(Photo by Kevin Baird via Creative Commons)

Are feed-in tariffs a ‘subsidy’ for a small group of utility customers?

When a business or homeowner lowers their electricity bill by installing solar panels or wind turbines, do they drive up other customers’ utility bills?

That’s the perennial claim made by utilities that oppose policies that would require them to compensate customers for electricity they generate.

Most recently in Iowa, utilities argue that feed-in tariff and net-metering rules benefit a small group of customers at the expense of everyone else.

“The concept of subsidizing somebody’s electricity at the expense of others is one our boards around the state have not been able to get behind,” Tim Coonan, a lobbyist for the Iowa Association of Electric Cooperatives, said last month after a feed-in tariff bill for small wind cleared an Iowa Senate committee.

Also last month, a spokesperson for Pacific Gas & Electric told Midwest Energy News that under California’s policies, poor households “subsidize the more affluent community” of homeowners who can afford to install solar panels.

The subsidy argument, however, is one that is overused and understudied, according to distributed power advocates.

“It’s a claim that needs a lot more investigation before it is reasonable to take it at face value,” says John Farrell, a senior researcher with the Institute for Local Self-Reliance and a leading expert on customer- and community-owned clean energy.

In California, ‘it’s actually the opposite’

A recent cost-benefit analysis of California’s net-metering policy found some customers paying slightly more as a result of others’ solar panels, but on average the state’s electricity customers were benefiting from the customer installations more than the systems’ owners.

In other words, California customers who have used solar panels to lower their electric bills are the ones subsidizing everybody else.

“They found despite utilities’ claims … about customers not paying their fair share of the fixed costs, it’s actually the opposite,” Farrell said.

The January 2013 report, prepared by consulting firm Crossborder Energy for the Vote Solar Initiative, looked at a broader range of benefits than most utilities acknowledge. For example, customer-owned solar panels can lower transmission costs and postpone local equipment upgrades.

California’s net-metering policy requires utility meters to run forward and backward for customers that generate their own power. The state’s major utilities claimed the rule would push billions of dollars of additional costs onto ratepayers who don’t participate in the program.

“We conclude that the utilities’ concerns with the impacts of [net-metering] on nonparticipating ratepayers are unfounded,” the Crossborder Energy report says.

The analysis studied the impact on residential and commercial customers of Pacific Gas & Electric, San Diego Gas & Electric, and Southern California Edison. When fully implemented, the average PG&E residential customers would likely pay a few cents more per month because of the policy.

All other customers, including PG&E’s commercial customers, would likely see benefits. Averaged across all three utilities, it creates a “small net benefit” for residential customers, and clear cost savings for commercial, industrial and institutional customers.

‘It’s really complicated’

So does that mean Iowa utilities are wrong to say that paying for customers’ wind power will push costs onto other customers? Not necessarily.

“In the end, it’s really complicated. You can’t take that study from California and generalize it for any utility,” Farrell said.

The variables range from grid congestion to rate structures. Without a specific cost-benefit analysis, you can’t just assume customer-owned generation adds costs, he said.

Paul Gipe, a California solar analyst who tracks feed-in tariff policies, says they’re simply a way to pay for new generation.

“This is exactly the same as when a private company, an electric utility, for example, is approved by its regulator to build a conventional power plant ‘in the public interest’,” says Gipe. The costs and benefits are studied, and if regulators think the plant is in the public’s interest, they will approve it even if it results in new costs for customers.

In a way, feed-in tariffs offer ratepayers more predictability and protection than conventional power plants, which usually come with a guaranteed profit margin for utilities, says Gipe. Feed-in tariffs require utilities to pay a certain rate for a set amount of time, but it isn’t adjusted upward if generation costs turn out to be higher than expected.

Buying solar power from utility customers is no more a subsidy for renewables than paying to build a gas or coal plant is a subsidy for fossil fuels, Gipe says. A subsidy is research dollars and tax credits for nuclear and fracking technology — not paying a fair price for generation, he says, and the distinction matters.

“The word ‘subsidy’ has a negative political connotation,” says Gipe. “Because of that, the word subsidy should be used correctly.”

3 thoughts on “Are feed-in tariffs a ‘subsidy’ for a small group of utility customers?

  1. This legislative session (2013) the Iowa REC’s used the argument above once again to fight and stop renewable energy legislation. Unfortunately this argument has resonated in the NGO community as well and seems to have reduced or eliminated the amount of organizing money available to support this proven policy pathway. Hopefully, more will finally start to understand the power of “sending the market the correct signals” before we shoot past the atmospheric carbon, point of no return. Great article!

  2. My take on all this is that we need to move past these kinds of “old paradigm” brush fires — they aren’t central to the urgent issues of the climate discussion. Old paradigm = whatever is bad for the utility must be good for customers/environment and vice versa. New paradigm = solutions that align interests of various stakeholders that allow progress to be made without unnecessary conflict.

    For DG, there are regulatory frameworks (buy all/sell all, or Karl Rabago’s “net metering 2.0” construct) that align utility interests with the interests of utility customers that want to install DG, which sidesteps this “how many angels can dance on the head of a pin” debate over cost shifting to non-participating customers. We need to work harder to find and deploy those kinds of new paradigm solutions, rather than get distracted by unproductive squabbles between key stakeholders.

  3. I am reluctant to see subsidy used to “engineer” what technology is used for power generation. Normally controlled markets fail. Free market forces do a much better job. Most utilities have to file an Avoided Cost. If a DG supplier can provide power at the Avoided Cost or less, it is in the ratepayer’s best interest to let the DG supply it. Simple. Fair. No subsidy is needed.