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United States

Net metering - a real world approach

Market stimulation policies in the US are geared to centralised wind farm economics and the potential of a "human scale" secondary market has long been ignored. But there is a way of stimulating this market without expecting Americans to resort to European style subsidy programs. The already popular concept of net metering --which allows ratepayers to offset their electricity consumption with their own generation -- could be extended to create a significant distributed generation market for big wind turbines. This feature looks at the ways it could happen, as well as implications, in several scenarios.

Net metering is hot in the United States. Thirty states have adopted rules and laws that allow ratepayers to offset their electricity consumption with their own generation - and a number of federal bills have been introduced that would take the concept of net metering nationwide. But for all the popularity of the policy, it has not accomplished much in the way of installed wind power capacity, not compared with the monster wind farm successes of the big time developers. Net metering could, however, with the right regulative framework, provide wind with a sizeable secondary market, a string of added value benefits, and be a rational economic step for society.

Net metered generators offset power at the retail rate and use the grid for backup. In this way they get a better payoff than by selling their power to the grid, with fewer expenses. But in every state with legislation allowing net metering, the number of electricity customers jumping at the chance to generate their own power is counted in the dozens rather than the thousands - and for wind power the market is all but non existent. Why, with all this legislation in place, is net metering failing to happen?

The devil is in the details. Net metering today is arbitrarily limited to small generators, typically of 40 kW or less. The aim of current legislation is to create "home power" opportunities for families who like the idea of generating their own electricity, but do not like the idea of forsaking the grid. There is one huge hitch, however. To be blunt, the small wind and PV generators the legislation is designed to support are nowhere close to being cost-competitive with grid power, even at the retail rate. Net metering, size capped at this level, does not pay.

The political aim of such limited net metering has not been to create a flourishing market for independent clean power producers, but to satisfy the "small is beautiful" ideals of a vocal minority. This accounts for the raging popularity of the policy among legislators. It is a feel-good piece of legislation that is easy to pass, mainly because it is almost totally ineffective and thus upsets nobody, not even the utilities who would stand to lose customers if net metering was set up to work effectively. Worse still, most advocates promoting net metering policies in America have their sights set on the home power dream rather than the rapid expansion of renewables. By default, they are helping cripple the real potential of net metering, especially for wind power.

An open secret

The small turbine wind industry is the first to admit that net metering as it is structured today has given it very little. "We do six to twelve new grid-tied machines each year," which benefit from net metering, "And maybe four or six times that for off-grid," says John Hippensteel of Lake Michigan Wind and Sun, which specialises in small wind systems. "If you're doing this for an economic investment, forget it," he adds. "Our customers do it because they want to do it, they believe in it."

Mike Bergey of Bergey Windpower agrees. Although there is no hard data, he thinks the number of net metered wind turbines is no higher than 1500 nationwide. Bergey is doubtful that size-capped net metering is a way to promote small wind systems anyway. "Net metering only works when it is accompanied with a buy down program," he says, adding that he hopes that new state public benefits funds will provide money for such programs. "There is no change in turbine sales when a state implements net metering. Net metering does not make markets."

The evidence of the high cost of small scale renewables systems is not hard to find. A recent study of net metering with small generators in British Columbia by Andrew Pape of Compass Resource Management looked at 500 watt PV systems, 10 kW and 25 kW wind systems and 1 kW and 10 kW micro-hydro systems. Small wind generators, with an installed cost estimated at over C$50,000 for a 10 kW system, were the least cost effective option, producing a loss of over C$500 a month. A small PV system costing upwards of C$5000 would produce only three or four dollars per month worth of energy, at the grid-connected rate for power. The report concluded grimly that "the solar PV system and all of the wind systems have poor financial attributes. A reasonable payback on investment is not possible" without government subsidies.

