Title: Net Energy Metered PV in Hawaii: Experience and ChallengesAuthor: Marco A. Mangelsdorf, Ph.D. ProVision Technologies, Inc. 69 Railroad Ave., Suite A-7 Hilo, Hawaii 96720 (808) 969-3281, 934-7462 facsimile firstname.lastname@example.org www.provisiontechnologies.com Abstract: In June 2001, Hawaii became the 35th state in the nation to adopt a net energy metering (NEM) law to promote the installation of small (10 kW and less) renewable energy (RE) grid- connected systems across the Hawaiian Islands. What effect has the availability of this law had on the diffusion of NEM photovoltaic (PV) systems in Hawaii? Given the typical abundant sunshine here coupled with consistently high electric utility rates, NEM should be taking off, yet consumer adoption has been slow. What have been the principal impediments to homeowners and businesses going solar electric? While the relatively small number of NEM PV systems installed to date does not allow for definitive conclusions on the ability of the NEM law to achieve its purpose, this initial evaluation will identify what challenges and obstacles exist and make recommendations to overcome them.Net Energy Metered PV in Hawaii: Experience and Challenges1) Introduction • PURPA 1978 • NEM defined2) NEM in Hawaii • Year One Review3) Challenges and Obstacles • Technical • Practical • Financial • Psychological4) Recommendations and ConclusionIntroductionSince the beginning of widespread electrification in the late 1800s to the late 1970s, electric utilitiesenjoyed practical monopoly control over the generation, distribution and sale of power to end-users.Things began to change by 1978, however, when the Public Utility Regulatory Policies Act (PURPA) wasenacted. PURPA assured private power producers of the right to sell excess power to their local utility atthe utility’s “avoided cost” rate. Though utility companies were only required to pay these privateproducers at the wholesale rate for their kilowatt-hours (kWh), PURPA was a critical first step in thecoming of age of photovoltaic (PV) power providers being able to interconnect to the grid.
2Through the 1980s and early 1990s, the cost of PV modules, along with the relative unavailability ofreliable and affordable sinewave inverters, kept the number of utility-interactive renewable energy (RE)systems very low. By the mid-1990s, PV costs had come down enough to encourage more first adoptersto think about putting up a small system to offset a portion of their utility bill. And inverter manufacturerswere getting to the point of mass-producing inverters with a clean enough waveform and adequate safetyfeatures to be acceptable to most utilities. With the combination of lower cost PV equipment and grid-compatible inverters, what was needed was the will to adopt new laws that improved on PURPA, laws thatwould give PV proponents a better value for their solar kWhs.To RE advocates, “net energy metering” (NEM) came about as a key legislative improvement overPURPA. NEM can be defined as the ability of an eligible customer with a RE system to interconnect totheir electric utility and feed surplus kWhs into the grid while being credited at the full retail rate. NEMallows the electric meter to spin forward when electricity flows from the utility to the home or business,and backward when the RE system produces surplus power beyond what is being consumed at any givenmoment, thereby increasing the economic value of RE systems for customers. Since this surplus power iscredited to the NEM system owner’s utility account at the retail kWh rate, this in effect allows the systemowner to use the utility grid to “bank” their energy: producing electricity at one time and consuming it atanother time.While Minnesota was the first state to enact a NEM statute in 1983, net metering, whether implementedby state law, public utility commission order or individual utility tariffs, didn’t really catch on nationallytill the second half of the 1990s. At present, 36 states have a net metering program on the books withCalifornia leading the way with the highest number of NEM PV systems installed to date. Net Metering (Source: The Union of Concerned Scientists, 2002) 25 kW NH: 25 kW ME: 100 kW 50 kW 100 kW 40 kW * 25 kW 20 kW MA: 60 kW 100 kW 10 kW 25 kW RI: 25 kW No limit 10 kW CT: No limit 10 kW No limit NJ: 100kW 40kW * 25 kW 10 kW MD: 80 kW * * 1,000 kW 100 kW 10 kW * * * 50 kW 36 states * IN: 1,000 kWh/month OK: 100 kW and 25,000 kWh VT: 15 kW, 100 kW for anaerobic digesters HI: 10 kW VA: 10 kW (residential);25 kW (commercial) GA: 10 kW (residential); 100 kW (commercial) KT: 10 kW (residential); 25 kW (commercial) AR: 25 kW (residential); 100 kW (commercial or agricultural) NEM across the U.S.
