Following the previous article, which discussed the RPS, FiT and FiP systems and their relationship with the front-of-the-meter (FTM) and behind-the-meter (BTM) storage, this article will detail the impact of net metering, seasonal pricing, and two-stage as well as three-stage pricing on the development of the energy storage market.
Net metering allows users to sell excess green electricity to the grid at the market price. The resulting electricity after subtracting the users’ consumed electricity from the electricity exported to the grid is called net consumption, which can be paid at the market price. Such mechanism mostly applies to small-scale solar or wind energy generation facilities on the user side. Since net metering requires two-way transport of electricity, it is more prevalent in Europe and the United States where two-way meters are widely used. In addition, the mechanism does not require a contract but only payment for the connection to the grid, which is a simpler way of metering. As of January 2022, 38 states in the U.S. have adopted a net metering scheme. However, the regulation varies from region to region, such as the availability of a full deduction, the amount of deduction should be based on the retail or wholesale price, and the distance from the meter installation. The implementation may vary regionally even for the same company due to the difference in rates. According to statistics from the Solar Energy Industries Association (SEIA), users sell an average of 20% to 40% of solar power back to the grid, while the rest is for their own use.
Although net metering is used by consumers, there is limited room for arbitrage since the rate of feed-in tariff is close to the general electricity price, with no additional subsidies provided. In addition, it is difficult for individual users to negotiate prices with electricity companies, so this method is adopted primarily by users who are financially capable. Although those who install solar panels are eligible for discounts on electricity, grid maintenance costs are actually passed on to consumers. The U.S. Department of Public Utilities (DPU) estimates that there is about US$3.4 billion of cost pass-through for grid maintenance each year. As a result, the California Public Utilities Commission (CPUC) planned to reduce the electricity price sold back to the grid from the range of US$0.17/kWh to US$0.44/kWh to the range of US$0.03/kWh to US$0.04/kWh, with an additional monthly maintenance fee of US$8/kW, by the end of 2021. This is to encourage self-consumption by households, and theoretically, the willingness to install energy storage should also rise. However, the plan is unable to stimulate installations due to a lack of additional subsidy.
Time-of-Use (TOU) metering includes the seasonal pricing and TOU metering. Seasonal pricing sets higher rates during seasons with high demand and lower rates during seasons with lower demand. If combining such a pricing method with net metering, excess electricity from solar energy could be returned to the grid during summer when electricity consumption is at its peak and can be used to offset electricity bills of summer and even fall. However, this cannot be applied in all regions because the net metering policy is inconsistent across the world, thus making the TOU metering more favored.
Electricity can be charged at two-stage or three-stage rate under TOU. California, for example, started implementing both TOU and seasonal pricing in 2018, with a higher rate from June to September, when electricity consumption peaks in the region, followed by October to May of the next year. For household electricity consumption, the rate is US$0.45/kWh for the summer peak between 2pm and 8pm on weekdays, and US$0.13/kWh during the off-peak hours between 10pm and 8am the next day, and US$0.28/kWh for the rest of the year. During the summer holidays, a two-stage pricing is used, with a peak rate of $0.28/kWh from 8am to 10pm and a off-peak rate of $0.13/kWh from 10pm to 8am the next day.
Figure 1: Electricity pricing for households in California
Through TOU, customers can save electricity generated during off-peak hours and use it during peak hours to save electricity costs and increase the self-consumption rate. TOU can also be combined with net metering to store the extra electricity generated during off-peak hours and sell it during peak hours to profit. Figure 1 shows that the three-stage TOU is a better arbitrage than the two-stage TOU due to its significantly higher rates during peak hours and diverse ways to profit. This indicates that TOU is conducive to energy storage installation. However, similar to net metering, there is little incentive to install BTM-residential energy storage for households because no subsidies are provided, but it is still attractive for FTM and BTM-C&I with high electricity demand and BTM residential sector with certain financial ability.
Table 1. Electricity pricing system and installed energy storage capacity in the United States, China, Germany, and Japan
Development of FTM and BTM storage under different systems
Table 1 shows the differences between the major electricity systems implemented in the United States, China, Germany, and Japan. Driven by the RPS, the share of renewable energy in the U.S. is increasing year by year, thus driving up demand for FTM storage. In addition, most states in the U.S. have implemented net metering and the feed-in tariff scheme, which, coupled with TOU and other supportive policies, boosts the installed capacity of BTM storage as tariff decreases gradually. In China, the development of BTM residential storage is limited compared to FTM due to cheap electricity prices, whereas BTM-C&I can profit through TOU. Currently, each province has introduced a policy that mandate energy storage deployment, which makes the FTM storage development considerable.
In Germany and Japan, which introduced FiT and FiP systems earlier than other regions, saw energy storage systems bringing economic benefits along with the gradual decrease in tariff rates of the pricing systems. Driven by policies, BTM storage has indeed flourished.
Although national or local pricing systems play an important role in the energy storage installation, the incentive policy and subsidies are still the biggest driver. Especially for users with fewer capital, subsidy is more attractive than the high rate of return at the beginning of energy storage development. Therefore, pricing system, albeit not the main factor driving energy storage installation, remains one of the drivers that facilitates energy storage development.