1) Net energy metering (NEM) laws allow homeowners and businesses with renewable energy systems to sell excess electricity back to the grid and be credited at the retail electricity rate. 2) In Hawaii, NEM was adopted in 2001 but adoption has been slow, with only 18 NEM PV systems installed as of 2002 despite abundant sunshine and high electricity costs. 3) Barriers to greater adoption include financial challenges like high upfront costs, as well as psychological factors, while technical and practical barriers have been largely overcome.

1. Title: Net Energy Metered PV in Hawaii: Experience and Challenges
Author: Marco A. Mangelsdorf, Ph.D.
ProVision Technologies, Inc.
69 Railroad Ave., Suite A-7
Hilo, Hawaii 96720
(808) 969-3281, 934-7462 facsimile
mmangelsdorf@hei.com
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 Challenges
1) Introduction
• PURPA 1978
• NEM defined
2) NEM in Hawaii
• Year One Review
3) Challenges and Obstacles
• Technical
• Practical
• Financial
• Psychological
4) Recommendations and Conclusion
Introduction
Since the beginning of widespread electrification in the late 1800s to the late 1970s, electric utilities
enjoyed 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) was
enacted. PURPA assured private power producers of the right to sell excess power to their local utility at
the utility’s “avoided cost” rate. Though utility companies were only required to pay these private
producers at the wholesale rate for their kilowatt-hours (kWh), PURPA was a critical first step in the
coming of age of photovoltaic (PV) power providers being able to interconnect to the grid.

2. 2
Through the 1980s and early 1990s, the cost of PV modules, along with the relative unavailability of
reliable 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 adopters
to think about putting up a small system to offset a portion of their utility bill. And inverter manufacturers
were getting to the point of mass-producing inverters with a clean enough waveform and adequate safety
features 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 that
would give PV proponents a better value for their solar kWhs.
To RE advocates, “net energy metering” (NEM) came about as a key legislative improvement over
PURPA. NEM can be defined as the ability of an eligible customer with a RE system to interconnect to
their electric utility and feed surplus kWhs into the grid while being credited at the full retail rate. NEM
allows 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 given
moment, thereby increasing the economic value of RE systems for customers. Since this surplus power is
credited to the NEM system owner’s utility account at the retail kWh rate, this in effect allows the system
owner to use the utility grid to “bank” their energy: producing electricity at one time and consuming it at
another time.
While Minnesota was the first state to enact a NEM statute in 1983, net metering, whether implemented
by state law, public utility commission order or individual utility tariffs, didn’t really catch on nationally
till the second half of the 1990s. At present, 36 states have a net metering program on the books with
California 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.

3. 3
NEM in Hawaii
Of all the fifty states, Hawaii is the most dependent on imported fuels to power its economy with over 90
percent of the state’s supply of energy resources coming from the mainland U.S. and several oil-rich
Pacific Rim nations. Consequently, the costs of transportation fuels and utility power in the islands are
consistently among the highest in the country, especially on Kauai and the Big Island. With these high
energy costs and the typical abundant sunshine across much of the state, one would expect that Hawaii
would have led the way in adopting a net metering program to take advantage of all those solar kWhs
waiting to be harvested. After all, Hawaii has been the leader in solar hot water systems installed per
capita for decades.
This was not the case, however, as attempts in the state legislature to pass a NEM law failed year after
year in the second half of the 1990s. Success was finally achieved during the 2001 legislative session as a
modest 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 receive
retail credit for surplus kWhs. If at the end of the approximate 30-day billing period the NEM customer’s
kWh balance is positive, i.e., more power was produced than consumed, the utility is not obligated to pay
the customer for these surplus kWhs. In effect, the lowest utility bill the owner of the NEM system can
hope for is one with a zero kWh balance and the PUC-approved minimum monthly charge, which varies
from island to island. As to the limit of RE kW capacity permitted to feed into the grid, the 2001 law
capped the maximum total of NEM generating capacity in the service territories of Hawaii’s four electric
utility companies--Hawaiian Electric Company (HECO), Maui Electric Company (MECO), Hawaii
Electric Light Company (HELCO) and Kauai Electric (KE)--at .5 of one percent of each utility’s peak
demand.
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 RE
sources 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, both
large and small. While some Hawaii RE advocates have urged a more ambitious RPS plan, a compromise
was reached on RPS goals for the state’s utilities: seven percent of a utility’s net electricity sales by
December 31, 2003; eight percent by December 31, 2005; and, nine percent by December 31, 2010. As of
December 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. 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 the
books, hopes were high that the law would encourage small-scale grid-connected PV systems to
proliferate across the state. Hawaii’s electric utility companies, having had adequate notice that NEM
would likely become law, were ready to go with their short, easy-to-understand and complete NEM
agreements. And PV vendors and integrators were ready to supply their products and expertise to the
expected 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 the
state, an average of less than two installed per month since the NEM law was signed in June 2001. (Note
that there may be at least twice that number of net metered PV systems if one counts those home- and
business-owners who have installed systems which are still in the approval process and those operating in
a “guerilla solar” mode, i.e., those grid-connected RE enthusiasts who oppose registering their PV systems
on philosophical or ideological grounds.)