Making it work

If net metering for small wind turbines and the home power market is not working for economics reasons, a logical next step is to see if it could work for bigger units. Big turbines, from 250 kW and up, are competitive with retail grid prices in many locations. What's more, there are plenty of rural customers both large enough to handle all the output from a big wind turbine and keen to save money on power costs. Yet big turbines are shut out of net metering by size cap rules.

The technology size caps are mainly intended to ward off utility and establishment opposition. Utilities do not like the idea of losing large, well paying customers. They are also concerned by the economic threat inherent in net metering legislation, which could cause their rate base to be hollowed out if the idea should happen to flourish among consumers. They have reason to be afraid. The price of big wind turbines is declining, as manufacturers chase economies of scale, and wind is close to competitive at wholesale power prices, and certainly competitive at retail. Self-generation can be a financially attractive option for big customers.

The extent of utility fears is clearly illustrated by the force of their opposition to any net metering legislation which could seriously promote distributed generation (box page 38). Lifting the arbitrary size cap that most states impose would open up the market to more competitive technologies, while still allowing small systems to net meter. The way it works is simple enough: you buy a generator sized to meet your load, and no more. As long as there are disincentives for over-sizing, such as limiting payment for excess generation to no more than the utility's avoided costs - or even no payment - the turbine will be sized correctly.

This is the approach used in Iowa, and recently adopted in Ohio. There, big customers can use big generators. The disincentives for over-sizing the generators ensures that net metering is still focused on self generation, not on creating hundreds of little independent power producers (IPPs). In states with arbitrary size caps, they do have little IPPs. A 40 kW wind turbine still produces much more than a rural household can consume. In Wisconsin, which has a 20 kW cap per electricity meter, one entrepreneurial fellow near the town of Eden Stone hooked up six 20 kW wind turbines on one farm, and attached them to six meters. He sells most of the power back to the utility at a retail rate.

A tale of two states

The impact of technology size caps on net metering markets cannot be stressed enough. Take the example of Iowa and compare it with the net metering experience in Minnesota, Iowa's neighbour to the north. In Minnesota, where generators less than 40 kW have been allowed to net meter since 1983, 105 customers do it, with a total capacity of no more than about 2 MW and total sales to utilities in 1998 of just 660 MWh. Almost all are small wind turbines, with a few solar and micro-hydro systems, says Rory Artig of the Minnesota Department of Public Service.

Minnesota's approach requires the utility to buy any excess power generated each month at an average retail rate. If a 40 kW turbine produces 7000 kWh a month, say, and the owner consumes only 2000 kWh, he gets about $300 a month for the excess, plus saving $120 by producing his own power. He pays a normal service charge. As Artig admits, it is not enough. "I agree, it has not done what it was intended to do - promote the distributed generation market," he says. "It's just not economical."

Across the border in Iowa, the rules for net metering are radically different, with radically different results. With no size restriction on generators, seven schools, hospitals and businesses have installed single turbines ranging from 225 kW to 660 kW, for a total installed capacity of over 3 MW. Another 19 customers have turbines under 100 kW, totalling 665 kW. At least 2 MW more in large turbines are planned, but have been delayed due to legal wrangling, the result of utility opposition to a regulation they fear will steal their customers.

Payment for excess power fed to the grid in Iowa is no higher than the "avoided cost" of generation, typically only about $0.02/kWh. But the disincentives for excess production mean the turbines are generally sized to meet the load of the customer, so the low avoided cost payment for excess power is irrelevant. The bigger turbines produce power for less than the utilities charge for grid supply, making self generation attractive.

The Iowa net metering success has the utilities running scared. One of their net metering victims is Greg Swecker, a farmer in Greene County, Iowa. Even though he bought and installed a refurbished 65 kW Windmatic turbine last year, his local rural electric co-op, Midland Power Co-operative, has been uncooperative in letting him connect it to the grid. The co-op has required thousands of dollars of interconnection fees, special "smart" meters and extra monthly charges, including charging the Sweckers for reading their meter. The turbine, installed by WindWay Technologies' Ty McNeal, has yet to operate. The co-op is not regulated by the Iowa Utility Board, so it may not be subject to the board's net metering rule. Swecker has a case pending to resolve the issue.