3NEM in HawaiiOf all the fifty states, Hawaii is the most dependent on imported fuels to power its economy with over 90percent of the state’s supply of energy resources coming from the mainland U.S. and several oil-richPacific Rim nations. Consequently, the costs of transportation fuels and utility power in the islands areconsistently among the highest in the country, especially on Kauai and the Big Island. With these highenergy costs and the typical abundant sunshine across much of the state, one would expect that Hawaiiwould have led the way in adopting a net metering program to take advantage of all those solar kWhswaiting to be harvested. After all, Hawaii has been the leader in solar hot water systems installed percapita for decades.This was not the case, however, as attempts in the state legislature to pass a NEM law failed year afteryear in the second half of the 1990s. Success was finally achieved during the 2001 legislative session as amodest net metering bill was passed and signed into law in June.The Hawaii net metering law mandated that grid-connected customers installing approved RE systems(solar, wind, hydro and biomass) of 10 kW alternating current (AC) output or less be permitted to receiveretail credit for surplus kWhs. If at the end of the approximate 30-day billing period the NEM customer’skWh balance is positive, i.e., more power was produced than consumed, the utility is not obligated to paythe customer for these surplus kWhs. In effect, the lowest utility bill the owner of the NEM system canhope for is one with a zero kWh balance and the PUC-approved minimum monthly charge, which variesfrom island to island. As to the limit of RE kW capacity permitted to feed into the grid, the 2001 lawcapped the maximum total of NEM generating capacity in the service territories of Hawaii’s four electricutility companies--Hawaiian Electric Company (HECO), Maui Electric Company (MECO), HawaiiElectric Light Company (HELCO) and Kauai Electric (KE)--at .5 of one percent of each utility’s peakdemand.The other important component of this law was the contentious issue of Renewables Portfolio Standard(RPS). To what degree should the government mandate that utilities increase the percentage of REsources in their generating capacity portfolio? A number of states around the country, including Hawaii,have adopted renewables portfolio targets in an effort to speed the process of promoting RE systems, bothlarge and small. While some Hawaii RE advocates have urged a more ambitious RPS plan, a compromisewas reached on RPS goals for the state’s utilities: seven percent of a utility’s net electricity sales byDecember 31, 2003; eight percent by December 31, 2005; and, nine percent by December 31, 2010. As ofDecember 31, 2001, the percentages of RE sales for Hawaii’s four electric utilities were: HECO 4.4%,MECO 4.3%, HELCO 29% and KE 8%.
4 Renewable Energy Standards (Source: The Union of Concerned Scientists, 2002) IA: 2% by 1999 MN: 3.6% by 2002 and 4.8% by 2012 WI: 2.2% by 2011 ME: 30% by 2000 MA: 4% by 2009 CT: 13% by 2009 NJ: 6.5% by 2012 PA: varies by utility 12 states AZ: 1.1% by 2007, 60% solar NM: 5% of standard offer TX: 2.2% by 2009 NV: 15% by 2013, 5% solar RPS across the U.S.Year One Review--Considering the long struggle that local RE advocates waged to get a NEM law on thebooks, hopes were high that the law would encourage small-scale grid-connected PV systems toproliferate across the state. Hawaii’s electric utility companies, having had adequate notice that NEMwould likely become law, were ready to go with their short, easy-to-understand and complete NEMagreements. And PV vendors and integrators were ready to supply their products and expertise to theexpected onslaught of eager first adopters, only to find the public’s appetite for state-of-the-art utility-interactive PV systems decidedly underwhelming.As of September 2002, only 18 NEM PV systems had been approved, inspected and interconnected in thestate, an average of less than two installed per month since the NEM law was signed in June 2001. (Notethat there may be at least twice that number of net metered PV systems if one counts those home- andbusiness-owners who have installed systems which are still in the approval process and those operating ina “guerilla solar” mode, i.e., those grid-connected RE enthusiasts who oppose registering their PV systemson philosophical or ideological grounds.)