5. 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 Installations
Of these 18 installations, seven are battery-based systems and 11 are battery-less. Battery-based systems
give the RE customer the security of a back-up power supply for a number of circuits in the home or
business in case of a utility outage. Battery-less systems, which have been growing in popularity over the
last several years, provide no back-up power in case of power interruptions, but are typically more
efficient and somewhat less expensive.
While businesses have much greater financial incentives—as will be discussed later—to install a NEM
system, only three of the 18 systems were purchased by businesses, 14 by homeowners and one system
was for a home-based business.
How have these systems performed? While some of these installations have only been operating for a
matter of months, it is possible to give a very preliminary report on the collective performance of these 18
systems. Overall, net metered RE customers have been quite satisfied with the output and reliability of
their systems. One Big Island customer, whose system has been on-line since December 2001, has
enjoyed net zero kWh bills since early 2002. Three O’ahu customers have been very pleased with the
performance 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 into
the islands’ four utilities is years away from being reached. For example, current NEM capacity is less
than two percent of the cap on the Big Island and less than four percent on Kauai. Unless the NEM system
size limit is increased, as is advocated by some in the RE community, it will take decades for these caps to
be reached at the present adoption rate.
Challenges and Obstacles
Given the availability of net metering in the state, the high cost of utility power and the abundant
sunshine, why aren’t more consumers going solar electric in Hawaii? To address this question
requires 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 NEM
systems here? The present availability of standard, high quality PV modules, which typically
come with manufacturers’ warranties of 20-25 years, has brought PV technologies down from
earth’s orbit to widespread terrestrial applications. With global corporations such as BP Solar,

6. 6
Sharp Solar, Shell Solar and Kyocera, among others, investing hundreds of millions of dollars and
developing world-distribution networks, the wide variety of PV products allows consumers to
purchase 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. Inverter
manufacturers have worked closely with Underwriters Laboratory (UL), the Institute of Electrical
and Electronics Engineers (IEEE), national laboratories (Sandia and the National Renewable
Energy 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 these
standards (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 IEEE
inverter guidelines and requirements.
In sum, high quality, reliable PV modules and grid-interactive inverters are available and accepted
by utilities, and city and county authorities across the U.S. At present, then, technical obstacles to
expanded 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 necessary
permits from the authority having jurisdiction is in place, and 4) gaining utility approval to
interconnect 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 available
from the Internet, those interested in installing a NEM system need have no concern of finding
competitively priced PV modules and balance of system components. Finding a knowledgeable
and experienced PV system designer and integrator is also no obstacle. On each island there are
seasoned PV specialists who possess both technical and practical expertise in NEM design and
installation. Additionally, according to state law, only licensed electrical contractors may legally
install systems (whether on- or off-grid), providing further assurance to the potential NEM
customer that their system will be professionally designed and installed and perform to
expectations.
While there is some variation across Hawaii's counties in what is required to obtain the necessary
permit(s) to install a NEM PV system, all the building departments have procedures in place for the
issuance of permits. As system plans and schematics are reviewed and completed installations are
inspected, building departments may rely on Article 690 of the National Electric Code (NEC) to provide
a basis from which to judge proper system design and installation. Moreover, nationally
known mainland U.S. PV specialists have held a number of workshops for Hawaii building and
electrical inspectors to assure the safety and quality of PV installations.
Finally, Hawaii's 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 18
pages must be completed and submitted along with other accompanying documentation.) As long as the
NEM customer submits the completed agreement, hires a licensed electrician using UL-listed