"They're trying to make it so farmers can't do anything for themselves," says Swecker. "They're spending ten to twenty times on lawyers as what the turbine would produce. It's not right, it's not good for Iowa."

for arbitrary size caps . . .

For all the arguments in support of lifting arbitrary size limits on net metering, switching to a flexible size cap is not without its pitfalls. Utilities can be powerful enemies, as MidAmerican in Iowa has been proving, both in court and with state and federal regulators (box page 38). Creating enemies is a dangerous policy for a minority group. "Who do you know in Iowa with a big turbine who hasn't been given the third degree by utilities?" asks Hippensteel. Indeed, the dangers of stirring up utility ill-will are considered so great by Tom Starrs, an attorney active in net metering issues, that he would rather let sleeping dogs lie.

"It's a matter of political feasibility," he explains. "In the absence of constraints on eligibility, many of these 30 states would not have net metering laws." In Starrs' view, some net metering, even if it is not resulting in more than a smattering of renewables development, is better than risking none at all. "To a utility, it's all about, one: safety and power quality, which I think are non-issues; and two: economics," says Starrs. "To the extent that they're losing revenues they're going to be paranoid. In the context of a small ten kilowatt generator the losses are modest, in the dollars per month, but with a big turbine it is no longer a trivial issue to the utility."

According to Starrs, size caps are not necessarily a bad thing. Net metering provides an "incremental" incentive for small renewables. "California in the 1980s created such an overwhelming stimulus for wind that it had mixed effects," he says. "It created a rush to the market that the market wasn't ready to accommodate." Even though small turbines are too expensive for the net metering legislation of today to have much effect, he still sees a use for the existing model. "It lowers the bar for when they will be cost effective. It keeps the bar far enough out ahead that manufacturers know what they're shooting for."

Starrs fears that if big wind turbines were allowed to net meter, they would quickly fill system-wide caps. California limits net metering to 0.1% of a utility's peak demand, or about 55 MW statewide, though other states allow up to 1%. "The good news is that you've got new capacity, the bad news is that you have eaten up the incentive with a technology that is close enough to be competitive in a short time frame," he argues. "You've eliminated the opportunities for small technologies."

... and for flexible size caps

Keeping the bar out front, however, does little for the struggling small turbine industry today. And if the market for small renewable systems cannot get off the ground, it will never have the political clout that ensures success in America's heavily politicised energy scene - the utilities will still run the show. It's a chicken and egg conundrum.

Switching to flexible size caps and letting more competitive big turbines in on the action will create a more dynamic market, thus leading to stronger political support for all renewables. In short, success breeds success. If a system-wide cap is filled by customers with big turbines, a lobby is born, one that would be eager to raise the cap. Without customers practising net metering, there is nobody to fight for the concept, and hence no support for future improvements.

Even 55 MW of wind in California will mean there are hundreds of motivated customers - factories, farms, schools, truckstops, and others - who will show up for hearings, write to their politicians, and speak out. Small scale net metering is more likely to benefit on the back of this movement than to end up worse off than it is today.

Raising the size cap, however, should not be synonymous with a net metering free-for-all. In the real world, an overall system-wide cap on net metering is probably the only way to deal with genuine utility fears about the long term economic dangers of hundreds of consumers netting off. Yet some net metering advocates still argue for rules that allow "wind without limits." This will not be achievable, and might well not even be practicable.

The underlying theory of net metering must remain focused on self generation. Premium power payments for electricity fed to the grid by generators bigger than the owner needs to meet demand are a political non-starter in America, despite their success in Europe. A farmer with a 600 kW turbine getting paid retail rates would invite a furore of opposition. Moreover, such payments are not allowed under current rules, which require "avoided cost" payment for power sold to utilities (box page 38). As long as it can be argued that net metering simply enables customers to make and use their own power, and not sell it to utilities, the bugaboo of the Public Utility Regulatory Policy Act can be avoided.

