Ohio customers' electric bills have two main parts: distribution and generation. Image by Kathiann M. Kowalski.

Ohio utilities take net metering fight to state Supreme Court

A case going before the Ohio Supreme Court could have a major impact on distributed generation in the state, while raising questions about corporate separation and possible conflicts of interest for regulated utilities.

The Public Utilities Commission of Ohio recently confirmed that net-metering customers are entitled to the full value of the electricity they feed back into the grid from renewable energy and other distributed generation technologies.

However, FirstEnergy and American Electric Power’s Ohio utilities are trying to reduce the amounts customers will get for that excess electricity. The utilities, along with Dayton Power & Light and Duke Energy, also raised other objections to the rules.

On July 23 the PUCO denied FirstEnergy’s third request for rehearing. AEP’s Ohio Power Company has already appealed the case to the Supreme Court of Ohio. FirstEnergy has not yet announced whether it will appeal as well.

Power in and power out

Net metering is a way for customers who produce some or all of their power to avoid overcharges for electricity they do not need. Those customer-generators may have solar panels, wind turbines, certain types of combined heat and power systems, or other types of on-site generation.

Net metering also provides a way for those customers to get compensation for any excess electricity they feed into the grid. In those cases, Ohio law says customers are entitled to the value of “that electricity.”

The big question in the PUCO case is what that value is.

Because of a 1999 deregulation law in Ohio, customers have a choice of which company provides their electricity. Electric distribution utilities are still regulated monopolies, however.

The regulated utility handles all the billing, but customers’ bills have two main parts: distribution and generation.

Distribution includes the equipment and work the utility does to carry and deliver electricity to its customers.

The other main part of customers’ bills covers electricity generation. If the utility is not the generation provider, it transmits payment to the electrical services company.

The PUCO’s recent decision holds that customers who provide excess electricity to the grid are entitled to the full value that would be charged under the electricity part of their bills.

Most of that charge depends on the market value of energy, which fluctuates. The rate also reflects a fixed “capacity” price, which is determined from annual auctions by the grid operator, PJM.

“It’s about 15 percent of the generation portion of the customer’s electric bill,” said FirstEnergy spokesperson Doug Colafella.

The utilities say customers producing excess electricity should only get the energy part of the electricity rate, and nothing for capacity. That’s how things have been handled so far, Colafella said. “We’re saying let’s follow the original rules that were put in place.”

“If a customer generates excess power, essentially they would be credited just for the energy that they produced and didn’t need,” Colafella explained. Including capacity would require larger payments.

“The PUCO is now saying that we would have to credit that kind of customer an average of about 15 percent more,” Colafella observed.

Utility company filings cite a 2002 Ohio Supreme Court case, which held that customers providing excess electricity to the grid should not get reimbursed for amounts covered by the distribution portion of the bill.

“The court stated that the net-metered customer did not contribute to the cost of PIPP [low-income support] charges, transmission, distribution, etc.,” explained Dan Sawmiller at the Sierra Club’s Beyond Coal campaign. “Inasmuch as the Court holding said that customers were entitled to the full generation rate, that would include capacity and energy.”

The PUCO said that its rulemaking decision complies with both the 2002 court case and the Ohio statute.

“[E]lectricity supplied to a customer-generator includes components such as capacity, demand, and energy,” the PUCO wrote. Its July decision confirmed rulings on the issue in January and May.

The PUCO also noted that Ohio law bars utilities from charging higher retail rates to net-metering customers than they would pay without their own generation.

Not compensating for part of the electricity charge could result in a different rate.

“The net metering rules require utilities to provide net metered customers compensation for electricity delivered to the grid at the same price that the utility would charge (including capacity and energy) for delivering electricity to the customer,” said Lawrence Friedeman, Vice President for Regulatory Affairs and Compliance at IGS Energy in Dublin, Ohio. The company promotes the development of distributed generation projects.

