Former Net Metering Program – By The Numbers
November 04, 2019
- The annual $54 million cost of the Net Metering Program by 2025 was calculated by identifying the shortfall in revenues that SaskPower receives from net metering customers compared to the cost of serving those customers.
- The basic monthly charge does not cover the fixed costs associated with operating and maintaining the infrastructure to generate, transmit and distribute energy to customers.
- SaskPower estimated that the program would grow at a pace of 50 per cent year over year. The projection was based on the growth in net metering customers over the past 2 years.
This past October, SaskPower revised its former Net Metering Program to keep annual costs from ballooning to $54 million by 2025. It’s a big number. To help us break things down, we sat down with Troy King, Vice President of Finance and Chief Financial Officer.
How did you calculate that the previous version of the program would cost SaskPower $54 million annually in potential net income by 2025?
SaskPower needs to earn a certain amount of revenue on an annual basis to cover the cost of providing electrical service to our customers. These costs include things such as fuel & purchased power, wages and salaries, depreciation and finance charges.
As revenues from net metering customers decline because they use less electricity provided by our company, SaskPower is only able to avoid fuel & purchased power expenses and carbon tax charges. The remaining costs are unchanged as SaskPower has to maintain the same infrastructure to generate, transmit and distribute electricity to our net metering customers when the sun isn’t shining and they need to use electricity from our grid.
The annual $54 million cost of the Net Metering Program by 2025 was calculated by identifying the shortfall in revenues that SaskPower receives from net metering customers compared to the cost of serving those customers. To calculate this, we determined the lost revenue from an average net metering customer and then subtracted the savings that customer provides through avoided fuel and carbon tax charges. We then estimated the growth in the Net Metering Program based on historical trends and determined that by 2025 the program would cost SaskPower approximately $54 million / year.
How does the $54 million translate into a 7% rate increase?
The earnings from net metering customers (revenue less fuel savings) were forecast to decline by $54 million / year by 2025. These earnings are required to cover the fixed costs of providing electrical service. These fixed costs include wages and salaries, depreciation and finance charges. To make up the shortfall, SaskPower must increase the amount it collects from non-net metering customers in the farm and residential customer classes to cover the cost of providing electrical service to all of SaskPower’s customers.
The farm and residential customer classes are the primary users of net metering. These classes currently generate approximately $763 million of annual revenue. The impact of net metering is that earnings from these classes would drop by $54 million to $709 million. To recover these costs from the rest of the residential and farm customers, an increase of 7% ($54 million / $709 million) would be required.
Net metering customers pay a monthly charge, so why is SaskPower saying that they aren’t paying for fixed costs?
The monthly charge that net metering customers pay is called a basic monthly charge and is intended to cover the administration costs related to customer services, such as billing and metering. The basic monthly charge does not cover the fixed costs associated with operating and maintaining the infrastructure to generate, transmit and distribute energy to customers.
These costs are recovered through the energy charge (amount of electricity used), which net metering customers can significantly reduce. As a result, net metering customers do not contribute enough through the basic monthly charge to cover all the costs of serving them.
How did you arrive at the growth projection?
SaskPower estimated that the program would grow at a pace of 50 per cent year over year. The projection was based on the growth in net metering customers over the past 2 years. We also assumed equal growth in the residential and farm classes based on current uptake.
SaskPower used the above facts and assumptions and forecasted that by 2025 annual net income would be potentially reduced by $16 million from residential customer net metering and $38 million from farm customer net metering, for a total impact of $54 million.
Did you factor in the avoided costs due to customers supplying some of their own electricity?
Yes. We factored in fuel costs based on natural gas-fired generation or coal-fired generation, which is around $0.03/kilowatt hour (kWh). As well, we factored in a carbon tax of approximately $0.004/kWh.