7. 7
components and the system passes county inspection, HECO, MECO, HELCO and KE are typically
quick to approve it for interconnection. So, while some Mainland utilities make it challenging to legally
feed 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 range
depending on the size of the system. The national average household daily consumption of electricity is
about 19 kWhs. Assuming that a typical Big Island homeowner, whose electric bill averages 19 kWhs
per day, wants to purchase a PV system to offset practically all of her utility power consumption, she
could expect to pay approximately $36,000 for an installed four to five kW direct current (DC) system.
Factoring in Hawaii's solar tax credit, with a maximum credit of $1,750 for residential applications, and
the dollar savings from much lower electric bills, this system will take more than 20 years to pay itself
off. (Appendix I) (This simple payback calculation assumes that the energy escalation rate over the
lifetime of the system will be the same as the average rate escalation that has occurred over the past 10
years.) On Oahu and Maui, where the cost of utility power is typically less than on the Big Island, this
payback period is going to be even longer, while on Kauai it's likely to be a bit shorter. Given the large
capital 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 analysis
of Hawaii businesses doing the same thing produces very different results. If a business on any of the
islands were to install a system the simple payback can be achieved in as few as five to six years. In
addition to the 35 percent state tax credit, which has no $1,750 cap for businesses, other state and federal
tax credits reduce the cost of the system by almost 50 percent. When an accelerated depreciation
schedule is applied, the net cost of the system after five years drops to about 15 percent of the original
price of the system. Adding in the five-year energy savings allows for a complete payback by the end of
that period, after which the solar kWhs produced over the 25+ lifetime of the system would be
essentially free. (This simple payback analysis assumes that no additional taxes will be applied on the
energy savings due resulting from the installation of the NEM PV system.)
To highlight the strikingly different economic scenarios of a residential versus commercial NEM PV
system, an actual system installed last year in Waikoloa Village on the Big Island is an illustrative
example. This three-kW DC NEM PV system was put up on a home for $22,923. At the present
effective kWh rate and assuming the past 10-year average annual energy escalation rate continues into
the future, the payback period is estimated to be 22.7 years. (Appendix II) If this same system were
installed on a business at the same location for the same cost, the system would pay for itself in less than
four years. (Appendix III)
For those homeowners who have a need for a back-up power supply, the downside of a long payback
period may be offset by the security that a battery-based NEM PV system can provide. However, as
long as utility reliability continues to remain above 99 percent and the cost of grid power stays relatively
stable, 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 yet
less than five have pursued the NEM PV option, which implies that there are other factors impeding PV
adoption in the commercial community.

8. 8
Psychological--According to a recent solar market survey carried out by the Renewable Energy
Development 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 they
have installed or are considering installing solar energy systems. Translating this strong stated support for
solar 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 spend
tens 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 electric
should serve as a strong incentive to seriously consider a NEM PV system purchase. In fact, according to
those PV suppliers and integrators who have been actively marketing to the commercial community, there
has 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. For
although there is the widespread perception that the cost of utility power is "relatively high," according to
the REDI survey, this does not translate into a strong enough motivation to seek relief through the NEM
PV option.
In effect, the status quo of relying on the local utility for 100 percent of one's power needs is relatively
painless 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 financial
perspectives, does not come across as compelling enough to change that status quo. So, while solar
electric suppliers and integrators have a strong motivation to move product, no corresponding sense of
urgency currently exists on the consumer side. In sum, Hawaii businesses and homeowners appear to be
satisfied enough with the status quo of relying on utility power so that the alternative of a supplemental
NEM PV system is believed to require more effort and expense than the value of the system is perceived
to bring to the purchaser.
Recommendations and Conclusion
Prior 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 several
key markets (Japan, Germany and the U.S.). In Japan, the government subsidizes grid-connected systems
through cash incentives. In Germany, the state developed a special RE feed-in tariff so that PV system
owners receive premium prices for their solar kWhs. In California and in a number of states, the
purchasers of NEM systems receive buy down monies that pay for up to 50 percent of the price of the
system.
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 the
islands. Such measures may include: state- and/or utility-supported education programs; increased state
and/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 a
system purchase.
Education--A large-scale effort needs to be undertaken by the state, utilities or other organizations in order
to establish NEM PV systems as a ready-to-go, mainstream option in the minds of those who seek to be
less than 100 percent reliant on utility power. With the high visibility of solar water heating panels on

