Spring 2010

Net Energy Metering (NEM) Cost-effectiveness Evaluation

The California Public Utilities Commission (CPUC) hired Energy and Environmental Economics, Inc. (E3) to perform an analysis of the costs and benefits of net-energy metering (NEM).

NEM is an electricity tariff billing mechanism, and its principal benefit is that it facilitates customers installing distributed generation (DG). Without NEM, some customers could be hesitant to install DG since a facility would receive no compensation for generation that may be exported to the grid at times when there is no simultaneous energy demand to utilize the DG generation onsite. For small customers, particularly residential customers, this could occur with some frequency. Another benefit of NEM is that it allows DG systems to be sized efficiently.

Without NEM, customers are compelled to undersize DG systems relative to their total electrical load or their electrical bill to ensure they always use the DG output and to avoid any uncompensated electricity export. NEM provides customers a tremendous 'peace of mind' knowing that exports either will offset their consumption at other times or produce a bill credit that can be applied in the next billing cycle. NEM allows an intermittent DG resource, such as wind or solar, to be sized larger than “minimum load” so that annual generation can be matched to total annual electrical demand at the site, optimizing the economic value of the DG investment.

While NEM clearly facilitates the development of DG resources in California, the NEM Cost Effectiveness Evaluation does not attempt to quantify the value of the DG resources overall. This report focuses on the quantifiable incremental costs and benefits associated with the NEM mechanism:

1. The costs are quantified in terms of bill credits calculated based on each customer generator’s retail rate and the incremental billing costs associated with NEM; and
2. The benefits are quantified as the avoided costs of energy and capacity procurement.

The report does not compare the world “with NEM” to the world “without NEM,” nor does it attribute to NEM as a benefit the role of the NEM tariffs in bringing DG resources online. Later this year, the CPUC will release two reports on the costs and benefits of DG overall: one focusing on solar and the other focusing on other ratepayer-funded DG technologies. These more comprehensive reports will include the NEM cost and benefit analysis as one consideration, but they will also take a broader view of the cost-effectiveness of the wide range of policies and programs that support DG.

The full report and related documents can be downloaded at:
http://www.cpuc.ca.gov/PUC/energy/DistGen/nem_eval.htm