The trick will be to get the system-wide size cap - or net metering quota - right. It must be high enough to provide society with the economic and security benefits of distributed generation, while low enough not to destabilise the supply system. In Ohio, the cap is 1% of the load, or about 275 MW total. A 1% cap in California would be 550 MW. Both these markets are large enough to be significant for wind.

If commercial and industrial customers can save money by net metering with turbines, a whole new and more influential class of customers is brought into the wind power camp. What's good for business is good for America, they say. Any attacks on net metering by commercial customers means attacking their profitability and their ability to create jobs. No longer would net metering be the purview of hobbyists and enthusiasts.

Net metering bonuses

Net metering could also provide electricity to utilities competing on green power markets. Single turbines or wind turbine clusters cannot compete on the green pricing front with other low-cost renewables, such as larger wind farms, which enjoy economies of scale. But a utility short of green power could get it cheaply by buying the excess from a net metering generator.

Furthermore, the opportunity net metering provides for "human scale" wind power installations must not be ignored. Ongoing siting battles in New England, Wisconsin and elsewhere show that large wind farms cannot be built everywhere. The NIMBY syndrome - Not In My Back Yard - and the resulting BANANA knee-jerk - Build Absolutely Nothing Anywhere Near Anyone - are creating siting problems for new wind projects. If the wind industry is to have a serious market anywhere east of the Mississippi River, new development models may be needed.

A market in waiting

Indeed, initial scouting has revealed that larger scale net metering could work. Paul White, now with the Project Resources Corporation in Minneapolis, Minnesota, spent two years with Vestas trying to sell big turbines to rural customers in Iowa. He is convinced there is a market there, with customers big enough to take all the power from even today's larger machines.

"It was at a time when the whole wind industry was frozen, due to utility deregulation, the market was zip," he recalls of those days in the early 1990s. "Vestas was trying to diversify, selling ones and twos." Vestas had done the market and technical research and made a few sales, such as to Schafer Systems, a plastics factory near Adair, Iowa. White blames utilities for blocking the market, just as his work was beginning to bear fruit. "We did so much to prepare the market and then the utilities stonewalled us," he says. "If someone can reap the benefits of that, more power to them."

While White agrees that flexible size caps are a good idea, he has further refined the target market for net metering with wind. The largest customers, those buying upwards of $20,000 of power a month, have likely already negotiated special lower rates with utilities, he says, and are unlikely to save any money with a wind turbine. The smallest customers can not use the power from even a 100 kW turbine. But those in the middle - like schools, wastewater treatment plants and rural industrial operations - lack the clout to get special rates, but still buy enough power to justify large turbines. "If their bill is $3000 per month, like a school, then one 225 kW turbine would suffice," he says. "There are dozens of projects out there at that size." Some of these customers could take up to 1.5 MW, he thinks.

While this market is small compared to utility scale wind farms, it is there. "[Utility] critics may say we don't want to lose all our customers to wind turbines, but they won't," says White. Not all rural customers of the right size will be in the right location or will be interested, he points out.

Although rural utilities are often concerned about the effects on the grid of small generating units feeding intermittent power to it, recent research shows there is not necessarily a problem. Iowa wind consultant Tom Wind has shown that a typical Midwestern rural grid, with 12.47 kV lines, could handle a 750 kW turbine without disruptions, provided it was sited close enough to a substation. Larger sizes may be possible, he says, with turbines that are "soft-starting," reducing voltage spikes and flicker. "Vestas and Zond are pretty gentle turbines," according to Wind.

Identifying the barriers . . .

White points out a new problem, however: as wind turbine manufacturers chase economies of scale and produce ever larger machines for wind farms, they are abandoning their mid-range models. Not all rural customers will have enough demand to take all the output from a megawatt-scale machine. Tom Wind also sees a shortage of opportunities for these larger turbines. "There aren't many customers out there who use two million kilowatt hours a year," he points out.

