Solar net metering policy discontent

It is estimated that there are around 113,000 residential units with solar generation equipment installed on their rooftops, along with a net metering connection. We may call these ‘distributed generators’. This is only 0.3 per cent of total households in the country. Most units availing net metering facilities have installed capacity greater than five kilowatts, putting them among the more privileged segment of society in the top two electricity consumption slabs.

Lately, there has been noise regarding a change in net metering price — the price at which an electricity distribution company swaps out the unit generated by a distributed solar generator. Such a revision in price is being taken as an attack on the country’s middle class.

For a lower to lower-middle-income economy like Pakistan, 0.3pc of households with net metering connections certainly do not constitute the middle class but are essentially the upper class. Those belonging to such an economic strata may not feel like it, but the country’s overall distribution of wealth and income says otherwise.

The current net metering price is around Rs22 per kilowatt hour, which is basically higher than the weighted average fuel cost of roughly Rs9 per kilowatt hour. In a scenario where excess generation capacity is available, it makes little sense to generate electricity via distributed solar at such a high cost. It also doesn’t make sense to add more utility-scale solar, where the price is higher than the average generation cost.

Current electricity pricing regime subsidises wealthy, solar power generating households while shifting cost burden on the grid-dependent citizens

The final tariff paid by a household is high and is a function of variable costs, capacity costs, transmission and distribution costs, losses, and a plethora of taxes. This has led to demand destruction, compounding problems in the process. A uniform tariff that socialises losses is a bad policy regardless. Similarly, a policy subsidising the upper class at the cost of everyone else is also bad.

The current electricity pricing regime is on a cost-plus basis, which means capacity charges for generation and transmission assets are essentially spread over generated electricity units. It is suboptimal at best and needs to be amended on a priority basis.

As net metering results in reduced demand from the grid, the residual units of electricity generated have a higher capacity cost component, which is paid by the remaining users on the grid.

A contrarian argument here is that households that generate electricity through rooftop solar also carry the burden of capacity costs of the grid since the same households use electricity from the grid when the sun sets or when solar generation declines. The grid acts as a backup or secondary source of power for such households, and hence, a fair price must be paid for having access to a backup.

An argument that is given by proponents of a high net metering price (that benefits solar-generating households) is that households had invested in solar generation equipment. Hence, they should be allowed to recover their investment.

The current net metering price is around Rs22 per kilowatt hour, much higher than the weighted average fuel cost of roughly Rs9 per kilowatt hour

There is no reason why a government should backstop losses or guarantee paybacks when no such explicit contract is in place. Even the distributed generation concurrence that is executed between the household and distribution company clearly states that the net metering tariff is bound to revision. Such revision should reflect economic realities rather than backstopping payback periods for a few thousand households.

Any policy intervention to adjust net metering prices must be designed carefully, and socio-economic realities must also be considered. As net metering users rely on the grid as a secondary generation source, they also should contribute towards capacity payments on a pro-rata basis. The same can be achieved by having a fixed cost corresponding to kilowatts installed by each household.

Only those households that have solar generation units of five kilowatts and above can be covered within such a structure, wherein a fixed component of tariff can be introduced linked to installed capacity. Similarly, the net metering price can be linked with the average generation cost, which can be adjusted as overall pooled costs change.

Through such a manoeuvre, it will be possible to reduce losses the grid has to suffer, and the excess cost that has to be absorbed by the more vulnerable and protected segments. As protected segments, and other consumer categories also benefit from a cross-subsidy provided by commercial and industrial users, this can also reduce the same in the process.

The policy needs to be designed to discourage investment in distributed energy and not burden other users solely by relying on the grid. Given a global surplus capacity, as the price of solar panels continues to decline, the market will continue to gravitate towards the addition of more solar generation.

Similarly, as the storage cost rapidly declines, it will get increasingly cheaper to move completely off-grid. Any policy that does not consider the changing economic realities of reducing storage and generation costs will compound losses for the grid in the future. The policy needs to be future-oriented, where distributed generation is fairly priced rather than serving the interests of a few thousand households to the detriment of millions.

Ammar H Khan is an Assistant Professor of Practice at the Institute of Business Administration, Karachi

Published in Dawn, The Business and Finance Weekly, May 13th, 2024