competitive resource productivity---in this context, lower costs and greater system reliability---that yields higher living standards for all.

Benjamin Zycher is the John G. Searle scholar at the American Enterprise Institute.