Net metering in South Dakota – A Primer, Part 1

This post is the first in a three-part series. Parts two and three will be posted later this week.

by Bill Powers

Minnesota is one of 43 U.S. states that requires utilities to pay retail rates for surplus solar power that their customers put on the grid. South Dakota is the only state in the region that does not require net metering. The Minnesota Department of Commerce has posted online much information regarding the price structure for reimbursing producers of solar power, including comments from various stakeholders. If you want to get a full picture of the issues, I highly recommend visiting this site  (

One of the chief issues in any net metering program is what rate to pay the local producer for surplus power provided to the grid. There are a number of ways to make these calculations. I intend to provide here some relevant considerations.

The various attempts to determine the price that ought to be paid producers of electricity differ considerably as to the relevant costs to be considered. There are at least three distinct perspectives from which prices can be assessed: the utility, as an incentive for local production, and global ecology (e.g., “value of solar”).

Consider first the case where prices are to be determined wholly by considering the differential costs associated with net metering. In considering the differential costs for the utility, we are simultaneously considering the differential costs for the utility’s customers, since these differential costs will be generally passed on to the consumer. Roughly, the base costs for the utility company are those associated with the facility, transmission, planning for additional facility or transmission capability, and present indebtedness.

These costs are modified when they purchase electricity from local producers. The utility company still has transmission costs, but their facility costs and planning costs may be reduced, the latter because with the addition of private grid electricity generation they may have reduced needs for extra generation capacity. When electricity is generated locally (say by a home or business) and distributed onto the grid, it will likely be consumed locally as long as the amount of electricity is small. Because the electricity is being purchased by the utility company close to where it is being sold, transmission losses are smaller than those from their generation plants.

However, the amount of indebtedness has not changed. The utility company has invested in infrastructure which it must still pay off. This indebtedness is unchanged by the amount of electricity it generates and sells. When the number of local producers is small, there may be no savings from purchasing electricity from local producers. They would still have the same facility and transmission costs and the same indebtedness. In addition, they might have extra integration costs associated with voltage and frequency regulation (a recent Minnesota study arguing that these costs would be small).

The consumer who is generating their own electricity is purchasing less electricity from the utility. This loss of revenue ought to result in an increase of the cost/kwh. When this is not the case, the utility realizes a loss of revenue. It seems, however, that such a loss ought not be linked to the cost paid by the utility company for locally generated electricity. So, when the amount of local producer generation is small, the producers ought to expect to be paid prices lower than or effectively equivalent to what the utility company receives from its customers. When the amount of local production becomes significant matters change and we can expect utility company savings to be significant.

In this case, they may be able to realize savings by reduced fuel consumption, and perhaps even by shutting down some facilities. A recent Minnesota study on the “value of solar” argued that solar photovoltaic generation of electricity amounted to a 5.5 cents/kwh savings by displaced fuel savings, 3.4 cents/kwh for avoided new power plant construction, and 3 cents/kwh from the social cost of carbon (, resulting in the value of solar being 14.5 cents/kwh, 3 – 3.5 cent/kwh higher than what is currently being paid. When the fraction of electricity generation becomes significant (and many states limit this fraction to no more than 1%), perhaps a more appropriate model is to consider local electricity generation as analogous to the purchase of electricity from the spot market.


  1. […] is part two in a three-part series; part one can be read here, and part three will be up […]

  2. […] is the final post in a three-part series. Miss the first two? Check them out here and here. by Bill Powers In order to determine what the price of electricity would have to be to […]

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