5 Utility No. of NEM Systems Type Application HECO 3 1 battery-based, 2 battery-less All Residential MECO 5 1 battery-based, 4 battery-less 4 Residential 1 Commercial HELCO 4 2 battery-based, 2 battery-less 2 Residential 1 Commercial 1 Res./Comm. KE 6 3 battery-based, 3 battery-less 5 Residential 1 Commercial Hawaii NEM InstallationsOf these 18 installations, seven are battery-based systems and 11 are battery-less. Battery-based systemsgive the RE customer the security of a back-up power supply for a number of circuits in the home orbusiness in case of a utility outage. Battery-less systems, which have been growing in popularity over thelast several years, provide no back-up power in case of power interruptions, but are typically moreefficient and somewhat less expensive.While businesses have much greater financial incentives—as will be discussed later—to install a NEMsystem, only three of the 18 systems were purchased by businesses, 14 by homeowners and one systemwas for a home-based business.How have these systems performed? While some of these installations have only been operating for amatter of months, it is possible to give a very preliminary report on the collective performance of these 18systems. Overall, net metered RE customers have been quite satisfied with the output and reliability oftheir systems. One Big Island customer, whose system has been on-line since December 2001, hasenjoyed net zero kWh bills since early 2002. Three O’ahu customers have been very pleased with theperformance of their systems with one homeowner describing himself as 100 percent satisfied with the“flawless performance” of his system. And NEM customers on Kauai give their PV systems top marks.Clearly, at this rate of NEM systems being installed, the maximum cap for net metered kWs feeding intothe islands’ four utilities is years away from being reached. For example, current NEM capacity is lessthan two percent of the cap on the Big Island and less than four percent on Kauai. Unless the NEM systemsize limit is increased, as is advocated by some in the RE community, it will take decades for these caps tobe reached at the present adoption rate.Challenges and ObstaclesGiven the availability of net metering in the state, the high cost of utility power and the abundantsunshine, why aren’t more consumers going solar electric in Hawaii? To address this questionrequires examining four issue areas that affect the scope and rate of NEM adoption in the state:technical, practical, financial and psychological.Technical—To what degree are there technical impediments to a more rapid diffusion of NEMsystems here? The present availability of standard, high quality PV modules, which typicallycome with manufacturers’ warranties of 20-25 years, has brought PV technologies down fromearth’s orbit to widespread terrestrial applications. With global corporations such as BP Solar,
6Sharp Solar, Shell Solar and Kyocera, among others, investing hundreds of millions of dollars anddeveloping world-distribution networks, the wide variety of PV products allows consumers topurchase a NEM PV system with the confidence that the technology is proven and reliable.Inverter technology and dependability have also made great strides in the past 10 years. Invertermanufacturers have worked closely with Underwriters Laboratory (UL), the Institute of Electricaland Electronics Engineers (IEEE), national laboratories (Sandia and the National RenewableEnergy Laboratories) and utilities to develop common standards and guidelines for the use of grid-synchronous inverters. While not all utilities across the country necessarily abide by thesestandards (e.g., New York) when determining acceptable equipment and procedures for utility-interconnection with PV systems, the large majority of electric utilities accept UL and IEEEinverter guidelines and requirements.In sum, high quality, reliable PV modules and grid-interactive inverters are available and acceptedby utilities, and city and county authorities across the U.S. At present, then, technical obstacles toexpanded NEM PV system adoption have been largely overcome.Practical—When considering whether to purchase a NEM PV system, a potential customer must,at least implicitly, have confidence that 1) system components are readily obtainable, 2)experienced system designers and integrators are available, 3) the process to obtain the necessarypermits from the authority having jurisdiction is in place, and 4) gaining utility approval tointerconnect is not problematic. In Hawaii, all these prerequisites to a system purchase are met.With an adequate number of eager local suppliers and the proliferation of PV equipment availablefrom the Internet, those interested in installing a NEM system need have no concern of findingcompetitively priced PV modules and balance of system components. Finding a knowledgeableand experienced PV system designer and integrator is also no obstacle. On each island there areseasoned PV specialists who possess both technical and practical expertise in NEM design andinstallation. Additionally, according to state law, only licensed electrical contractors