By Georgena Terry, Volunteer Research Associate, CESAIn 1983, Minnesota became the first state to require net metering for distributed generation. More than three decades later, many other states have joined Minnesota in requiring utilities to pay retail rates for the solar power they purchase from customers. The rooftop solar PV market is growing across the country, thanks in part to net metering. But as greater quantities of solar electricity penetrate the grid, some utility companies and energy analysts are questioning whether net metering will still make sense in the future.

The concerned utilities argue that solar electricity produced by distributed generation reduces the revenue needed to cover a utility’s fixed costs of operation. They claim that net metering gives those using solar power unfairly large payments for the electricity they generate. On the flip side, advocates of solar point out that distributed solar power is more valuable than conventional power. It has a multitude of environmental benefits, it can decrease the need for power plant upgrades, and it can reduce demand stress on the grid.

Minnesota’s legislature realized that the state’s public utilities commission and utilities were hard pressed to accurately value solar’s contributions without a formal, comprehensive, inclusive evaluation of solar. Accordingly, Minnesota set a national precedent again by enacting a bill directing its Department of Commerce (DOC) to derive a methodology that could be used by utilities to implement a value of solar (VOS) tariff.

Over several months, the DOC held hearings with all stakeholders—utilities, environmentalists, citizens, and others. This stakeholder process was critical, according to Lise Trudeau of the DOC, because it created a transparent and open-minded atmosphere from which the methodology evolved.

Using the insights they gleaned from the hearings, the DOC staff was able to value solar power. They used avoided costs as the building blocks of the valuation. The largest avoided costs were fuel, environmental impacts, and generation capacity. The U.S. EPA-derived “social cost of carbon” was used to estimate economic damage caused by CO2 emissions.

The DOC’s goal was not to advocate for any particular position. It was simply to enable an equitable way of accounting for the value of solar. Utilities are not required to adopt the value of solar tariff; they may continue to use net metering.

As defined by Minnesota, VOS differs from net metering not only in an accounting sense, but in a physical sense as well. VOS customers have two meters: one tracking the electricity they consume and another tracking the solar electricity they produce. Customers pay for consumption at the going retail rate but earn a credit based on the VOS rate. A 25-year contract locks in the value of the solar credit. If the solar system produces more electricity in a year than the customer consumes, it is forfeited to the utility. In addition, the solar renewable energy certificates belong to the utility.

The VOS concept is still a work in progress. The utilities and the state are still figuring out when it does or does not make sense to use VOS. But Minnesota’s exploration of the concept has informed and enriched a national discussion on solar electricity rate design.

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This blog post was originally published in the Clean Energy States Alliance (CESA)’s 2015 report “Clean Energy Champions: The Importance of State Policies and Programs.” This report provides the first-ever comprehensive look at the ways states are advancing clean energy and suggests how to further encourage clean energy growth.

This blog post was also published in Renewable Energy World.