Residential Solar Power Faces Serious Growing Pains

One of the first public battles over solar power was fought at the very highest political level. President Jimmy Carter saw solar power as an antidote to U.S. dependence on foreign oil, and he installed panels on the roof of the White House during his time in office. But his successor, Ronald Reagan, was less enamored of renewable energy’s potential–and had the panels removed in one of his first acts as President.

Today the war over rooftop solar still rages, if at a lower register. In the past decade, the value of annual rooftop installations has soared more than twentyfold, to $7.4 billion in the U.S. in 2015, and analysts expect the total number of homes with solar panels to cross the 1 million threshold this year. But whether that red-hot growth continues will be largely up to the public-utility commissioners and state legislators debating the future of a policy called net metering.

Net metering mandates that local electric utilities pay solar owners for the excess power their panels produce, which is fed back into the grid. There are other policies to encourage residential solar–like tax credits at the federal and state levels–yet without net metering, solar power wouldn’t make economic sense for most homeowners, even in hot and sunny regions.

But any electricity that customers generate from their rooftop panels is electricity they won’t buy from the utility–which is obviously a problem for utilities. ICF International, a consulting firm that works on energy issues, estimates that power generators will lose $2 billion in revenue by 2019 thanks to rooftop solar energy. Utilities argue that customers with solar installations still receive the benefit of the grid–including a backup source of power when the sun isn’t shining–without paying their share of its upkeep. And thanks to net metering, utilities have to pay extra for that excess solar energy. “That creates a mismatch if you have customers who are relying less on your system and buying less,” says Sue Kelly, president and CEO of the American Public Power Association, even though “at the moment of truth they’re still relying on the grid.”

Some utilities have responded by lobbying state regulators to roll back net-metering tariffs. The solar industry has already lost one fight in Nevada, where the utility owned by Warren Buffett’s Berkshire Hathaway persuaded regulators in December to cut by 75% the rate at which solar owners would be paid for the power they fed back into the grid. And Hawaii told new solar owners that they would be paid only the lower wholesale price that utilities pay other power generators. “If all the regulators in all the states take a hard attitude toward net metering, they will kill the solar industry,” says Jenny Chase, a solar-industry analyst at Bloomberg New Energy Finance (BNEF).

Nevada’s new policies have led solar companies to all but pull out of the state, which had been a prime target for new customers. The stock prices of SolarCity and Sunrun–two of the largest providers of consumer solar panels–have dropped 50% in recent months, in part because of fears that net-metering policies may disappear. “The risks for rooftop solar are getting more and more complicated,” says Cory Honeyman, senior analyst at clean-energy advisory firm GTM Research.

But the solar industry believes that hard-line states like Nevada will be the exception. In California, where 475,000 homes have solar panels, regulators in January committed utilities to continue buying electricity from solar-panel owners at the retail rate–a figure that averaged around 17¢ per kilowatt-hour at the end of 2015, significantly higher than what utilities pay on the wholesale market. (Think of a kW-h of electricity as the power needed to run the dishwasher once.) Solar companies say they are prepared to win in other states where the net-metering battle looms, like Maine and New Hampshire. “I think most of the time the regulators will be under pressure to resist the utilities,” says Chase.

It helps that the growth in solar is being driven by technological advances as well as policy. The cost of photovoltaic systems–the technology that converts sunlight into electricity–has declined rapidly in recent years, from more than $10 per watt in 2001 to around $3.50 per watt in 2015. More than $67 billion was spent globally on small-scale solar projects last year–a 12% expansion over 2014, according to BNEF. That trend is expected to continue through 2016.

The solar war doesn’t have to end in unconditional surrender for one side. Rather than end net metering, utility companies could institute a minimum fee all customers pay for grid maintenance, whether or not they have solar. Or they could adjust the net-metering tariff to match the declining cost of photovoltaic systems. That would be enough to ensure that utility companies could keep up the grid while still giving consumers an incentive to adopt solar–vital if the U.S. is to meet its carbon-cutting goals.

The reality is that energy is always political. “We consume energy that is highly subsidized–either by governments directly or by incentivizing you to behave a certain way,” says SolarCity CEO Lyndon Rive. For solar companies–and perhaps for the planet–the incentives need to stay on their side.