may legallyinstall systems (whether on- or off-grid), providing further assurance to the potential NEMcustomer that their system will be professionally designed and installed and perform toexpectations.While there is some variation across Hawaiis counties in what is required to obtain the necessarypermit(s) to install a NEM PV system, all the building departments have procedures in place for theissuance of permits. As system plans and schematics are reviewed and completed installations areinspected, building departments may rely on Article 690 of the National Electric Code (NEC) to providea basis from which to judge proper system design and installation. Moreover, nationallyknown mainland U.S. PV specialists have held a number of workshops for Hawaii building andelectrical inspectors to assure the safety and quality of PV installations.Finally, Hawaiis electric utilities have expended considerable effort in developing straightforward two-to three-page NEM agreements that have reasonable requirements in order to interconnect to the grid.(By contrast, in Pacific Gas and Electric territory in northern California, NEM forms totaling at least 18pages must be completed and submitted along with other accompanying documentation.) As long as theNEM customer submits the completed agreement, hires a licensed electrician using UL-listed
7components and the system passes county inspection, HECO, MECO, HELCO and KE are typicallyquick to approve it for interconnection. So, while some Mainland utilities make it challenging to legallyfeed PV power into their grids, this has not been the case in Hawaii.Financial--The cost of an installed NEM PV system is likely to be in the $5,000 to $100,000 rangedepending on the size of the system. The national average household daily consumption of electricity isabout 19 kWhs. Assuming that a typical Big Island homeowner, whose electric bill averages 19 kWhsper day, wants to purchase a PV system to offset practically all of her utility power consumption, shecould expect to pay approximately $36,000 for an installed four to five kW direct current (DC) system.Factoring in Hawaiis solar tax credit, with a maximum credit of $1,750 for residential applications, andthe dollar savings from much lower electric bills, this system will take more than 20 years to pay itselfoff. (Appendix I) (This simple payback calculation assumes that the energy escalation rate over thelifetime of the system will be the same as the average rate escalation that has occurred over the past 10years.) On Oahu and Maui, where the cost of utility power is typically less than on the Big Island, thispayback period is going to be even longer, while on Kauai its likely to be a bit shorter. Given the largecapital investment needed for a standard NEM PV system and the long payback period for homeowners,it is not surprising that there have been relatively few such purchases made.The above scenario examines the economics of homeowners installing a NEM PV system. The analysisof Hawaii businesses doing the same thing produces very different results. If a business on any of theislands were to install a system the simple payback can be achieved in as few as five to six years. Inaddition to the 35 percent state tax credit, which has no $1,750 cap for businesses, other state and federaltax credits reduce the cost of the system by almost 50 percent. When an accelerated depreciationschedule is applied, the net cost of the system after five years drops to about 15 percent of the originalprice of the system. Adding in the five-year energy savings allows for a complete payback by the end ofthat period, after which the solar kWhs produced over the 25+ lifetime of the system would beessentially free. (This simple payback analysis assumes that no additional taxes will be applied on theenergy savings due resulting from the installation of the NEM PV system.)To highlight the strikingly different economic scenarios of a residential versus commercial NEM PVsystem, an actual system installed last year in Waikoloa Village on the Big Island is an illustrativeexample. This three-kW DC NEM PV system was put up on a home for $22,923. At the presenteffective kWh rate and assuming the past 10-year average annual energy escalation rate continues intothe future, the payback period is estimated to be 22.7 years. (Appendix II) If this same system wereinstalled on a business at the same location for the same cost, the system would pay for itself in less thanfour years. (Appendix III)For those homeowners who have a need for a back-up power supply, the downside of a long paybackperiod may be offset by the security that a battery-based NEM PV system can provide. However, aslong as utility reliability continues to remain above 99 percent and the cost of grid power stays relativelystable, Hawaii homeowners will have little financial incentive to purchase NEM PV systems.Hawaii businesses, by contrast, have more compelling monetary incentives to go solar electric and yetless than five have pursued the NEM PV option, which implies that there are other factors impeding PVadoption in the commercial community.