9. 9
roofs across the state, many residents and business owners will claim to be familiar with solar
applications, often confusing PV with solar thermal and vice versa. A concerted education effort is
needed to highlight NEM PV system applications as a distinct and available technology that is ready for
prime time. The more consumers are able to understand and differentiate between solar thermal and
electric, the more they will understand and appreciate the benefits of the NEM PV option.
Tax Credits--Hawaii's solar tax credit is set to expire June 30, 2003. For NEM PV applications to be
economically viable in the state after that date, an extension of this tax credit will be of critical
importance. On the national level, there has been bipartisan support for a federal RE tax credit. Given the
state's oft-stated need to reduce its dependence on imported fuel sources and a similar need for the U.S. as
a whole to be more energy self-sufficient, it is reasonable to assume that state and federal tax credits
encouraging the more rapid proliferation of RE systems will be made available and perhaps even
expanded.
Buy Down Incentives--A growing number of states have instituted programs that pay out utility ratepayer
monies or taxpayer dollars to those who install RE NEM systems. The rationale behind this approach is
essentially two-fold: to reduce the need to bring new fossil fuel-consuming power plants on line and
increase the percentage of RE in utilities' generating portfolios. In states where buy down programs have
been established, the NEM system adoption rate has been significantly accelerated. In light of the
expected increase in the demand for utility power over time and the difficulties of obtaining regulatory
and public approval for the construction of new conventionally fueled power plants, such a program in
Hawaii is worthy of serious consideration. The state's next governor and legislature can and
should 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 for
their RE kWhs at a higher rate than they are being charged for purchasing conventionally generated
power. From a strictly financial perspective, such a pro-RE rate structure is not likely to dramatically
decrease the simple payback period for the RE system. Such a tariff structure does, however, contribute to
creating a positive set of inducements to consider installing a grid-connected RE system, especially when
it may be combined with tax credits and/or buy downs.
Financing, Leasing and Third-Party Ownership—Relatively few homeowners and businesses are likely to
either have the available cash on hand to purchase a NEM PV system or, if they do have the dollars in the
bank, are not comfortable in spending their money on such a non-urgent big-ticket investment. Financing
the purchase of the system can help to remove this obstacle. Assuming that the possible NEM PV
customer is willing to take on the liability of taking out a loan to purchase or lease the system and can
qualify for it, this option offers great potential for reducing the perceived burden of coming up with the
needed capital. Ideally, the monthly payment for the loan or lease should be completely offset by the
energy savings produced by the NEM PV system. If the loan is rolled into the original mortgage or into a
refinanced mortgage or home improvement loan, a positive cash flow is possible where the average value
from the PV kWhs adds up to more than the monthly loan obligation. Finally, there is the recently
developed option of not requiring any direct capital investment or loan/lease obligation for an interested
party who wants to install a NEM PV system—third-party ownership. In this scenario, a third-party
purchases and owns the system, installs it on a residence or business and sells the solar kWhs to that

10. 10
homeowner or business at a reduced and/or constant rate over time. At the end of the term of the power
purchase agreement, the homeowner or business can enter into a new agreement or opt to buy the system
for its residual value, which would typically be a small fraction of the original purchase price. This option
essentially removes all liability—both financial and system performance questions—from the homeowner
or business and offers the real promise of making going grid-connected solar electric as risk-free as
possible.
Successive gubernatorial administrations and legislatures in Honolulu in cooperation with Hawaii's RE
supporters, electric utilities and consumers have achieved notable success in the widespread acceptance
and adoption of solar water heating applications. While a typical NEM PV system is a larger investment
than a solar thermal installation, there is no reason to believe that an equally cooperative strategy to
promote NEM PV will not achieve similar impressive results. Putting the pieces of this ambitious strategy
in place will require a considerable collaborative effort from the state, PV professionals, utilities and the
financial community. The alternative to this effort, however, is seeing Hawaii's energy future continue to
be precariously dependent on imported fuels for the vast majority of its electricity needs especially when
the countless roofs of our homes and businesses offer the space needed for thousands of NEM PV systems
and a means toward greater energy security and a cleaner environment.