Hidden costs of solar energy

How unchecked net metering is driving up tariffs and threatening the power sector

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KARACHI:

The expansion of solar energy is reshaping electricity distribution, but it also presents economic imbalances that need to be urgently addressed. While solar power provides a cleaner energy alternative, its increasing adoption is reducing overall grid demand, creating financial challenges for utilities and non-solar customers.

The current net metering system allows solar users to sell excess electricity back to the grid at rates that do not account for the full costs of electricity generation, distribution, and infrastructure maintenance. Unlike large-scale renewable energy projects that are directly integrated into the grid, individual net-metered solar users contribute less to grid upkeep, shifting the financial burden onto traditional grid customers and utilities.

Net-metered consumers in Pakistan currently avoid paying fixed infrastructure costs. According to a comprehensive study, 'The Distributed Divide', conducted by Arzachel, approximately Rs200 billion in grid fixed costs were shifted to non-solar users in FY 2023/24, resulting in a Rs2/unit tariff increase.

A 5% decline in grid demand due to solar adoption could result in over Rs130 billion in costs being incurred by non-solar consumers, further exacerbating the financial strain on them. If grid demand were to decline by 10%, the cost being passed on to non-solar consumers could exceed Rs260 billion, intensifying the burden on the power sector and leading to higher tariffs for consumers who rely solely on the national grid. Considering the massive import of solar panels, grid demand is expected to decline by 15%, potentially resulting in a 17% increase in the base tariff.

This growing disparity threatens the long-term sustainability of the electricity sector, potentially leading to increased circular debt and further tariff hikes. While net metering was initially designed to promote solar adoption, its growing scale has created grid management challenges. The ability of prosumers to export excess electricity leads to reverse power flows, voltage instability, and additional costs for utilities. As solar adoption increases, these issues become more pronounced, necessitating urgent reforms.

One potential solution is transitioning from net metering to net billing, where solar customers are compensated at a lower rate for their excess electricity while still paying fair grid fees. Many countries have already implemented this change to address financial challenges posed by distributed solar generation.

For instance, in 2022, Poland replaced its net metering system with net billing for photovoltaic (PV) installations up to 50 kW. Under the previous net metering scheme, owners of PV systems could inject a significant portion of their generated power into the grid, receiving credits that often did not reflect the actual market value of electricity. The new net billing system compensates prosumers based on the market value of the electricity they inject, encouraging better alignment with grid needs and ensuring that fixed infrastructure costs are more equitably distributed among all users.

Similarly, in the United States, several states have transitioned from net metering to net billing or reduced net metering rates. For example, California's NEM 3.0 policy significantly reduced export compensation rates, and Hawaii moved to a self-supply model, requiring solar customers to consume most of their generated power on-site. These changes aim to prevent cost-shifting to non-solar users and ensure that all consumers contribute fairly to grid maintenance and infrastructure costs.

The International Renewable Energy Agency (IRENA) notes that net billing schemes are employed in countries like Italy, Mexico, and Portugal. In these systems, prosumers are compensated for the excess electricity they feed into the grid based on the actual market value, which can vary with time and location.

This approach incentivises self-consumption and ensures that prosumers are fairly compensated without imposing undue financial burdens on non-solar consumers. By adopting net billing, countries aim to create a more balanced and sustainable energy ecosystem, where the costs of maintaining and upgrading grid infrastructure are shared more equitably among all users, and compensation for excess solar generation reflects its true market value.

Additionally, introducing demand charges and minimum monthly bills for net-metering users, as recommended in 'The Distributed Divide', can help recover fixed costs fairly. The report recommends charging residential net-metered users Rs1,000/kW/month in demand charges while charging non-net-metered users Rs500/kW/month for the same.

Industrial net-metered users could pay Rs2,500/kW/month compared to Rs1,250/kW/month for their non-solar counterparts. These measures would discourage excessive energy exports while ensuring that grid maintenance costs are equitably shared.

A common misconception is that solar adoption benefits all users equally. However, as solar penetration increases, its financial advantages diminish for new adopters.

Early solar customers benefit from net metering subsidies, while later adopters experience reduced savings due to rising infrastructure costs. Net metering allows consumers who own renewable energy facilities to use electricity when needed while getting credit for contributing their production to the grid. As more consumers install solar panels, per-unit grid costs increase, disproportionately impacting newer solar adopters who face higher tariffs and lower compensation rates.

Non-solar consumers, particularly low-income households, bear the brunt of cost shifts caused by net metering. Since electricity tariffs are largely volumetric, fixed costs for grid maintenance and power procurement are spread over fewer units, increasing rates for customers without solar panels. The National Average Power Purchase Price (NAPPP), used to compensate net-metered consumers, is Rs27/kWh, while grid costs continue to rise. Extrapolating trends, it is assumed that 30% of solar energy generated is exported to the grid, with the rest consumed by prosumers during the daytime. If we conservatively estimate that an additional 5,000 MW of PV solar was installed behind the meter over the past year, it would have displaced approximately 7,200 GWh of grid electricity during the day. This also means that nearly 9,942 GWh of grid demand has been displaced due to both net metering and behind-the-meter (BTM) solar generation. These calculations highlight a significant reduction in grid demand during daytime hours.

This dynamic is pushing utilities toward what is described as a "DISCO death spiral," where increasing solar adoption reduces revenue, leading to tariff hikes that further incentivise grid defection. If unchecked, this cycle could result in severe financial instability for electricity providers, ultimately affecting all consumers.

To achieve a sustainable and equitable energy transition, a phased approach is essential, balancing immediate actions with long-term strategies. In the short term, transitioning from net metering to net billing with cost-reflective buyback rates, introducing minimum bills and demand charges to ensure fair grid contributions, and promoting battery storage adoption through incentives will help stabilise the system. Implementing time-of-use tariffs will further align electricity consumption with demand patterns, reducing peak load imbalances.

Over the long term, investments in smart grids, advanced metering, and distributed energy resource integration will enhance grid efficiency and reliability. Dynamic tariff structures, evolving from time-of-use to real-time pricing, will optimise energy use. At the same time, regulatory reforms and public-private partnerships will provide a stable foundation for renewable growth. By combining these measures, policymakers can create a fair and financially viable system.

THE WRITER IS A COMMUNICATIONS PROFESSIONAL, WRITES ABOUT TECHNOLOGY, EDUCATION AND SOCIAL ISSUES