“IGS supported the Commission’s net metering rules because they provide reasonable compensation to distributed generation resources and enable them to compete on more level footing with traditional power plants,” Friedeman said.

Encouraging distributed generation with reasonable compensation for electricity going into the grid is “good public policy,” Friedeman stressed. “Distributed generation projects are on-site, reliable and local, energy efficient, and are cleaner than traditional power plants. “

Potential windfalls

Both camps in the net metering dispute see the other side gaining an unfair advantage if their position prevails.

“For most customer-generators there is no way to ascertain whether they have contributed to a reduction in capacity costs,” Colafella said. “If they don’t provide capacity, they should not be paid for capacity.”

On the flip side, any excess electricity fed into the grid can be sold to other customers. Those other customers would almost certainly pay the full generation rate, without getting any discount for capacity.

“There’s certainly the potential for a windfall” to utilities, said Martin Kushler, a senior fellow at the American Council for an Energy-Efficient Economy (ACEEE).

Conflicts of interest

Indeed, Ohio’s four large electric utilities have unregulated affiliates that sell electricity.

“It creates this very direct conflict of interest,” said Kushler.

The less customers can get for electricity they put into the grid, the longer it takes to pay off the capital costs for their own generation. Less financial incentive to choose those technologies would reinforce demand from existing electricity suppliers.

“This seems to get into even more issues of corporate separation — yet another attempt by an Ohio distribution utility to make its generation affiliate more profitable,” Sawmiller agreed.

Similar reasoning explains why FirstEnergy and other utilities supported the recent rollback of Ohio’s energy efficiency standard, Kushler said. “Arguably, at least under traditional regulation, the utility would have some obligation to minimize costs to their customers.”

However, that’s not what happened with Ohio Senate Bill 310, he says. The new law, signed by Governor John Kasich in June, freezes the renewable energy and energy efficiency standards for two years and then scales them back significantly.

“Energy efficiency was saving electricity at about 2 cents a kilowatt-hour — far cheaper than any source of supply — and yet the vested interests were successful in decimating Ohio’s energy efficiency policy,” Kushler said.

So far, three of Ohio’s four electric distribution utilities have said their energy programs will continue for at least part of the freeze period under SB 310. FirstEnergy is the exception.

“At this point we have not made any decision as to whether we’re going to make any changes to our current plan,” Colafella said.

“I would be totally shocked if they do anything but cancel those programs,” said Rob Kelter, an attorney with the Environmental Law and Policy Center. “It would negatively affect FirstEnergy customers, but it would help their unregulated affiliate sell more electricity.”

Meanwhile, on the federal level, FirstEnergy’s ongoing FERC challenge aims to exclude demand response from the results of May’s capacity auction for 2017-2018.

“We believe that removing these demand resources from the capacity market is going to provide vital compensation for essential physical assets like nuclear, coal, [and] gas base load plants,” Colafella said. “It’s going to help foster properly functioning capacity markets.”

“Demand response presents absolutely zero reliability concerns,” Sawmiller noted. “It won’t freeze like a coal plant did during the polar vortex. In addition, it’s incredibly cheap. This applies downward pressure to capacity prices, lowering electric bills for all customers.”

“If FirstEnergy is able to reduce the amount of demand response that goes into these auctions, it will raise prices for customers,” Sawmiller added.

“Having demand response bid in lowers the price for all the generators that bid in,” Kushler agreed. Conversely, keeping demand response out would raise the auction’s closing price. In Kushler’s view, FirstEnergy’s attempt to exclude it is yet another “classic conflict of interest.”

ACEEE, the Sierra Club, and the Environmental Law & Policy Center are members of RE-AMP, which publishes Midwest Energy News.