8Psychological--According to a recent solar market survey carried out by the Renewable EnergyDevelopment Institute (REDI) of California, Big Island businesses and homeowners are "very supportive"of solar energy, with 70 percent of business respondents and 98 percent of homeowners saying that theyhave installed or are considering installing solar energy systems. Translating this strong stated support forsolar energy systems into greater numbers of NEM PV system purchases remains challenging, however,as a substantial gap remains between this strong support in principle and making a commitment to spendtens of thousands of dollars on a grid-connected system.As has been implied above, the typical simple payback period for Hawaii businesses to go solar electricshould serve as a strong incentive to seriously consider a NEM PV system purchase. In fact, according tothose PV suppliers and integrators who have been actively marketing to the commercial community, therehas been moderate to strong interest in NEM PV applications. What has been most often the case, though,is that this interest dissipates after a firm proposal is submitted and it comes time to make a decision. Foralthough there is the widespread perception that the cost of utility power is "relatively high," according tothe REDI survey, this does not translate into a strong enough motivation to seek relief through the NEMPV option.In effect, the status quo of relying on the local utility for 100 percent of ones power needs is relativelypainless to the business owner despite the frequent grumbling over the perceived high cost of electricity.Conversely, the NEM PV option, while attractive from both the environmental and financialperspectives, does not come across as compelling enough to change that status quo. So, while solarelectric suppliers and integrators have a strong motivation to move product, no corresponding sense ofurgency currently exists on the consumer side. In sum, Hawaii businesses and homeowners appear to besatisfied enough with the status quo of relying on utility power so that the alternative of a supplementalNEM PV system is believed to require more effort and expense than the value of the system is perceivedto bring to the purchaser.Recommendations and ConclusionPrior to the mid-1990s, most PV applications across the globe were in the off-grid market. By 1995, grid-connected systems consumed more PV product than off-grid as pro-RE legislation was enacted in severalkey markets (Japan, Germany and the U.S.). In Japan, the government subsidizes grid-connected systemsthrough cash incentives. In Germany, the state developed a special RE feed-in tariff so that PV systemowners receive premium prices for their solar kWhs. In California and in a number of states, thepurchasers of NEM systems receive buy down monies that pay for up to 50 percent of the price of thesystem.In Hawaii, assuming that the cost of a NEM PV system does not dramatically decrease in the near future,additional efforts and measures are likely going to be needed for these systems to proliferate across theislands. Such measures may include: state- and/or utility-supported education programs; increased stateand/or federal tax credits; a state or utility buy down program; premium feed-in tariffs for NEM kWhs;and, financing and other means to mitigate or eliminate the large up-front capital investment needed for asystem purchase.Education--A large-scale effort needs to be undertaken by the state, utilities or other organizations in orderto establish NEM PV systems as a ready-to-go, mainstream option in the minds of those who seek to beless than 100 percent reliant on utility power. With the high visibility of solar water heating panels on
9roofs across the state, many residents and business owners will claim to be familiar with solarapplications, often confusing PV with solar thermal and vice versa. A concerted education effort isneeded to highlight NEM PV system applications as a distinct and available technology that is ready forprime time. The more consumers are able to understand and differentiate between solar thermal andelectric, the more they will understand and appreciate the benefits of the NEM PV option.Tax Credits--Hawaiis solar tax credit is set to expire June 30, 2003. For NEM PV applications to beeconomically viable in the state after that date, an extension of this tax credit will be of criticalimportance. On the national level, there has been bipartisan support for a federal RE tax credit. Given thestates oft-stated need to reduce its dependence on imported fuel sources and a similar need for the U.S. asa whole to be more energy