Seeking Equity in Renewable Energy Transition
By Asim Javed
The National Electric Power Regulatory Authority (NEPRA) implemented Distributed Generation and Net Metering Regulations in September 2015, which enable consumers to connect photovoltaic systems to the grid. The objective of these regulations was to encourage the use of renewable solar energy and to allow consumers to lower their electricity bills by utilising the grid as a virtual battery.
Solar households can transfer surplus energy to the grid during the day and retrieve it at night or when their solar panels were not producing sufficient electricity. Well-off households have been particularly enthusiastic about the implementation of net metering, as it provides them with a means to manage their increasing energy expenses while simultaneously contributing to the national power supply.
Net-metered capacity increased from 630 MW in June 2023 to 2.2 GW by mid-2024. The rapid adoption is driven by the consistent decrease in the cost of solar panels and the rise in electricity prices. Solar systems can significantly reduce electricity bills and offer energy independence, which is why consumers are motivated by financial benefits. For instance, the payback period for modest systems (5–10 kW) ranges between 2.5 to 4 years, depending on internal consumption.
While it may appear advantageous to increase renewable energy capacity through net metering, there are concealed costs. The unequal distribution of grid maintenance costs between solar and non-solar consumers is a significant concern. Solar consumers pay substantially reduced charges due to their lower net energy consumption, which results in non-solar users bearing the brunt of grid maintenance costs. The objective of this article is to emphasise the inequity in energy pricing that results from these concealed costs, which disproportionately impacts individuals who are unable to invest in solar systems. Failure to resolve these concerns shall result in an increasing financial burden for non-solar consumers.
To comprehend the impact of rooftop solar installations and net metering, it is imperative to breakdown the components that comprise consumers’ electricity bills. Each charge included in the electricity bill serves a specific purpose and most of these charges are directly proportional to actual net consumption during the billing period. Detailed descriptions of each are provided below:
Capacity charges are paid to power plants to guarantee their continued operation and the ability to produce electricity at any time, irrespective of the actual generation of electricity. This fee encompasses the fixed expenses associated with infrastructure, maintenance, and readiness, including debt servicing. This charge guarantees the power supply’s dependability; however, it makes a substantial contribution to the overall tariff.
Energy Charge covers the variable cost associated with electricity generation, primarily tied to the type and price of fuel used (e.g., gas, coal, RLNG, or oil). The fuel component of the bill fluctuates due to variations in international markets. Discos pass these variations directly to consumers on monthly basis.
Fuel Adjustment Costs are monthly adjustments reflecting changes in fuel prices used for electricity generation. If fuel prices increase compared to the baseline rates, utilities recover this difference through the FCA.
Quarterly Adjustment Costs are determined by NEPRA at the end of each quarter to account for economic and operational variations that impact the cost of electricity for Discos. These variations include interest rates, exchange rates, inflation, or fuel price fluctuations not captured fully in monthly FCAs.
Finance Cost Surcharge is a fixed charge applied per unit of electricity consumed, intended to recover financing costs related to the utility’s loans and investments in infrastructure. It helps cover the interest and other financial costs incurred by power companies in maintaining and expanding the grid.
Distribution Margin covers the costs of operating and maintaining the distribution network, including transmission lines, transformers, and substations. It ensures that the infrastructure required to deliver electricity from power plants to consumers is kept in good condition and functions efficiently.
General Sales Tax is calculated as a percentage (currently 18%) of the total bill amount, excluding certain surcharges.
Electricity Duty is a federal government charge calculated as a percentage (e.g., 1.5%) of the utility bill before the inclusion of other surcharges. It is intended to generate revenue for the government and is applied uniformly across consumers based on their net consumption from the grid. It functions as an additional levy alongside the GST.
Market Operator Fee covers the administrative costs of CPPA-G, which include managing the buying, selling, and distribution of electricity across the grid. The CPPA-G acts as an agent of Discos to purchase electricity from power generation companies and therefore all costs associated with this task are charges as Market Operator Fee.
Transmission and Distribution Charges include the costs associated with transmitting electricity from generation plants to the distribution network and then to consumers. Nepra determines these charges annually with adjustments where required.
Most of the aforementioned charges are determined by monthly net consumption, which implies that they will rise in tandem with the level of energy consumption and vice versa. The majority of solar users achieve zero or negative net consumption during the month by transferring surplus power to the grid. As a result, they are frequently exempt from most of these fees. The contribution of these consumers to grid maintenance costs is negligible, as they rarely draw a substantial quantity of energy from the grid.
In contrast, non-solar consumers have nothing to export during the month and therefore their net consumption is total withdrawals from the grid. Therefore, they are responsible for the full cost of grid operations and associated fees. The per-unit price for non-solar consumers increases as a result of the reduced number of individuals who are responsible for splitting the fixed costs of grid maintenance. This means that you are required to bear more burden if you can not afford solar infrastructure. If we look carefully, non-solar consumers are subsidising the benefits that solar users receive..
This arrangement is both unjust and unsustainable. The government and policymakers must act promptly to resolve the crisis as the disparity between solar and non-solar consumers continues to widen. The financial burden on non-solar consumers shall become unmanageable with more and more rooftop installations. Without any immediate intervention from the government, this may result in undermining public trust and support for renewable energy policies. In order to maintain the grid’s viability and encourage the adoption of solar energy, a balanced approach is ess
To establish a fair and sustainable framework, several solutions are practical. One is modifying the net metering setup to include a small grid usage fee. The grid usage fee may be fixed per installed KW or as a variable rate based on actual imports during the month. This arrangement shall ensure that solar consumers contribute to maintenance costs without discouraging solar investments in future. Another approach is multiple Time-of-Use (ToU) billing. In ToU different rates are set for multiple peak and off-peak times, encouraging consumers to shift usage during daytime and reduce grid strain in evening.
Similarly, the gradual transition of new solar installations to gross metering while permitting existing users to retain modified net metering benefits could help maintain consumer confidence and ensure fairness. The integration of hydropower projects with intermittent solar generation would be more efficient and reliable. The next era of development should emphasise the use of smart grids to better manage the micro trends in the sector. It is imperative to establish long-term planning and policy stability, which will guarantee that energy sector reforms are predictable and will attract investment, thereby facilitating a transition to a sustainable and balanced energy future.