7 thoughts on “Ohio utilities take net metering fight to state Supreme Court

  1. The crux of this matter is that the grid is not a battery and it is very expensive to try to make it work like a battery. Buffering and backing-up intermittent power sources like solar and wind with the grid involves cycling controllable generators up and down rapidly to accommodate fluctuations and “firm up” their soft power, and keeping entire plants spinning at idle just to jump on the grid for a moment when intermittents sag to far or trip offline because of a cloud or wind gust, and keeping entire plants around in standby year round and only running them for maybe a day or two a year like we had in January and February when there are record temperatures and electricity consumption and the sun and wind aren’t awake yet to help. We also have to install additional brand new natural gas power plants to keep pace with the additional requirements for more compensation and firming and reserve and backup for each new increment of wind and solar. We are also adding thousands of miles of power lines to connect the geographically remote and diffuse commercial wind and solar farms to the grid. All these costs are being incurred at a time when national electricity demand has declined because of the economy and growing energy efficiency and is not forecast to recover to 2007 levels until 2024 or so. We should not be adding any new generation or power lines, only replacing worn out ones.

    Since intermittents are causing extra costs, intermittents should pay the bill for them. The best way for owners of intermittents to pay their own way is to backup and buffer themselves with their own onsite electricity storage and take the cost burden off the grid. To make intermittent wind and solar power into reliable, controllable power that has value to a grid and deserves price parity with other sources of wholesale (not retail) power requires large amounts of electricity storage. The average homeowner needs to install 20 kWh of storage to make their 4kW of rooftop solar able to cover most days without depending on the grid. The problem is that storage is extremely expensive at $500 to $10,000 per kWh. If homeowners pay the extra $10,000 or $20,000 to add storage to their $10,000 to $15,000 rooftop solar, then they can live off the grid most days of the year and only use it for emergency power. This would entitle them to only pay the monthly connection/customer charge and any energy charges for power they need incidentally just like all other grid customers, and not have to pay for grid buffering service. However, in this configuration, they are not going to have any excess power to sell back. If they double the amount of storage and solar panels, they should have enough to provide a household-worth of power back to the grid when the grid wants it rather than when the intermittents happen to generate it. Then they actually have a reliable and marketable product to sell back to the utility. So, for an investment of a mere $50,000 or so, a homeowner now has carried the cost burdens themselves and can enjoy their own electricity for a lifecycle cost of only about $1/kWh or so (9 times the utility rate) and sell their extra power back to the grid at peak times where it might be worth the exorbitant rates it is now guaranteed by crazy RPS mandates regardless of its usefulness. Then the homeowners can do the math to see if the power they sell back to the grid at wholesale rates will achieve a payback (hint: not even close).

  2. There are several aspects of this situation which the article does not cover well. The first brings to mind the slogan ‘What’s good for the goose is good for the gander.’ Under the article’s section heading “Conflict of Interest,” the author interjects this sentence, referring to distributed generation projects: “The less customers can get for electricity they put into the grid, the longer it takes to pay off the capital costs for their own generation. Less financial incentive to choose those technologies would reinforce demand from existing electricity suppliers.”

    As electricity consumers who ultimately bear all the costs that we as taxpayers don’t, we must all look at this statement from the point of view of the existing large, dispatchable generation plant as well. We rely on their reliability, flexibility and dependability every hour of every day. I think we should be grateful to reinforce demand for electricity from the dependable fleet of power plants we are committed to pay for (committed whether we use them or not)!

    System demand (energy and capacity) is stagnant. Without EPA MATS and MACT rules impinging on capacity, we already have all the power plants we need. Failing to use what we have already built (and are committed to pay for through guaranteed cost recovery mechanisms still in place or later on when investors in merchant plants get stingy enough) to its greatest potential reduces revenues and margins accruing to those existing generation resources. Those revenues and margins must meet fixed cost obligations plus reasonable profit or power plant owners/investors might decide to retire them prematurely. But would they even be permitted to do so by FERC and NERC? Refrains of Atlas Shrugged are beginning to surface here, and this is where capacity value (and its cost) come into play.

    Capacity prices may constitute only 15% of generation charges today, but absent sufficient capacity to meet peak demand, those prices could skyrocket to half or more of total generation prices. That would be a boon for demand response “resources” – up to the point that those providers are faced with a choice of shedding their own product or service market share in their primary business because they can earn more by producing less. And furthermore, how will distributed generation owners be held accountable for their ability (or inability) to produce at peak demand times?