self-sufficient, it is reasonable to assume that state and federal tax creditsencouraging the more rapid proliferation of RE systems will be made available and perhaps evenexpanded.Buy Down Incentives--A growing number of states have instituted programs that pay out utility ratepayermonies or taxpayer dollars to those who install RE NEM systems. The rationale behind this approach isessentially two-fold: to reduce the need to bring new fossil fuel-consuming power plants on line andincrease the percentage of RE in utilities generating portfolios. In states where buy down programs havebeen established, the NEM system adoption rate has been significantly accelerated. In light of theexpected increase in the demand for utility power over time and the difficulties of obtaining regulatoryand public approval for the construction of new conventionally fueled power plants, such a program inHawaii is worthy of serious consideration. The states next governor and legislature can andshould examine this option to encourage more RE generating capacity.NEM Tariffs--While not yet popular in the U.S., establishing a utility rate structure that pays grid-connected system owners premium prices for their RE kWhs has caught on in some European countries.In Germany, for example, such a tariff was established in 2000 to pay those particular utility customers fortheir RE kWhs at a higher rate than they are being charged for purchasing conventionally generatedpower. From a strictly financial perspective, such a pro-RE rate structure is not likely to dramaticallydecrease the simple payback period for the RE system. Such a tariff structure does, however, contribute tocreating a positive set of inducements to consider installing a grid-connected RE system, especially whenit may be combined with tax credits and/or buy downs.Financing, Leasing and Third-Party Ownership—Relatively few homeowners and businesses are likely toeither have the available cash on hand to purchase a NEM PV system or, if they do have the dollars in thebank, are not comfortable in spending their money on such a non-urgent big-ticket investment. Financingthe purchase of the system can help to remove this obstacle. Assuming that the possible NEM PVcustomer is willing to take on the liability of taking out a loan to purchase or lease the system and canqualify for it, this option offers great potential for reducing the perceived burden of coming up with theneeded capital. Ideally, the monthly payment for the loan or lease should be completely offset by theenergy savings produced by the NEM PV system. If the loan is rolled into the original mortgage or into arefinanced mortgage or home improvement loan, a positive cash flow is possible where the average valuefrom the PV kWhs adds up to more than the monthly loan obligation. Finally, there is the recentlydeveloped option of not requiring any direct capital investment or loan/lease obligation for an interestedparty who wants to install a NEM PV system—third-party ownership. In this scenario, a third-partypurchases and owns the system, installs it on a residence or business and sells the solar kWhs to that
10homeowner or business at a reduced and/or constant rate over time. At the end of the term of the powerpurchase agreement, the homeowner or business can enter into a new agreement or opt to buy the systemfor its residual value, which would typically be a small fraction of the original purchase price. This optionessentially removes all liability—both financial and system performance questions—from the homeowneror business and offers the real promise of making going grid-connected solar electric as risk-free aspossible.Successive gubernatorial administrations and legislatures in Honolulu in cooperation with Hawaiis REsupporters, electric utilities and consumers have achieved notable success in the widespread acceptanceand adoption of solar water heating applications. While a typical NEM PV system is a larger investmentthan a solar thermal installation, there is no reason to believe that an equally cooperative strategy topromote NEM PV will not achieve similar impressive results. Putting the pieces of this ambitious strategyin place will require a considerable collaborative effort from the state, PV professionals, utilities and thefinancial community. The alternative to this effort, however, is seeing Hawaiis energy future continue tobe precariously dependent on imported fuels for the vast majority of its electricity needs especially whenthe countless roofs of our homes and businesses offer the space needed for thousands of NEM PV systemsand a means toward greater energy security and a cleaner environment.