Net Energy Metering (NEM) Cost Effectiveness Evaluation - January 2010


The California Public Utilities Commission (CPUC) hired Energy and Environmental Economics, Inc. (E3) to perform an analysis of the costs and benefits of net-energy metering (NEM) in compliance with Public Utility Code 2827, which requires the CPUC to “…submit a report to the Governor and the Legislature on the costs and benefits of net energy metering…”  The analysis follows the cost-benefit methodology for the evaluation of distributed generation (DG) adopted by the CPUC in Decision (D.) 09-08-026. The NEM Cost Effectiveness Evaluation presented here is one step in the larger context of DG cost-effectiveness evaluation.

  • Incentives for DG, of which NEM is one part, have attracted significant participation from IOU customers installing DG, representing a significant contribution to California’s energy portfolio.
    • Through 2008, nearly 40,000 residential and 3,000 non-residential accounts from California’s three large IOUs enrolled in NEM.
    • The vast majority of customers with NEM (99%) had solar PV installed.  Fuel cells, biogas, wind, and hybrid technologies make up the remaining 1%. 
    • The report estimates total 2008 generation from residential NEM customer sites at more than 250 GWh and more than 320 GWh from commercial sites.
  • NEM is a small part of the package of incentives offered to DG customers and of the overall investment in DG with a total 20-year cost of $230 million, or approximately $20 million per year on an annualized basis for NEM solar PV installed through 2008.
    • Net NEM costs for installations through 2008 total approximately 0.08% of total utility revenues on an annual basis. Given an overall average rate of $0.144 per kWh, this implies an average rate impact of $0.00011 per kWh is necessary to cover NEM costs.
    • While the cost of NEM is currently relatively small compared to utility revenues, the cost of NEM will continue to grow as the number of customers on NEM tariffs continues to grow.   If the total installed capacity of NEM solar generation reached 2,550 MW of solar capacity by 2017, the total cost of the program would be $137 million per year (in 2008 dollars).  This is approximately 0.38% of projected IOU revenues in 2020, which would imply an average rate increase of $0.00064 per kWh.
  • The report provides a measure of the total incentive provided to solar PV participants through NEM (which until this point had not been estimated) but is not a measure of the overall cost-effectiveness of solar PV.
  • The 20-year Levelized Non-Participant net costs are relatively low, but vary widely between residential and non-residential installations.
  • Sensitivity Analysis performed as part of this analysis indicate several areas for further study, but most significantly identified incremental billing costs as representing as much as 27% of the net levelized $/kWh cost of NEM to ratepayers.
  • Overall, NEM is a cost to ratepayers, as are other incentives for clean generation such as CSI incentives.  We estimate this cost at about $20 million on a 20-year annualized basis for the fleet of solar PV installed through the end of 2008.
    • The “lowest” to “highest” scenarios in terms of cost compared to the Base Case analysis showed a range of approximately $14-27 million in annualized costs

The CPUC has presented this report to the Legislature and the Governor's office with an Introduction by the Energy Division staff.  In the interest of making this information available and more accessible to stakeholders and the public, the CPUC will be hosting a workshop on March 24, 2010 from 9:30-12:30 in the CPUC auditorium to walk participants through the analysis and conclusions of the report, allowing for discussion with the consultants and Energy Division Staff responsible for the evaluation. 

The full report and related documents can be downloaded here:

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