Net Metering regulatory avenues of the solar supply chain and business models – Part 1

    Net Metering

    India is ranked third, globally concerning power generation, accounting for 5.86% of the world’s total annual energy generation after China and the US. Concerning the regulatory regime, net–metering plays a vital role in maintaining such a position where the country’s energy sector regulates via the amended Electricity Act 2003. The Act is the parent legislation that governs all kinds of energy resource, except for nuclear energy. Fundamentally, the concept of net-metering allows residential and commercial customers who generate their electricity from solar power to sell the electricity they aren’t using back into the grid. Based on the lesson learnt from the international net-metering demonstrations worldwide, several regulatory changes and initiative have been taken by various state regulators in the past year. For instance – Support incentive arrangements have been implemented for the promotion of the metering arrangements, fiscal incentives such as capital subsidy, tax credits etc.

    Looking forward, several states have passed net-metering laws. In other states, utilities may offer net metering programs voluntarily or as a result of regulatory decisions. The differences between state legislation, regulatory decisions and the implementation of policies mean that the mechanism for compensating solar customers varies widely across the country. As of today, only a few (Indian) States have such policies, discouraging users elsewhere. Consequently, with the increased use of renewable, the role of regulators is also intensified as the challenges to ‘One Nation One Grid Scheme’ is escalated high to tackle bidding guidelines for wind power projects and safeguards duty on solar panels and indirectly to assess monetary benefits from net-metering. Therefore, as a qualitative discussion, the article deliberates on net-metering as a concept, its types, the context of developing regulations, more important discusses the type of business models and its future impact on the Indian Energy Regulations and consumer’s base and arriving at feasible solutions for sustainable energy generation in India.

    Net –Metering as a concept

    Net-metering is a concept for utility billing that provides credit to customers (both residential and business) who make excess electricity with their solar panel systems. The net-metering system electricity also sends it back to the grid. The concept of net-metering suits well in renewable energy generation like rooftop solar systems that generate electricity near the point where they will be used, and this reduces the strain on the grid’s distribution and transmission infrastructure, and this also minimizes energy-loss from sending voltage many miles from the nearest power plants. For instance, in residential areas a customer has a Photovoltaic (PV) system installed on their roof, it may generate more electricity than the home uses during daylight timings. If the home is net-metered, the electricity meter will run backwards to provide a credit against what electricity is consumed at night or other periods when the home’s electricity use exceeds the system’s output. Based on this, customers are only billed for their “net” energy usage, which can save money on their utility bills every year. On average, it has been estimated that only 20-40% of a solar energy system’s output ever goes into the grid, and this exported solar electricity serves nearby customers’ loads.

    Net-metering: Consumer perspective definition

    The definition of an eligible consumer for a net-metered project is important from the perspective of permitting third-party ownership of rooftop solar systems. Globally, the net-metering system is permitted for both self-owned and third-party ownerships, and accordingly regulatory frameworks have been developed to address the same. The third-party ownership is also being facilitated through legislative or regulatory measures.

    In India, the third-party-owned power projects supplying electricity to consumers would amount to third party sale of electricity unless addressed otherwise. These consumers would subsequently be liable to pay wheeling charges, cross-subsidy surcharge and additional surcharge (if applicable). Rooftop solar projects under net-metering are expected to be of small size and will act as on-site generation cum consumption for the consumer. The connectivity with the grid will act as a support facility to the consumer to bank the electricity in the grid for a defined period. There is merit in allowing both self-owned as well as third-party-owned systems under the net metering arrangements where the primary purpose is to meet the internal electricity consumption requirement of the consumer.

    It is proposed that consumer’s eligibility for net-metering be defined in such a way that it allows, both self-owned as well as third-party-owned systems, to be installed for meeting consumer’s self-consumption. The regulations could then exempt only such eligible consumers from wheeling, banking and cross-subsidy related charges.

    Types of Net –Metering

    There are two different types of metering arrangements, Gross and Net metering. Surveys say that globally, both net metering and gross metering concepts have been implemented. In a gross metering arrangement, the entire energy generated by the rooftop solar PV system is fed directly into the electrical grid and the system owner is benefited by feed-in-tariff based on the sale of power to the utility. However, little differently, in a net-metering arrangement, the focus is primarily on self-consumption of electricity generation by the consumer. The surplus energy is either sold to or banked with the local utility. In the sense, the Net metering arrangements, thus, combine elements of captive consumption and exchange of power with the utility.

    The Feature (s) of Net-Metering

    Giving Customers Control Over Their Electricity Bills: On prima facie is that net metering allows utility customers to generate their electricity efficiently. During the day time, most solar customers produce more electricity than they consume and net metering allows them to export that power to the grid and reduce their future electric bills.

    Creating Jobs & Encouraging Private Investment

    Net metering also provides substantial economic benefit in terms of socio-economic sense such as jobs, income and investment. It is seen that due to the increase in awareness of net-metering, the demand for solar energy has increased in the market, and this in turn creates jobs for installers, electricians, and manufacturers who work in the solar supply chain. Today, in India, the solar industry employs thousands of workers in large part-transmission and distribution due to strong state net-metering policies which have allowed the solar industry to thrive. Andhra Pradesh, Tamil Nadu, Rajasthan, Madhya Pradesh, Maharashtra are few of them.

    Protecting the Electric Grid

    Sometimes, net-metering policies lose opportunities. They create a smoother demand curve for electricity and allow utilities to better manage their peak electricity loads. By encouraging generation near the point of consumption, net metering also reduces the strain on distribution systems and prevents losses in long-distance electricity transmission and distribution. Many studies are found in the context of that demonstrate the value of the solar system to local economies and the electricity system as a whole.

