Best stock to invest in – Net Metering Is the Solar Industry’s Junk Food

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Shoppers who bring reusable bags to the grocery store buy
more junk food

This example is part of a growing body of behavioral psychology
research showing that when we feel good about ourselves for doing
one thing right, we give ourselves permission to be careless in
other areas.

The solar installation industry seems to be falling into the
“reusable shopping bag” trap. Solar itself is the reusable shopping
bag. The junk food is net metering.

Net metering is a simple, intuitive way to pay for solar generation
at retail rates. But it puts solar companies on a collision course
with regulators trying to protect non-solar customers from
cost-shifting. Solutions to this conflict exist and have the
potential to unlock an even brighter future for the solar industry.

Net metering pays owners of distributed solar for their excess power
generation at the same price they would pay for power from the grid.
When solar is a small fraction of the generation on the grid, this
is a great deal for utilities and other ratepayers: solar generation
occurs during the day, when electricity demand is typically higher
and wholesale prices are also high. This is crucial on hot summer
days when air conditioners drive up peak loads.

Net metering becomes less attractive for utilities as solar
penetration increases. Hawaii and California are seeing this

Because electricity transmission is hard to build and storage is
expensive relative to electricity generation, supply must be locally
and instantaneously matched with demand. When lots of generation
comes from variable, price-insensitive resources like solar, the
grid suffers from too much of a good thing. In the middle of the
day, solar production starts to meet and eventually surpasses
daytime peak demand, and the value of electricity falls. Low prices
during the day mean that more flexible forms of generation need to
make profits when solar production is low, increasing prices and the
value of electricity at night and on cloudy days.

This process puts utilities and regulators in a bind. The conflict
can hurt both sides of the utility-customer relationship.

The Nevada
Public Utilities Commission’s decision
to end net metering for
both old and existing customers may seem like a victory for the
utility, but it is a Pyrrhic victory at best. 

When only a small fraction of the electricity on the grid comes from
solar (low penetration) in any part of the grid, net metering is a
subsidy to the utility, not the net-metered customer. But rather
than replacing net metering with something that would encourage
distributed solar where it would be most useful, Nevada has driven
solar installers
from the state. 

The decision did the greatest damage to solar customers who had the
rules changed on them retroactively, and many of them will now never
recover their solar investments. It also hurt other ratepayers who
might have wanted to go solar in the future, and robbed all
ratepayers of the benefits of any such installations to the grid.
They are also robbing the planet of an opportunity to
cost-effectively reduce carbon emissions.

The retroactive removal of net metering is also increasing
uncertainty among large-scale energy developers, who reasonably
wonder if something similar could happen to them.

How the conflict over net metering can be an opportunity

Must solar companies’ gain be a utility loss? Hardly. The key is to
learn from the principles of stakeholder capitalism and turn the
seeming tradeoff into an opportunity.

Speaking at the 2016
Conscious Investors Summit
, R. Edward Freeman, the academic
director at the Institute for Business in Society of the Darden
School and the University of Virginia, made the point that tradeoffs
are a managerial failure.

Freeman explains that when you treat employees and managers like
jackasses, with carrots and sticks, they start acting like
jackasses. When you treat them like human beings who crave a sense
of purpose, they work with passion and deliver creative solutions to
seemingly intractable problems. 

The solar/utility conflict is far from intractable, but for now,
both sides are acting like jackasses. Utilities deride net metering
as a subsidy from customers who can’t install solar to those who
can, while the Solar Energy Industries Association publishes principles
stating that customers should always have net metering as an

Both sides should stop acting like jackasses and seize the
opportunity instead to focus on the tradeoff.  

A solution already exists. This is the value-of-solar tariff, where
solar customers are paid for the value of the electricity they
produce at the specific time and place they put it on the grid.

Under a value-of-solar tariff, non-solar customers cannot subsidize
solar customers (a common utility claim about net metering). By
definition, under a value-of-solar tariff, solar customers are paid
only for the value they bring to the grid. They won’t be subsidized
by other ratepayers simply because they are only paid for the value
they create.

Untapped potential

Not only can a value-of-solar tariff resolve the conflict between
solar and non-solar customers, but it can also unlock opportunities
for solar which are currently being squandered under net

Under net metering, the incentive is to install solar so that it
produces the maximum possible amount of electricity. This means
pointing the panels south, at latitude tilt. Under a value-of-solar
tariff, the incentive is to produce as much value for the grid as
possible, which often means pointing panels west or southwest, in
order to help service peak air-conditioning loads on hot days, which
usually occur in the afternoon. Such decisions depend on both the
local climate and on the local loads on the grid.

They also depend on getting the value of solar right. This is where
we need creativity from all parties working together.

The paradox of doing good

Few people expect much creativity from utilities — although there
are notable exceptions, especially when it is the regulator driving

The solar industry is another matter. Almost all solar companies
portray themselves as working for the good of the planet, and most
of those genuinely believe that is what they are doing.

That’s where the reusable bags conundrum comes in. The mental
accounting that allows a shopper to offset junk food indulgence with
shopping bag virtue also seems to be affecting the solar industry as
a whole.

If the solar industry were a person, it would be thinking: “I’m
doing something great for the planet, so I don’t need to worry about
all the non-solar ratepayers my actions might hurt. As long as the
greater good is being served, it’s not my problem.”

It’s a pity that solar companies, which are doing so much good for
the planet by displacing fossil fuels, are falling into the same
trap as shoppers who displace plastic bags with reusable, but then
poison themselves with junk food.

More solar companies need to stop substituting doing good for being
good, and start living up to their true ideals. Solar has the
potential to help all users of electricity, not just those who can
install it themselves. A value-of-solar tariff can unlock that
potential, as long as we have the creativity and courage to take
everyone’s interests into account.

Getting a value-of-solar
tariff right will be tricky
, but creativity
in the pursuit of a greater good
is precisely what stakeholder
companies excel at.

If all parties work toward a well-calibrated tariff, everyone will
have the incentives they need to get the most out of future solar
installations. Solar companies will get more business deploying
solar where it does the most good. Regulators will see that all
ratepayers are treated fairly. Utilities will find that new solar is
connected to the grid where it makes it easier, not harder, to
balance supply and demand.

Some people will still want to install solar even where the new
supply is difficult to integrate, but a value-of-solar tariff will
give them the incentive to install it with electronics and storage
that makes the new supply easier to manage, or the price will be low
enough that it will make sense for the utility to make the changes
needed to handle it.

This kind of dynamic tariff is also likely to catalyze demand
management, energy storage, and other industries we have not even
thought of — all of which will add jobs, create value, and help
unlock the potential of solar.

Perhaps the solar industry and utilities can both have their cake —
and eat it together.

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