    Finally, we should recognize that demand response is a means of paying people to forgo the freedom to use electricity in the quantities required to accomplish what they wish to accomplish at the times most advantageous for them to do so. We should step back and remember that the electricity system was designed and still functions to serve society’s needs as they occur – and not vise-verse. That includes producers being able to function across consistent hours so employees can maintain a consistent work schedule.

    There is an interesting analogy to demand response and time of use pricing. Think about the fact that we as food-consuming taxpayers subsidize farm owners to forgo farming their land through CRP. In essence we subsidize behaviors that ultimately decrease GDP and which increase the cost of the food we must purchase. I call that masochistic but the farm lobby calls it gravy.

    The bottom line is that distributed generators want the luxury of someone else paying for their capital purchases, and then on top of that, want someone else to pay for the reliability of electricity supply those purchases fail to offer. If someone wants wind or solar or a gas backup generator on their property, they should buy it for themselves with their own after-tax dollars. Then they should be free to not purchase any grid-distributed electricity they do not need. But to offer those generation owners retail rate reimbursement for producing more electricity than they need and feeding it back to distribution and transmission at no charge means those producers need to be held to the same standards of reliability and system dispatch as conventional generators as well as discounting for transmission system use and losses a la PJM’s LMP algorithm.

    It’s like paying retail price for food that has been transported to your town’s grocery store – including the transportation cost embedded in the retail price, but then planting a garden and expecting to sell the excess home yields to grocery stores at retail prices. And to top it off, the grocery store has to come to the gardener’s house to pick up the produce at their own expense.

    It’s tricky business to unravel the layers of laws, rules and justifications designed to force multitude Peters to pay for each other Pauls’ goods and services. And the more we do it, the less efficient our economy becomes – and the harder it is to undo.

    Whoever believes more and more complex government market manipulation increases economic efficiency and fairness to all, please say “aye.” To the rest of you, I’ll see you in Gault’s Gulch.

  3. Cliff Claven presents a reasonably realistic scenario and path to understanding the true comparative value between mass produced and grid distributed electricity vs. distributed generation. However I believe his cost estimates are low. I do not see where he has indicated either an expected lifespan of the conversion or storage equipment nor any ongoing fixed or variable costs (such as interest, insurance, maintenance and component replacement or refurbishment, land, floor space, etc.) Home and business owners and government entities with a pension to produce their own electricity should be diligent in advance of capital commitment to understand the “levelized cost” of an off-grid energy and capacity system able to compare in value to the services provided by the grid system.

  4. What both commenters fail to grasp is that Ohio coal electricity is incredibly polluting from a life cycle carbon emission basis compared to solar and/or wind. They also fail to understand that solar energy tracks with usage. The times of greatest electricity use are when solar produces the most, for air conditioning on sunny days. Furthermore, solar and wind from distributed sources do not require transmission infrastructure like that needed to transfer dirty coal electricity from Southern Ohio to Cleveland and Columbus. It is produced right next door on a neighbors roof. Rather than trying to find every reason under the sun to destroy renewables and tax them out of existence, the brain power of the two commenters who seem to be shills for First Energy, might be put to better use figuring out how we transform the grid to 100% renewables as will be required in the near future to prevent environmental Armageddon. Something they apparently have no understanding of.

  5. Mr. Frank Black: First, I do not fail to understand that “solar tracks with usage.” This is true to the degree that solar never produces at times of greatest demand. Further “tracking” is coincidental, but speaks to our diurnal genetic makeup, which the electricity system has been designed to accommodate. But to get to solar’s (or wind’s) economic value of per-unit emissions mitigation, one must use actual metrics, such as effective load carrying capability and overnight cost per nameplate MW.

