Once upon a time, many solar-enthusiast homeowners saw their rooftop photovoltaic (PV) panels as investments in a greener future, not as contributors to their own household budgets. Now, though, as panel prices have fallen and net-­metering compensation plans have proliferated, those panels are becoming real players in the nation’s electricity market. As a result, the technology’s rapid growth is raising a basic question for utility executives and public utility commissions across the United States—what is rooftop solar really worth?


Rooftop solar installations are affecting the decades-long relationship utilities have had with their customers. With more customers becoming both generators and consumers of electricity, utilities are pushing back against standard net-metering approaches for compensating these homeowners with PV panels installed on their roofs. It’s not just investor-owned utilities rocking the net-metering boat. Even the green-focused Rocky Mountain Institute sees a need to rethink pricing schemes for the electricity produced by solar panels and other distributed resources.


To date, much of the value of net metering has been the concept’s simplicity; the utility subtracts the number of kilowatt-hours a homeowner’s panels produce in a month from that customer’s total electricity usage, and the remainder is the actual bill. The easy visualization of a meter turning backward helped spur PV adoption in the technology’s early days. Now, many utilities object that this approach undercuts their ability to maintain the larger connected grid along with shareholder earnings.


A point many utility customers don’t understand is that electricity suppliers don’t earn a profit on the commodity they sell: i.e., the electricity flowing through the wires. Generation costs pass directly to utility customers. Instead, as regulated monopolies, utilities earn a profit from a guaranteed return on equity (which relates to the companies’ investments in substations, transformers and other capital equipment) that their customers pay back in fractions of a cent for each kilowatt-hour they consume. With net metering, PV owners often are compensated at the full retail rate, which includes the various equipment-related surcharges, not just for the electricity they are supplying back to the grid.


This discrepancy between compensation and value drives utility disputes across the United States. In 2013, Arizona legislators decided to tax leased solar panels—many homeowners opt to lease instead of buy outright. As a result, two leading leasing companies, SolarCity and SunRun, are suing the state. In spring 2014, Oklahoma signed legislation establishing a means by which electric utilities could levy a fee on customers operating on-site solar, wind or other distributed generation equipment.


As a September report from the Lawrence Berkeley National Laboratory points out, the financial impact of net metering could, in short order, become especially significant for utilities operating in deregulated service territories, which are prohibited from owning sources of generation. Simply put, because they don’t own power plants, these companies have a lot less equity from which they can earn a return.


Two years ago, Austin Energy, the publicly owned utility serving the Texas capital, initiated a plan it calls the “value of solar tariff” that replaces net metering with two separate calculations. First, customers are charged for their full usage at a kilowatt-hour rate that reflects system investments (because this is a municipal utility, investor earnings aren’t at issue). They also receive a credit against that bill for the kilowatt-hours their PV systems produce, based on an annually recalculated value of solar—currently pegged at $0.107 per kilowatt-hour. The kilowatt-hour value is determined by weighted algorithms that consider five value points:


• The cost of energy it is replacing


• The extent to which its use defers the need for new generation (Austin Energy owns its generation assets)


• The extent to which its location might defer need for added transmission and distribution expense


• Avoided transmission and distribution losses


• A value that recognizes the premium utility customers are willing to pay for green energy


“It is really nothing more than a full avoided-cost equation,” said Karl Ràbago, Austin Energy’s former vice president of distributed energy services. Now executive director of the Pace Energy and Climate Center at the Pace School of Law in New York, he has also participated in Minnesota’s efforts to develop a similar tariff and has testified in front of utility commissions in North Carolina and Georgia.


The Rocky Mountain Institute included value of solar tariffs in its recent report on the how electric utilities design their rates, “Rate Design for the Distribution Edge,” even throwing in a couple other variables that also could factor in determining how much solar-generated power is really worth, including the time of day when PV panels are contributing to the grid and where in the distribution system they are located.


As many are coming to realize, current one-size-fits-all residential rates will need to change as solar becomes a bigger part of the energy-generation puzzle. For Ràbago, the change needs to start with a true reckoning that the value—and challenge—of all of the added PV panels is much more complicated than the simple matter of how many kilowatt-hours they produce.


“The one thing we should all do first is actually get the value of solar right,” Ràbago said.