Understanding the Electric Utility Model
Fixed Costs, Variable Costs and Net Metering Explained
I have this black box that I do not know much about what goes on inside it. I call it “MyUtility/NetMetering”. It seems to work okay, I send it any extra electrical energy that is produced by my solar electric system. When I need the energy back, I get it back at no extra cost.
How does this work? What really is in the black box?
At first glance, it seems like it is just a big battery from my simple point of view. Or is it something else?
I do not think it is really just a large battery because that technology does not seem to be practical on a large scale yet.
What is on the other side of this black box? Seems like it mostly uses fuels such as coal, oil, natural gas, and some labor plus materials to produce the energy output.
The black box is turning fuel and labor into electrical energy delivered to my property.
What happens when I use more electricity? The black box must use a little more fuel.
What happens when I use less electricity? The black box must use a little less fuel.
Seems simple, fuel used is proportional to energy delivered.
What happens when I have excess electricity from a solar system and send it back to the black box? Because there are many other users, some even next door, the black box must use a little less fuel.
Now let's get to the big question: The black box uses a little less fuel when I have excess electricity from solar generation, and it uses a little more when the sun is not shining. Does this difference cost the black box anything?
The answer is not simple. The black box has both fixed and variable costs. The fixed costs do not change as the amount of electricity being processed changes, but the variable costs do. The variable costs are directly related to the energy sold and consist of fuel and any energy purchased from other utilities.
One black box (APS regarding residential services in 2010) has variable costs that are 31 percent of the total cost for electricity, reducing any variable costs of Net Metering as a percentage of the total cost.
Does the handling of Net Metering energy affect the fixed costs? Not really, but it does affect the electric bills of all black box customers because of the process used to distribute the fixed costs to customers.
Practical considerations and laws on ‘Universal Service’ under which utilities must serve all customers in their exclusive service areas at the same rates require a lot of averaging and assumptions on how costs relate to usage of energy. Due to the complex nature of the black box it is essentially impossible to determine the exact costs of delivering energy to customers, even if net metering did not exist. The usual solution to this is to take the data that is available and use it to construct utility rate schedules that on average distribute costs to classes of customers.
This data includes individual electric meters (energy and sometimes demand- the rate of use of energy), metering within the black box as to how energy is flowing, and mathematical models of the equipment to understand losses that are always present. Most utility rates monetize a substantial fraction of the fixed costs by including them in the variable part of the rate (divide the fixed costs by the total energy, charge each customer based on energy used). In 2010 APS monetized 85 percent of the fixed residential costs. This is illustrated by the APS chart below:
The variable revenue is based on both energy consumed and demand charges that reflect the peak loads imposed on the utility and the amount of equipment required to provide the energy.
This has been accepted practice prior to any net metering. The fixed revenue is basically a charge for having a connection and to cover the costs of issuing electric bills and receiving payments.
While this is a widespread practice by utilities, and is done in accordance with the rules set by law and utility regulators, is it fair?
As the costs of renewable energy have come down, it is now practical for some black box customers to make some of their own energy, mostly by photovoltaic power systems. We are also facing a more polluted environment, some of which is caused by the fuels used by the black box. In many states this has resulted in laws or utility regulations intended to reduce environmental effects by encouraging the use of cleaner renewable energy sources even though they are more expensive. This means that all customers of the black box end up sharing these extra costs to improve the environment. Now an accepted policy.
Recently it has been questioned if this is a fair process. Most of the owners of renewable energy systems have invested in their systems both to reduce their future costs of energy and to improve the environment. The black box sees this mostly as a reduction in energy sales with a corresponding reduction in fuel costs. Because of the monetization of some of the fixed costs, there is some rebalancing of the variable rate due to less energy being processed.
Some are saying that this is not fair to the non-solar user. That is misleading since it is just one of the costs of cleaning up the environment that are to be shared by all because all benefit from a cleaner environment.