Hidden financial implications of the net energy metering practice in an isolated power system: Critical review and policy insights

https://doi.org/10.1016/j.rser.2017.04.032Get rights and content

Highlights

  • A detailed description of the NEM practice in Cyprus is provided.

  • The current NEM practice in Cyprus is shown to create unjustified revenue gaps for the DSO.

  • It also entails cross-subsidies from prosumers with high self-consumption to prosumers with low self-consumption.

  • An alternative, applicable NEM practice is discussed that requires no extra infrastructure costs.

Abstract

This paper provides useful insights regarding the financial implications of the currently applied Net Energy Metering (NEM) practice in Cyprus through analyzing the implemented policy under: a) the customers’ perspective and b) the utility (Electricity Authority of Cyprus) perspective. These two perspectives are known in the scientific literature as the participant cost test and the utility cost test respectively. Within the paper, the financial analysis from the customers’ perspective, it embraces the impact resulting from a series of factors influencing the viability of net-metered PV systems’ investments. Furthermore, the analysis from the utility's perspective relates to the expected costs and benefits that EAC may experience due to the current NEM rules and applied charges. Finally, the key findings pertaining to the current NEM policy's hidden financial and policy implications are critically discussed. This discussion is performed to facilitate a more diligent NEM policy that will allow further penetration of roof-top PV systems through well-informed and transparent decisions.

Introduction

Net metering (NEM) is an alternative policy to traditional Feed-in Tariffs (FiTs) for the compensation of distributed generation (DG). The key difference between the two schemes is that NEM works through retail tariffs, thus allowing retail customers to offset their electricity bills via the utilization of their privately owned generating system [1]. Net-metered photovoltaic (PV) investments are gradually becoming popular amongst residential customers due to the simplicity of NEM scheme. Under this scheme the customers’ consumption is directly coupled to the energy yielded from their privately-owned PV unit. Thus, it provides a relatively understandable form of repaying their investment by virtue of their reduced retail electricity consumption charges. Even though NEM is appealing due to its relatively unpretentious form, there exist: a) different implementation schemes and b) concerns regarding its long-term sustainability amongst stakeholders at an international level.

The main NEM implementation schemes are shown in Fig. 1 [2]. Specifically, Fig. 1-(a) illustrates the use of a single bidirectional meter that keeps record of the cumulative amounts of imported and exported energy. The implementation shown in Fig. 1-(b) relies on the use of two separate, unidirectional meters (one measuring the customer's consumption and the second measuring the customer's PV generation). Lastly, the NEM implementation shown in Fig. 1-(c) utilizes two separate meters, one bidirectional and one unidirectional that measure the import/export energy and PV energy respectively. An important subtlety regarding the third configuration lies in the fact that it allows utilities to keep record of the exact amount of PV energy that is self-consumed behind-the-meter of the NEM customer. Conversely, the other two configurations are not able to keep an explicit record of the self-consumed PV energy. Depending on the objectives of the regulatory authorities, this extra information may be needed in the electricity billing or taxing processes.

It should be noted that the most widely adopted metering implementation is the one shown in Fig. 1-(a). The second metering implementation is usually utilized in cases where the customer's consumption is charged entirely through the retail tariff whilst the PV generation is compensated at a different rate (either lower or higher). This kind of arrangement decouples the two energy amounts (i.e. consumption and PV generation) and, to this extent, it is similar to how a regular distributed generator would receive compensation through a Feed-in Tariff scheme. Finally, the third metering implementation is utilized in cases where the self-consumed and exported PV energy are treated differently in the electricity billing processes and/or the total consumption of a NEM customer must be known to the utility.

The arising concerns regarding NEM implementation mainly pertain to the traditional business model of regulated utilities. This business model has been based on volumetric retail rates. That is, customers are (implicitly or explicitly) charged based on their total consumption volume (i.e. kWh). However, volumetric rates usually include both fixed (i.e. the costs that do not vary with the generation output) and variable utility costs [3], [4], [5] thus having the potential of creating significant revenue gaps [6], [7], [8], [9], [10], [11], [12] when inflexibly applied in NEM schemes. The latter is an ongoing debate in several countries that have adopted NEM schemes and is reflected on relevant studies relating to alternative NEM mechanisms (e.g., Value of Solar Tariffs [13], [14], [15]). Value of Solar Tariff, in particular, is a mechanism that could potentially better reflect on the various cost components that are included in retail tariffs, thus aiming to minimize the revenue gaps that may appear as PV penetration increases to significant levels.

