A landmark settlement between Duke Energy and distributed energy resources (DER) advocates in North and South Carolina could remake the rooftop solar sector and be a model for ending regulatory disputes across the country.

The proposal, released Sept. 16, could calm contention between utilities and solar advocates over the perceived "cost shift" some utilities and policymakers see as a subsidy for rooftop solar paid by non-solar-owning customers. The settlement would, if approved by Duke's North and South Carolina regulators, pair rooftop solar with smart DER devices and time-varying rate designs to add to the utility's demand response capability and give customers an incentive to help address the utility's peak demand challenges.

"This is a totally new framework that treats self-consumed solar paired with demand response as energy efficiency and includes rate design innovations in dynamic pricing," said Duke Energy Vice President for Rate Design and Strategic Solutions Lon Huber. "We eliminate the cost shift, but retain a vibrant solar market, which could be a paradigm-changing win in the national net metering debate."

Legislative and regulatory conflicts continue to increase nationally over replacing the retail rate net energy metering (NEM) tariff typically paid to solar owners for electricity exported to utility systems, said North Carolina Clean Energy Technology Center (NCCETC) Senior Policy Program Director Autumn Proudlove. "Some states have delayed action, but the approved changes have reduced compensation."

Successor tariff debates ultimately slow rooftop solar growth, according to Proudlove. But Duke and other utilities who see how customer-owned DER can cost-effectively help reduce peak demand and meet policy goals are working with stakeholders across the country on ways to take advantage of those DER investments without imposing costs on other customers.

The new proposal, developed in response to solar policy directives in South Carolina's 2019-enacted Act 62, and North Carolina's 2017-enacted House Bill 589 (HB589), can accomplish those objectives, according to representatives of Duke, Sunrun, Vote Solar, the Southern Environmental Law Center (SELC) and the North Carolina Sustainable Energy Association (NCSEA) who helped shape the settlement.

Fights over NEM

NEM compensates rooftop solar owners for the generation their arrays send to the grid, and is available in 40 U.S. states and Washington, D.C. Compensation is set at the same retail rate customers pay for electricity, unless successor tariffs are in place that adjust that compensation.

NEM was deployed state by state to support early renewables growth. Retail rate compensation was a proxy for the value of the exported generation. Since at least 2013, utilities have complained about NEM to regulators, arguing its reduction in solar-owning customers' bills shifts system costs to the rest of the customer base. Solar advocates argue NEM benefits all utility customers by reducing operational costs.

The result is often-heated conflicts between utilities and solar advocates over a successor tariff that would theoretically represent the true value of distributed solar but prevent an undue shift of costs to non-solar-owning customers. The Duke settlement aims to eliminate some of those debates through rate design and smart technologies.

In many states, compensation debates "have been quite contentious" because utilities "want to reduce or eliminate the cost shift and have proposed compensation at avoided costs or wholesale rates," Proudlove said. Solar advocates are "realistic about coming changes," but want cost-benefit or value-of-solar studies to set a compensation that matches the value of their exported generation.  

South Carolina's Act 62 required review of the retail rate NEM provision by regulators in 2021 and North Carolina's HB589 required a review by 2027. With successor tariff debates likely and Duke subsidiaries the dominant electricity providers in both states, it made sense for stakeholders to work toward a plan, NCSEA General Counsel Peter Ledford said.

The proposal, which the settlement partners described as "unprecedented" and "paradigm-changing," has special significance because solar has struggled in the Southeast, regulators have been and continue to be hard on NEM policies, and installed solar capacity has only recently begun to match the region's resource potential.

Southern Company subsidiary Alabama Power's retail rate is $0.1337/kWh, but based on concerns about a cost shift, pays solar owners only a regulator-approved $0.035/kWh for exported electricity, SELC reported in 2019. And, in July, the utility won regulatory approval for one of the region's "highest solar-specific monthly charges," said SELC Senior Attorney and Solar Power Initiative Leader Lauren Bowen.  

In Florida, the 2019 regulatory approval of solar leasing, combined with the state's NEM, led to a boom in rooftop solar, Southern Alliance for Clean Energy (SACE) Energy Policy Attorney for Florida George Cavros reported Sept. 11. By the end of 2019, there were "nearly 60,000 customer-owned net-metered systems." But there was also a call for regulatory review of the NEM policy, Cavros reported.

"It is a pattern around the country," Bowen said. "At a certain rooftop solar penetration, the need for a variation on net metering is raised."

The North and South Carolina bills' requirements that retail rate NEM be reviewed make successor tariff debates likely and a new approach practical now, stakeholders said.

