Solar power is at a unique place in history. It’s growing rapidly, its price is falling precipitously. Within the next 10 years, it will compete favorably with utilities for electricity sales, on price, and without subsidies.

Given its rapid ascent, it might seem silly to talk about change.  But the continued expansion of distributed solar power may rely on modifying a bedrock of distributed solar policy.

The Past

The solar past is all about net metering (and generous federal, state and utility incentives), a policy allowing smaller scale arrays (usually 1 megawatt or smaller) to connect to the grid at low cost, and for that solar energy to be credited to the producer’s electric bill as though it were a comparable amount of energy conservation. If a solar array produces 100 kilowatt-hours (kWh) in a month and the customer uses 300 kWh, then the customer’s bill is for the “net,” 200 kWh.

Why Net Metering Is Awesome

• Typically reduces or eliminates extraneous fees on producing local energy
• Standardized tariff – same deal for everyone
• Easy to understand compensation
• Tax free energy production, because it is “paid” as an energy credit, not cash
• Customer doesn’t need a battery because net metering is an accounting policy, not an electrical engineering one

Why Net Metering Isn’t Everything

• In most cases, you can’t produce more than you consume. If you’re a commercial warehouse with roof space for 2 megawatts of solar but very little on-site demand, it’s not economical to fill the roof with solar panels.
• Compensation was – historically – much less than the actual value of solar to the utility, its customers, and society.
• The customer may have a perverse incentive to increase electricity consumption if they are producing lots of on-site energy, because the price paid for excess energy is much lower than for energy used to offset on-site use.

The following chart explains how net metering laid the financial foundation for solar PV projects, but that incentives had to make up the difference. It also illustrates how, based on the preliminary estimates of the value of solar from Minnesota‘s new policy, utility compensation for solar energy produced under net metering was likely far less than the actual value of that energy (unless the utility also offered rebates or incentives).

The Present

By the end of 2013, the U.S. had installed 13,000 megawatts (MW) of solar PV systems, and net metering contributed to a huge portion. The cost of installing solar had fallen 60% in five years and, in certain parts of the country, the cost of a solar array averaged over 25 years of energy production (called the “levelized cost”) had dropped below the price many customers paid to the utility per kWh. The following chart illustrates, with the levelized cost data for Missouri (about average for the U.S., but much above the cost in sunny areas like California or Colorado).

The growth in solar power and falling prices have led to a new dynamic in solar economics. For the first time in many places, solar electricity from the rooftop is cheaper than utility-provided power – without subsidies!  And in particularly sunny places, the levelized cost of solar may even be below the “value of solar,” meaning that solar energy producers (if paid this value) could make a return on investment just on these merits.  This “present” phenomenon will take place in different regions of the country at different times, but will happen everywhere within 5-7 years.