    Second, you seem to be implying that CO2 from Ohio coal plants is important to reduce because carbon dioxide concentrations in the atmosphere drive climate change. Are you? If so, then wouldn’t it make sense to establish a target level of system-wide power plant carbon emissions and then seek the most economically efficient means of reaching that target? If so, then please consider the left-leaning (and carbon-phobic) Brookings Institution’s comment on the matter, here. http://www.brookings.edu/research/papers/2014/05/low-carbon-electricity-technologies-frank

    Third, your offering of the term “environmental Armageddon” should remind readers of the children’s tales “Chicken Little” and “The Little Boy Who Cried Wolf.” But even if it were true, does Frank Black understand that industrial consumers of electricity will take their manufacturing to where electricity is less expensive (and far more emissions intensive (like India, China and most recently, even Germany) if the cost of ours becomes a significant drag on their competitiveness? The US already has one of the cleanest electricity systems of all developed nations, so attracting global manufacturing here may be far more valuable to the global emissions profile than offering incentives for manufacturers to emit more elsewhere.

    And fourth, I am pleased to hear that I “seem to be a shill for First Energy.” If it happens that their conclusions about the US electricity system match my own, then I would gladly accept any financial support for my efforts that they would wish to provide. But let me be clear about this: My conclusions about electricity sources and their economic and environmental effects are a result of my own study and analysis and will not be altered by any form of remuneration, period. Furthermore, the ad hominem attacks you hurl are a strong indicator of surrender and/or retreat on scientific grounds, which should bound this discussion in the future. Thank you.

  6. Correction: This is true to the degree that solar never produces at times of LOWEST demand. I apologize for the error.

  7. Net Metering in Ohio by definition means that the generating facility is intended primarily to offset part or all of the customer generator’s electricity requirements. That means at best, on a net basis, the customer will purchase no electricity from the utility. At times the customer sends excess electricity to the grid, and at other times the customer takes deliver of energy from the grid. Talk of keeping entire power plants spinning idle most of the time just to be able to handle intermittent net-metered renewable resources is nonsense. This is an argument some use against utility scale renewable energy systems for baseload generation, but that’s an entirely different conversation. The topic at hand is Net Metering, and the fact is that these systems do not disrupt the operation of the grid as others argue. Utility demand varies more when air conditioners, electric dryers, microwave ovens, etc. turn on/off than when a cloud passes over a solar array. The utilities figured out long ago how to manage such demand variability.

    Have you ever considered what happens to the excess electrons from a PV system that get sent to the grid? They are delivered to the closest load (i.e. the house/business/etc next door.) The utility charges that customer the full retail rate for the electricity. That includes charges for generation, transmission and distribution. However, the utility incurs no cost for transmission, and the distribution path to reach the load is a fraction of what it would otherwise be (i.e. compared to if the electrons came from a power plant hundreds of miles away.) If the utility pays the renewable generator the full retail rate for excess generation (which, by the way, is what the utilities are fighting against having to do) that’s a wash, yet they still get paid for transmission and distribution. On top of that, if the excess generation occurs during utility peak demand (which happens pretty much all the time in the case of Solar PV), the excess generation offsets expensive electricity that the utility would otherwise have to generate or purchase from the spot market and deliver. Not only does this result in operational cost savings for the utility (which by the way, in the case of the regulated utilities, translates into savings for all ratepayers), with enough distributed generation it reduces the need for standby capacity that only gets used a few times a year. Again, more savings for all ratepayers.

    People want to portray net-metered customers as grid free-loaders, yet the irony is that the regulated utilities and ratepayers are benefiting financially from the excess generation. In the near future many Ohioans will see a substantive increase in their electricity bills due to higher transmission costs that the regulated utilities will pass along to their ratepayers. Distributed generation such as Solar PV relieves transmission congestion, especially at times of high transmission utilization (i.e. peak demand). What we need is more distributed generation so that all ratepayers can save money on their energy costs. Those who have invested in on-site renewable generation should be thanked and provided with equitable Net Metering rules.