A sustainable solution

The settlement participants see the new proposal as a sustainable way to end the NEM and successor tariff debates.

"Collaborations on successor tariffs often produce piecemeal, short-term agreements," Vote Solar Senior Regional Director and Regulatory Counsel Thad Culley said. "This proposal is a comprehensive and paradigm-changing solution and should hold up over the long term."

The settlement proposal brings together time-of-use (TOU) rates, critical peak pricing (CPP) and incentives for participation in Duke's demand response programs, Sunrun Director for Public Policy Tyson Grinstead said. "No one piece is the perfect solution, but the package as a whole preserves the critical underpinnings of net metering."

It offers an upfront rebate for adding a smart thermostat that Duke could use to shed or shift customer usage and manage peak demand, he added. Taken as a whole, the benefits would be "as good as with net metering," Grinstead said.

The high-level Act 62 objectives required eliminating the cost shift, ensuring the solar market remain uninterrupted and offered the option of time-varying rates and other strategies, Huber said. "The settlement's combination of policy elements addresses those objectives and incorporates best practices for those options from other states into a scalable long-term framework."

The CPP and mandatory TOU rates send solar-owning customers improved price signals to reduce consumption when power prices are high, Huber said. "Along with monthly netting, solar owners will be able to maximize the value of self-consumption. A minimum bill, grid access fee, and non-bypassable charges assure that the cost of public programs and the grid are covered" without imposing costs on other customers.

Models of the settlement plan suggest a 92% or more reduction of the Duke-calculated cost shift from solar owners to non-solar-owners, Huber added. "The plan would increase solar owners' current average payback for their rooftop systems from 11 years to about 14 years, but with the demand response program incentives, it would likely come back in line with today's payback."

NCSEA has crunched the numbers, Ledford said. "This will not work for every customer in every situation, but we think the payback will make rooftop solar a good deal." Vote Solar's Culley agreed the plan "will offer good cost savings," if solar owners respond to price signals, and also noted it has a grandfathering provision that will protect current solar owners.

The plan's incentive will initially be available only to customers with smart thermostats, but eventually other flexible DERs will be eligible, Huber said. "If North Carolina and South Carolina regulators approve the proposal, customers' self-consumed solar and dispatchable demand response would be part of Duke's 'shared savings' energy efficiency program, making rebates eligible for cost recovery," he added.

If that happens, the utility would be allowed to recover the same 10.6% of the net benefits from utility savings that is allowed for any other technology in Duke's energy efficiency program, he said. And that makes it "in shareholders' interest for Duke customers to add rooftop solar." 

DER advocates defended the utility's cost recovery. It is an expenditure "that allows customers to invest their own capital to build a more distributed and reliable grid," Sunrun's Grinstead said. "That is a win-win."

Duke shareholders "should be able to earn on efficiency investments because it puts those investments on a level playing field with other capital investments that shareholders earn returns on," NCSEA's Ledford agreed. That is "a policy decision that was made in North Carolina 15 years ago and has played out well."

Will regulators approve?

The proposal now faces regulatory review from two commissions. "Duke's Carolinas system shares the costs of energy efficiency programs between the states, and both state commissions have to approve them," Huber said. Settlement partners are optimistic South Carolina regulators will approve because the proposal meets Act 62's objectives, but North Carolina approval is less certain, Huber said.

The energy efficiency provision is a key strength in North Carolina "because Duke has never had satisfactory visibility or control of DER on its system and that is a practical operational difficulty," NCSEA's Ledford said. This proposal resolves that because the smart thermostat provides visibility and some control over customer usage, protects the solar market's financial calculus, and protects and benefits customers not interested in solar, he added.

"It is too soon to say the North Carolina commission will approve it, but much of this has been negotiated between the utility and [solar] industry advocates who work in both states," Ledford said. "Opponents may not see this as a perfect solution, but once they look at the numbers, they will understand why it is a good compromise."

There are also uncertainties in South Carolina, said Grinstead, a former aide to Sen. Lindsey Graham, R-S.C. "Four new commissioners will be appointed to the seven-member commission by the legislature later this year and one of the first things they will take up is this settlement."

But the proposal meets Act 62's objectives, which will make approval more likely, VoteSolar's Culley said, agreeing with Huber. And in North Carolina, "if Duke and NCSEA agree on a settlement, as they did with HB589, it is likely to get approval."

While Huber is cautiously optimistic about approval in the Carolinas, he is also looking ahead. "This can guide the rest of the country on how to look at rooftop solar, and how to move beyond our traditional way of separating rooftop solar from other demand-side resources."