The traditional regulated monopoly model for electric utilities is outdated. It limits innovation, product and service development in the power sector. One example is the regulatory treatment of distributed energy resources (DER). In 46 states and D.C., customers are permitted to sell back excess energy generated from DERs through a process called net metering. As DERs like battery storage and rooftop solar penetrate the market, they increasingly expose cross-subsidies inherent in traditional utility rate design. Standard net metering policies attempt to serve a diverse customer base within this rigid framework and cannot properly capture the costs and benefits to the grid. In turn, controversies develop over net-metering regulation and whether or not all customers are paying for the grid services they consume.

This method has typically relied on billing and crediting DER customers at the retail rate of power. The retail rate is designed to distribute the costs of building and operating the electric grid according to how much power a customer uses. That means it captures common utility costs like generation and transmission capacity, fuel surcharges, and grid maintenance. Net metering customers may avoid utility fees altogether if they produce enough energy to contribute to the grid, though they clearly depend on the grid to sell their excess generation and provide backup power. In this case, utility companies must shift the burden of those costs to non-net metering customers through higher rates.

At the same time, the administrative simplicity of net metering fails to account for many of the environmental and economic benefits from DERs. Utilities can avoid building new generation and transmission facilities if enough power comes on-line at the distribution level. All customers benefit when DERs help neighborhoods recover more quickly from power outages. DERs can provide ancillary services, improve reliability, and improve power quality. None of these benefits are captured in net metering either.

As participation in net metering programs grows, alternative frameworks that address these shortcomings will be necessary. A potential option to change institutional design would be to rely on clearer price signals to elucidate the costs and benefits across a variety of grid services. This would involve a distribution utility that uses an open retail market platform, open interconnection standards and a transparent two-part grid services charge.