Solar energy: the FTC’s next target

solar energy industryEvery few months, the FTC hosts a workshop that raises issues of competition and consumer protection within a particular industry.  Generally, following these workshops, the FTC begins to pursue actions against companies focused on by the earlier workshop.  It is almost as if the FTC’s workshops serve as a warning that the FTC is about to come down on those businesses discussed by the workshop.  The latest of the FTC’s workshops is being held today.  Today’s workshop is related to competition and consumer protection issues in the solar energy industry.

“Something New Under the Sun”

The workshop, “Something New Under the Sun,” is intended to “explore competition and consumer protection issues that may arise when consumers generate their own electric power by installing home solar photovoltaic (PV) panels – a practice known as solar distributed generation (DG).”  Specifically, the workshop will hold panel discussions on four discrete topics, including: 1) the current state of the solar power industry, and anticipated technological advancements; 2) current regulatory approaches to compensating consumers for the power they generate, with a particular focus on net metering laws and regulations; 3) competition among solar DG firms, between solar DG firms and regulated utilities, and between solar generation and other power generation technologies; and 4) consumer protection issues, including how consumers get the information necessary to decide whether to install solar PV panels.

FTC Issues Discussion Paper in Conjunction with Workshop on Solar Energy Industry

In conjunction with the workshop on solar energy, the FTC released a discussion paper on a number of issues as it relates to solar energy.  Included in those issues raised by the FTC are: the current state of the solar industry, net metering, competition issues, and consumer protection issues.  While the main thrust of the discussion paper is aimed at determining the correct rate for net metering, the paper also discusses consumer protection issues, like costs, benefits, and uncertainties associated with installing solar energy systems on a property.

What is Net Metering?

As the FTC has acknowledged, “Determining the correct rate for net metering is a complex issue.”  To better understand this “complex” issue, it is important to understand some basics about solar energy systems and net metering.  Under a net metering system, consumers who install their own solar energy system receive a credit for power they produce but do not consume.  The excess electricity produced by the consumer’s solar energy system is transferred into the power grid for sale to other consumers, and the owners of the solar energy systems receive a credit for the excess power, paying only for their “net” electricity consumption.

However, because solar energy consumers remain connected to the power grid as insurance against losing power during periods where their solar energy system is not able to generate enough power, they may not be shouldering enough of the financial load as it relates to the overall grid.  As a result, net metering may be shifting too much of the financial burden regarding the fixed costs of the overall grid to consumers who consumer electricity generally.

The Net Metering Debate

The net metering debate has focused on the issue of whether it is the retail price of electricity (including transmission, distribution and other costs) or the wholesale price that should be paid as the net metering credit.  Thus, the question for the FTC is whether a regulated retail rate, which allows utility companies to recover both fixed and variable costs, is proper, or whether the utility should pay the consumer the actual retail or wholesale rate.

Differing Theories of Compensation

The FTC summarized the debate between the differing theories of compensation as follows:

Some view regulated retail rates as designed primarily to allow the utility to recover both fixed and variable costs, which helps to ensure the continuing viability of the utility.  In this view, compensating solar DG customers at the retail rate allows these customers to avoid paying an appropriate share of the fixed costs of a system that was built to serve them, shifting these costs to customers who have not installed solar PV panels.  Proponents of this view argue that the price utilities pay for solar DG should be closer to the (typically lower) price utilities pay for most other types of generation on the wholesale market.

Others argue that the utility should pay for customer-installed solar DG at the retail rate, because solar DG enables the utility to avoid more costs than it incurs.  In their view, to the extent that peak periods of solar generation coincide with periods of high overall demand, solar DG will reduce the utility’s need to invest in generation.  Moreover, some argue that by placing some of the generation closer to the point of consumption, solar DG may reduce the utility’s need to invest in transmission or distribution facilities.  Thus, because solar DG results in avoided costs for the utility, the correct price for solar DG ought to reflect the value of those avoided costs.

Government Incentives for Solar Energy?

The FTC also set forth that:

Some also suggest the government should incentivize consumers to install solar PV panels by factoring the environmental benefits of solar power into ratemaking decisions.  For example, because solar-generated electric power does not create the same pollution or other externalities as carbon-based sources of electric power, compensating solar customers at or above the retail rate may be a way to achieve desirable environmental objectives.

Regulated Retail Rates May Reduce Competition

The issue of how to compensate consumers for their excess solar energy is further complicated by the fact that the retail price for solar energy in most places is set by regulation, not the market.  In those places that do not use a variable retail rate, the regulated retail does not always reflect the often-variable prices for wholesale electricity purchased for resale to retail consumers.  If, during certain periods of time, the regulated retail rate does not reflect the variable wholesale price of electricity, then consumers will likely not be incentivized to install solar energy systems on their properties.  Additionally, the lack of accurate retail price signals may affect entry decisions by solar DG firms, which in turn would affect overall competition in the power industry.

Consumer Protection Issues Raised by the Solar Energy Industry

Beyond the issues of competition, the solar industry also presents consumer protection issues.  While the overall costs associated with installing a solar energy system continues to decrease, it remains a significant capital expenditure that may take years to pay off.  In recent years, a number of companies, non-profits, and public utilities have sought to expand consumers’ access to home solar through various financing, leasing, or power purchase agreements.  According to the FTC:

It is critical to ensure that customers have accurate information about the costs, benefits, and uncertainties associated with installing solar PV panels on their properties. One important component of this information is what customers know (or can possibly know) about potential changes in the compensation for the solar electricity they generate as determined by regulatory and legislative decisions.

Where Competition Meets Consumer Protection

As set forth above, the solar energy industry presents an interesting amalgamation of competition and consumer protection issues.  On the one hand, consumers choosing to install costly solar energy systems may be under-compensated for their contributions to the overall power grid, but those same consumers may not be contributing enough in costs towards the overall power grid to maintain the grid in the future.  On the other hand, you have solar energy providers that may be deterred by regulated retail rates, and, as a result, it is important to make sure those businesses are giving accurate information to consumers when negotiating the buying and selling of solar energy systems.

Thus, solar energy systems’ businesses need to be cognizant of their relevant utility market, understanding whether their relevant jurisdiction engages in net metering, and whether consumers are compensated for the excess power they produce at a regulated retail rate (static) vs. the actual retail or wholesale rate (variable).  By understanding the rate at which consumers are credited for their excess power, solar energy providers can better inform consumers regarding the potential changes that a consumer can expect to their compensation for the electricity they produce, including information about regulatory and legislative decisions determining that compensation.  Additionally, consumers will need to be instructed on the significant up-front costs associated with installing a solar energy system, and the associated benefits and disadvantages associated with solar energy.

Contact our FTC Law Team Today

If you or someone you know is engaged is the solar energy industry, please contact our FTC law team for a consultation regarding both your competition and consumer protection issue needs.  As noted, the FTC’s workshop on solar energy likely signals that the FTC will give a unique focus to the solar industry.  As a result, solar companies will need to be aware of changes to compensation rates for consumers producing solar energy, as well as any guidance provided by the FTC regarding best practices for advertising and selling solar energy systems to consumers.  Contact our FTC law team via email (kporter@chrisjen.com), by phone (801-323-5000, or 801-386-6621 after hours/text), or through our contact form.

* Photo Cred.: sites.psu.edu

Copyright 2016