Ironically, the old 100-250 kW turbines that filled the California and Danish landscape in the late 1980s and early 1990s were well suited for an American market that at the time did not exist. Now that a market is possible, at least in two states, they are going out of production.

One large store of such turbines is the huge collection of California machines that are being replaced in repowering efforts (Windpower Monthly, September 1999). A few of these have found their way to net metering arrangements, such as two Micon 108 turbines in North Dakota, installed at a hotel and casino at the Spirit Lake Nation in Fort Totten and at a water treatment plant at the Turtle Mountain Chippewa Reservation near Belcourt. Both were refurbished by Foras Energy Services of Palm Springs, California, and installed by Micon US in August 1998. German/Danish wind company Nordex still advertises a 250 kW turbine, while Vermont's Atlantic Orient continues to offer its stalwart 50 kW AOC 50 turbine. Another potential entrant is a 100 kW prototype, the Northwind 100, being developed by Northern Power Systems for extreme cold weather climates.

A greater hurdle than a lack of available technology, however, is utility opposition. Utilities have used a variety of barriers to thwart net metering, like special interconnection fees, engineering studies and million-dollar liability insurance, even for very small wind and PV systems. Howard Wenger of AstroPower Inc, a PV company in California, has shown that these "hidden costs" add up to about 40 years worth of energy savings from installing a 2.5 kW PV system. Utilities in New York, Iowa and elsewhere have imposed similar charges and requirements.

Another barrier is complicated contracts, derived from those used for independent power producers, which are offered to net metering customers, regardless of size. Lastly, net metering rules often apply only to customers of investor owned utilities. Many rural residents, the most likely users of small wind turbines, are served by rural electric co-ops, with little recourse to regulators when they meet roadblocks.

These myriad problems have prompted new interest in national legislation. A recent bill proposed by Representative Jay Inslee aims at standardising net metering across the country, setting interconnection rules and requiring simpler standardised contracts. Furthermore, many federal restructuring bills include net metering provisions. But the Inslee bill does not allow big turbines. Originally proposed with a 250 kW cap, it was later cut down to 100 kW. All other federal bills in the pot include size caps as well, although the bill proposed by Representative Dennis Kucinich allows generators up to 2 MW (table).

In other words, even if one or all the federal bills were passed, it would not make net metering happen. In essence, all they do is seek to codify what has already been established in 30 states - the same policies that have accomplished so little.

. . . and dismantling the barriers

What is needed is one bill, not aimed at meeting the demands of home power enthusiasts, but aimed at using net metering to facilitate a viable market for distributed generation using market-ready renewable energy technologies. To do this the legislation must:

o allow customers to use whatever size generator best meets their needs over the course of a year, but no larger

o enforce this flexible cap by sharply limiting payment for excess generation, even to the point of granting the excess to the utility

o create a system-wide cap to assuage the fears of utilities, perhaps at 1% of a utility's peak demand

o create incentives for utilities and power marketers in the form of bonus credits for compliance with a Renewables Portfolio Standard

o ensure that net metering customers pay their fair share of the distribution grid, since they use it to "store" their power for later use, but no more than their fair share

o provide pricing incentives for distribution utilities to seek out customers to use distributed generation in areas of the grid that are weak or in need of upgrading

o require standardised interconnection and contract agreements for a clear market framework, although these are less critical for larger projects than for small.

Keeping net metering crippled in the hopes that someday small generators will be able to use it economically is a wasted opportunity for wind power. Protecting utilities from net metering competition is also short sighted. An active net metering market, with a flexible size cap and thus bigger turbines, is neither a technical nor economic threat to power systems - and rather than crowding out small generators, it will pave the way for them. The innocuous, feel-good policies which have given us size-capped net metering will not save the earth. Net metering today is a paper tiger. Now it needs some teeth.

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