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Subsidies and Cost Shifting Won’t Power Maine’s Economy

May 12, 2016 Posted by John Eick and Joe Horvath - No Comments

Anyone remotely familiar with Maine’s economy knows it’s at a crossroads. Between 2004 and 2014, its cumulative economic growth ranks 49 out of the 50 states, a mere 21.8 percent. Non-farm payroll employment has shrunk 1.2 percent over the same period, placing Maine’s employment growth at 48 in the nation. An economic resurgence is clearly needed, and state legislators have two options. They can loosen the reins holding back growth, or try to pick winners and predict market trends.

Recent history, especially in the Northeast, shows that reducing tax and regulatory burdens on businesses, individuals and investors leads to widespread economic opportunity. Distributing crony carve-outs, on the other hand, routinely fails to spur growth. With his recent veto of a “net metering” bill sustained by a House vote, Governor Paul LePage may have provided an opportunity for the rooftop solar industry to become fully self-sufficient, albeit by placing a small hurdle in its way.

An energy issue of increasing economic consequence, net metering has recently seen significant activity in states across the nation. For the uninitiated, net metering is a billing system whereby electric customers with rooftop solar or other small-scale, on-site distributed generation (DG) systems can obtain credit for any surplus power they may generate. The federal Energy Policy Act of 2005 mandates all public utilities offer net metering services to their customers upon request and 44 states currently maintain net metering programs, including Maine.

From a free market perspective, electric customers who value and can afford DG technologies should be free to install these systems on their homes or businesses. At the same time, however, these customers should pay for all costs associated with their decision without shifting financial burdens onto non-DG customers. Embedded in the retail rate of one unit of electricity is not just the cost to generate electricity, but also the cost to build and maintain the transmission and distribution infrastructure (i.e., the electric grid) necessary to deliver electricity to homes and businesses. When DG customers are reimbursed at the full retail rate for any surplus electricity generated, they in effect avoid having to pay for these services.

In addition to the infrastructure costs, there are other balancing and backup services unique to DG and net metering that must be accounted for. Americans have the perfectly reasonable expectation that when they flip a light switch, lights will come on. However, given the intermittent nature of solar and most other renewable sources, utilities must continuously monitor the amount of electricity generated by a rooftop solar customer and instantaneously supplant any gaps with electricity from the grid. Using data provided by the U.S. Energy Information Administration (EIA), the Edison Foundation’s Institute for Energy Innovation estimates DG customers shift roughly $60 in non-energy grid services to non-DG customers each month.

States should consider relatively modest reforms (e.g., a monthly grid hookup charge, reimbursement at the avoided cost rate, etc.) requiring customers who use services provided by the electric grid to pay for those services. Doing so would ensure fairness and provide all electric customers with greater transparency.

Earlier this year, the Maine State Legislature considered a bill that would replace the state’s retail net metering program with a new purportedly market-based incentives system. Under the proposal, the state’s utilities would purchase and aggregate the solar electricity generated from DG customers and utility-scale providers alike. The utilities would then bid this electricity into New England electricity markets where it could be used by electric customers. Other subsidies and incentives for rooftop solar would then decrease over time as market penetration increased.

Citing cost concerns and after negotiations with legislative leaders failed, Governor LePage vetoed the bill. The governor specifically sought to cap the amount money reimbursed to solar customers for their surplus electricity to guard against significant electricity price increases. The Maine Public Utilities Commission (MPUC) estimated that the legislation would cost ratepayers around $22 million in aggregate annually, and Maine’s general fund itself would incur $200,000 of costs in the first year of enactment and $263,000 in 2019. These costs, while not unmanageable, are unfairly placed on consumers and taxpayers to support a particular industry that, if demand were as high as some say, would be able to support itself.

“The solar industry itself admits that the average ratepayer would see an increase of around 31 cents per month,” Krysta Lilly of the Maine Heritage Policy Center recently wrote. “That doesn’t sound too bad until you consider that for large electric consumers (and employers) such as Sappi, Bath Iron Works and Fairchild, this ‘modest increase’ could be in the hundreds of thousands of dollars each month.”

Despite fairly widespread support in-state, the Maine House of Representatives was unable to muster enough support to override the veto. MPUC will now be forced to address the issue, given that rooftop solar is nearing caps limiting the current net metering program to 1 percent of peak load. MPUC will now have the opportunity to redesign the state’s net metering program in a way that accounts for the cost-shift. This could very well mean striking a balance, allowing new and innovative technology to spread without placing an undue burden on Maine taxpayers and businesses.

Subsidizing a single industry and a small group of consumers at taxpayer expense will not help Maine grow its gross state product or improve employment. If Maine policymakers want the state to be economically competitive like nearby New Hampshire and Massachusetts, then a good start would be to cease attempting to manipulate the market. Instead, Maine government should allow freer competition and let informed consumers make their own choices.