To this extent, it should be noted that there exists an inherent connection between utility revenue stability, net-metered customers and regular customers which is dictated by the inherent nature of retail rate design. This has been decorously discussed in relevant research works [16], [17], [18], [19]. In simple words, if price signals are not correctly reflecting the true costs and benefits associated with the evolution of the grid to a more heavily PV penetrated system; the arising revenue imbalances will affect the rest of the customer base. For example, if NEM compensation is set too high, then utilities are bound to face revenue gaps that will weaken their financial status and their future ability to consistently remain in the electricity business. To restrain such an effect, utilities may choose to recover these lost revenues through elevating electricity rates for their entire rate base. This creates a direct cross-subsidy from regular customers to solar ones. This raises fairness concerns and has the potential of leading into the electricity rate death spiral [7], [16], [20], [21]. On the other hand, if NEM compensation is set too low, then the investment incentive is effectively reduced, thus hindering future PV penetration [8]. It is, therefore, crucial for utilities and regulatory authorities to provide the correct price signals to customers (and potential investors) for two very important reasons [22], [23]. The first reason pertains in ensuring as much as possible a “least-cost” system expansion and, therefore, minimum prices and the second (and perhaps most important reason) to maintain a high level of stature and credibility in the process, in order to assure retail customers that their exposure to regulatory risks is minimum.

This work focuses on providing policy insights regarding NEM policies via an in-depth overview of the current NEM practice that has been adopted in Cyprus since June 2013. Firstly, a concise description of the market organization in Cyprus is provided in order to provide a background context in the subsequent analyses. To this extent, the NEM effects are examined both from the customers’ as well as from the utility's perspective. Based on the results of this examination, a critical review of the currently adopted charging mechanism for NEM customers is performed. Particular emphasis is given on each cost component of the regulated use-of-system (UoS) charges, which largely reflect the fixed utility costs. We discuss how these are currently recovered from NEM customers and, consequently, how they affect the final collectable revenue of the whole system's fixed costs. Consequently, the hidden financial implications associated with the implemented NEM practice are revealed. As a final note, the paper presents an alternative, applicable NEM practice that may substitute the currently adopted NEM practice in Cyprus. This alternative NEM practice takes into account the interaction of NEM customers with the grid. The alternative practice is investigated for two important reasons: a) firstly, its implementation is based on the use of the same metering infrastructure that is currently utilized in Cyprus, and, b) it is directly compatible with the traditional, volumetric model of UoS cost recovery. To this extent, the alternative NEM practice proposed would treat all customers, regular and NEM, consistently. Hence, the proposed approach can be perceived as an unbiased UoS charging framework in terms of both DG and energy efficiency investments [24], [25], [26], [27].

Section snippets

Brief description of the market organization in Cyprus

The market organization that applies in Cyprus (see Fig. 2) is known in literature as the “purchasing agent” market organization model [28]. That is, a single entity (i.e. the wholesale agent) is responsible for reliably producing/procuring adequate electricity amounts either from its own generators or from independent power producers (IPPs) to serve its customers’ base. The power system in Cyprus is characterized as a small, electrically isolated system with an almost exclusive dependence on

Critical review of current NEM practice in Cyprus

EAC as a regulated utility solely operates and bears all the costs associated with procuring, maintaining and operating all necessary facilities and equipment in order to serve customers at an acceptable reliability level. One should appreciate, at this point that the cost recovery business model of EAC is that of traditional regulated utilities. It relies on volumetric (kWh) retail rates. Bearing in mind that the cost recovery business model of EAC is not envisaged changing in the near future,

Proposed alternative NEM practice for Cyprus

The critical evaluation of Section 3 has thoroughly demonstrated the need for alternative methods in determining the compensation framework of NEM customers. In this section, an alternative NEM billing process is examined. The reasoning behind this alternative practice lies with the need to explore potential ways forward from the current NEM practice in Cyprus without any extra infrastructure/metering costs.

In particular, the alternative billing mechanism refers to maintaining the current

Conclusions

NEM schemes have been proven successful in attracting demand-side investment in distributed generation thus giving rise to prosumers due to their simple and understandable form. However, these schemes also constitute a major challenge for utilities and regulators due to the fact that the costs and benefits that NEM customers bring to the system have to be directly associated with the underlying retail tariffs in order to preserve the simplicity and attractiveness of the policy.

To this extent,

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