    International Status

    As per reports by the European PV Industrial Association, and the research carried out by Indian leading MNCs such as Deloitte – it provides an overview of the metering arrangements, ownership pattern and incentive structure for the rooftop solar PV projects which is being followed by various geographies across the world. In countries such as Germany, the Netherlands and Denmark, consumers can benefit from net metering arrangements. In these countries, consumers with small solar or wind energy generators can supply excess energy to their local distribution facility in exchange for vouchers to offset electric energy provided to them at other times when required. In particular, Germany is a well-known example of the successful propagation of the gross-metering concept. Japan was found on a similar pattern and several states in the United States, on the other hand, have implemented the concept where the energy is self-consumed before the surplus is sold to the grid. The recent trend in Japan has been to progressively move towards a gross metering model with FiT mechanism.

    This concept of net-metering is quite famous in developed nations but not in developing countries. Among developing countries, Thailand is observed as the first country to initiate net-metering. In India, the concept is not very old, and some states such as Andhra Pradesh, Tamil Nadu, Uttarakhand, Maharashtra and also Delhi have come up with their policies of net metering. However, there are several issues around the same. Firstly, both the DISCOMS and end-consumers in India are reluctant about Net Metering. From the consumer end, the reluctance stems from tariff structure and grid reliability. Tariff structure so far does not offer many motivating incentives. Concerning grid reliability, India suffers from excessive load shedding, which may result in a waste of power from solar PV during outages. There needs to be anti-islanding protection in grids which enables the invertors to it shut off and stop feeding the power into the grid when there is a power outage.

    International experience in the energy sector in the evolution of rooftop solar segment highlights that there is a very high relevance of policy and regulatory framework. Such policies found seen as a support to the development and propagation of various lucrative business models. Therefore, having learned from the various lessons at International cases, in India also both the types of Gross and Net metering models necessitate distinct and modified policy support from the Government for various benefits, incentives and subsidy instruments. Similarly, the ownership patterns, intermediaries and financing mechanisms get shaped to a large extent by the regulatory mechanism in place across various countries and India has made a very good effort and has been successful in planning and designing such policies to the extent.

    Context of developing net metering regulations in India

    Energy regulations in India are complex and have been framed perhaps for simpler and easier operations to support metering systems through all kinds of energy resources. Often, gross-metering based renewable projects (including solar) are seen evolving since many times. In tune with the National Solar Mission that is an initiative of the Government of India and State Governments, regulatory commissions to promote solar power, many states have seen developed the regulatory framework for the solar sector. Over time, in search for more share to the optimal energy mix, this resulted in enhanced capacity addition from the large capacity solar power projects. However, as an emollient remedy, as such there was no feasible way to use such projects, thus, many states started implemented other than under gross-metering arrangement.

    As an inestimable case, states like Gujarat have initiated the implementation of small capacity rooftop solar projects under the gross-metering arrangement, with a defined commercial arrangement and interconnection requirements. Technical and commercial requirements for net-metering arrangement have however not been addressed adequately and this constrains the propagation of this segment of rooftop projects. It is well recognized that a grid-connected net-metering arrangement requires a well-defined regulatory and commercial framework to address issues related to third-party owned systems, provisions under the open access regulations, and banking of energy, etc. Further, exhilarating the need for a business model, key business models and parameters important from the perspective of developing draft model net-metering based rooftop solar regulation have been identified as follows.

    Net-metering business models

    The net-metering based rooftop solar projects facilitate the self-consumption of electricity generated as well as feeding the surplus into the network of the distribution licensee. The type of ownership structure for installation, classify as an important criterion for defining the different rooftop solar-based business models. The models that gain the attention of customers on monetary terms as well as on the sustainability part of using solar as resources. In this reference, many models are seen developed worldwide internationally; and the rooftop solar projects have found two explicit distinct ownership arrangements.

    Self-owned arrangement wherein rooftop owner also owns the PV system and Third-party ownership in which a developer owns the PV system and also enters into a lease/commercial arrangement with the rooftop owner. Both these models are also found very much relevant in the Indian context and have been discussed in the section below.

    Self-owned arrangement metering model

    net metering
    Figure 1: Business model I: Self Owned Net-Metering

    In a self-owned, net-metering based rooftop PV model, the rooftop owner who is also the electricity consumption for the utility installs the rooftop solar system, either on its own or with the help of a system supplier and installer. The electricity generated by the system is first used to service the consumer’s captive load within the rooftop owner’s premises. The solar power generated more than the owner’s electricity consumption is fed into the grid through a net meter, which is a bi-directional energy meter capable of registering both import and export of electricity.

    So, technically, net-metering enables customers to use their generation from on-site renewable energy systems to offset their consumption over a billing period by allowing their electric meters to turn back when they generate electricity over the demand, enabling customers to receive retail prices for the excess electricity they generate. Net-generation highlighted here is credited to the owner’s account and adjusted subsequently against imports from the grid. For this model to work and to interconnect with the distribution utility, necessary provisions permitting net-metering through rooftop solar systems have to be adopted. In the interim, there are several policy instruments like the Generation Based Incentive (GBI) or capital subsidy which can be adopted to bridge the difference between the higher cost of solar generation and applicable retail tariff for the consumer categories. There are several other forms of this model which have been implemented in Japan. The net –metering concept in Japan is seen as relatively higher retail tariffs combined with capital subsidy make such systems attractive for rooftop owners, while in the case of the United States, tax rebates are the primary concerns for incentives.

    This article will be continued in the next issue as Part 2

    Vivek Soni, Chartered Engineer, PhD IIT Delhi Faculty, Bharatiya Vidya Bhavan’s Institute of Management New Delhi

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