Alternative Regulations: Negative impact of net metering calls for options

Negative impact of net metering calls for options

At the United Nations Framework Convention on Climate Change held in Paris, India made a commitment to reduce its carbon emissions intensity by 33-35 per cent by 2030. These targets are closely related to the share of renewable energy in the country’s energy mix. The government has set an ambitious renewable target of 175 GW by 2022, of which 100 GW will be from solar photovoltaic (PV).

Solar has emerged as the fastest growing energy generation technology globally due to a rapid decline in its cost, and increased awareness on climate change and energy security. The solar segment has been dominated by rooftop solar PV generation, which helps reduce the distribution losses as it is used primarily at the consumer end. Globally, two key instruments drive the deployment of solar rooftop installations:

  • Gross metering: Under this framework, the energy generated from solar rooftop systems is exported to the grid and the utility pays the rooftop owner as per the feed-in tariff (FiT). Energy imports from the grid by the owners for their consumption are billed separately.
  • Net metering or virtual net metering: Under the net metering framework, the energy generated from a rooftop system is first used for self-consumption by the rooftop owner and the surplus energy, if any, is exported to the grid. The owner gets credit from the utility for this in its energy bill. Under the virtual net metering framework, the energy generated from the rooftop system on multi-family or multi-tenant buildings is exported to the grid and the credit is distributed by the utility amongst the tenants of the building in their energy bills.

The development of the solar rooftop segment in India started in June 2010, with the announcement of the “Rooftop PV and Small Solar Power Generation Programme” by the Ministry of New and Renewable Energy. This was designed primarily to encourage the states to devise their solar policy for grid-connected projects focusing on distribution networks. Under the scheme, a target of 100 MW was set for rooftop and small ground-mounted solar plants connected at the LT/11 kV/33 kV grid. This scheme was based on the gross metering framework, under which the state utilities signed long-term power purchase agreements (PPAs) with solar rooftop developers on solar FiT approved by the respective state electricity regulatory commissions (SERCs). Although the scheme was well received as far as small ground-mounted solar plants are concerned, it did not succeed in tapping the solar rooftop capacity.

The Forum of Regulators (FoR) made a detailed study on net metering policies adopted worldwide and recommended to develop net metering regulations. The FoR presented “Model Regulations for Net Metering-based Rooftops in India”. It chose net metering so as to not put the load of solar rooftop power purchase on distribution utilities that already suffered from high losses and weak revenue bases. Following this development, the majority of the SERCs have notified net metering regulations, thus providing a framework to promote solar PV rooftops. While this framework has an advantage of lower payouts from utilities to solar PV rooftop developers as compared to gross metering, it suffers from a number of disadvantages:

  • Net metering makes solar PV rooftop economically attractive only for commercial and industrial consumers where tariffs are higher than solar levellised cost of energy (LCOE) generation.
  • It creates a non-conducive environment for tapping rooftop capacity on a large scale by third-party investors.
  • Loss of business for the utility, especially high-paying consumer categories.

In addition, the net metering framework has a severe disadvantage owing to its negative impact on the consumer’s retail tariff. This is so because net metering installations are generally opted for by those consumer categories that have higher tariffs than the solar LCOE generation. The energy sales of such subsidising consumer categories decline due to their self-consumption, thereby causing a cross-subsidy loss to the utilities. As commercial consumers are generally cross-subsidising the tariffs for below poverty line, agricultural and domestic consumer categories, the tariffs for such subsidised consumer categories tend to increase.

The quantitative analysis of the above impact of net metering on the consumer’s tariff is explained in the accompanying table. A scenario has been developed based on assumed retail supply tariffs, average power purchase costs (APPC) of the utility vis-à-vis the cost of procurement from solar rooftop plants and has been simulated for 25 years starting from 2015-16. To reach a conclusion, the following assumptions have been made:

  • Solar renewable purchase obligation of 8 per cent has been considered to be met through solar PV by 2022
  • For non-solar power, 5 per cent year-on-year escalation of APPC has been considered over the base year (2015-16) rate of Rs 4 per kWh
  • A year-on-year decrease of 5 per cent in the solar LCOE generation has been considered by 2022 over the base year rate of Rs 6 per kWh
  • Solar LCOE generation for the year of commissioning has been considered for the entire life (25 years) of the plant
  • Domestic, commercial and industrial tariffs have been considered at 80 per cent, 100 per cent and 120 per cent of ACS respectively
  • Equal solar capacity installation has been considered under net metering and gross metering
  • Equal self-consumption has been considered in the commercial and industrial categories.

The figures (refer graphs) depict the variation in the average cost of supply of utility and the average tariff for domestic, commercial and industrial categories. It is evident from the given figures that net metering negatively impacts the consumer’s retail tariff. The average tariff of all consumer categories increases under the net metering framework. Therefore, it is the need of the hour to develop and deploy a parallel regulatory mechanism, which not only addresses these challenges but also provides an alternative investment case for solar rooftop projects and a conducive environment for tapping the rooftop capacity on a large scale by third party investors. One such solution is gross metering.