Each day, tens of thousands of Americans become part of an energy revolution simply by flipping a light switch.

Whether for financial or environmental reasons, buildings that historically relied solely on electricity produced far away in large power plants now make a portion of their energy needs right at home.

This individual decision, played out at thousands of homes and businesses every week across North America, is having a transformational impact on the economics of the utility business and raising important questions about the grid itself.

Together, this so-called "distributed generation" solar power is still less than 1 percent of the total U.S. power supply, but that is changing with startling speed. The international consulting firm McKinsey recently predicted solar distributed generation will grow 10 to 30 times larger by 2020.

"The North American grid is the largest and most complex machine in human history, the key to our country's economic future. And it will see more change over the next 10 years than we've seen in the last 100," said IBEW International President Edwin D. Hill. "How it is done will have a huge impact on the jobs and futures of hundreds of thousands of IBEW members."

The energy revolution is being driven by retail customers who buy power from a utility when the sky is dark, but buy less as the sky brightens and the solar array on their roof goes to work.

Often there will be times when these solar systems produce more power than the customer is using. In most states, the system owners then have the right to start sending electricity back out into the grid and the utility must buy it.

These homeowners become part-time electricity customers and part-time electricity suppliers, something that was never imagined when the grid was designed and built over a century ago.

How Distributed Generation Works

Once millions of rooftop solar systems are installed and connected, the nature of the electricity distribution system will have been altered. Where the meter used to mark the destination of electric power, now it is a revolving door.

This isn't about large-scale solar, wind or hydroelectric installations selling dozens, sometimes hundreds of megawatts of power wholesale. For utilities and regulators, no matter the fuel, power produced at large-scale installations can easily be seen and, more importantly, controlled before it is sent out over the transmission and distribution system.

Distributed generation is millions of tiny grid-connected installations, almost always rooftop solar photovoltaic arrays on houses, shopping malls and office buildings. Instead of carrying power from relatively few, very large and constantly-running power plants to millions of energy consumers, power flows at varying rates into the grid from all directions. The physical structure of the grid — the millions of miles of wire, substations and transformers — is not designed for this networked energy flow. And neither are the regulations or economics of the grid.

A coalition of labor unions, utilities and environmentalists is warning that the undeniable benefits of distributed solar could be swamped by increased costs, reduced reliability and an unfair shift of the cost of going green onto the backs of the poor. Germany, which is leading the world in installation of distributed solar and renewable power generation, is seeing each of those.

"There are many questions about how this will work that we don't know the answers to," said Jeff Hamel, an executive director at the Electric Power Research Institute, a non-partisan think tank in Washington D.C. "But the grid is very integrated, very connected and we want to make sure that the engineering and economic decisions create an affordable, accountable and reliable clean energy system."

The problem is that the solar rooftop revolution is moving much faster than the regulators and engineers.

Opening One-Way Streets to Two-Way Traffic

The first electrical distribution system built in Great Barrington, Mass., in 1886, and the 21st century continent-spanning grid we have now follow basically the same physical model: producers make wholesale energy, utilities buy it, sell it to retail customers and deliver it over the grid.

Electrons go in one direction, money goes the other.

No longer. With distributed generation, energy flows both ways along lines and through transformers and substations that were designed for one-way traffic.

As nearly every state has so-called "net-metering" rules in place that allow customers to run the meter backward, in effect, the utility is required to take all the energy distributed solar can produce, and pay retail rates for much of it.

"The problem is that we've spent trillions of dollars creating a grid that isn't designed for that," said IBEW Utility Department Director Jim Hunter.

Since 2006, the price of installed solar systems has dropped 75 percent and residential solar capacity has grown 50 percent each year to more than 2,200 megawatts, according to the Solar Energy Industry Association. Commercial and industrial rooftop solar has grown even faster, from 191 megawatts in 2006 to more than 4,000 megawatts in 2104.

While wires can carry electrons both up and downstream as easily as pavement can carry cars one way or another, keeping traffic flowing smoothly is another matter. If all the signs, on- and off-ramps and stoplights point in only one direction, disaster is almost inevitable. If you let those cars loose before you prepare the system, the potential for problems is extremely high (see sidebar on the German experience with renewables).

For the average American utility, these technical challenges are surmountable. A robust system of sensors that track the status of all parts of the transmission and distribution system and large scale energy storage would solve many of the problems created by renewables. If system operators could control water heaters and HVAC systems as easily as combined-cycle natural gas plants, they would have much greater flexibility matching load to power, as well as power to load.

But many utilities are facing the reality that reliability in this new world requires an unavoidably expensive kind of redundancy. In the Pacific Northwest, for example, where wind power is a large part of the power generation mix, system operators keep more than 1,000 megawatts of hydroelectric capacity in reserve in case wind power suddenly slows.

Keeping a cheap, consistent power generation method in reserve is pretty expensive insurance, but it is much cheaper than the options available to areas without hydro power. Most other places have to build and maintain a reserve supply of much more expensive — and more polluting — natural gas-burning peaker plants.

"The problem for utilities isn't mainly technical. All the technology to do this exists. The hard part is figuring out how to get it paid for," Hunter said.

As Germany is finding out, failure to integrate the new distributed energy resources can cause huge problems. Solar alone jumped from less than 2 percent of total energy production to nearly 21 percent in the last 10 years. By comparison, the U.S. share of renewables — solar, wind and hydroelectric — started higher than Germany — nearly 6 percent — but has grown to only about 13 percent.

The result has been an increase not only in energy prices but a decrease in reliability and the unintended consequence of turning back to less earth-friendly fuels.

"The Germans get nearly a quarter of their power from wind and solar but, overall, the system is less reliable, more expensive and dirtier," Hunter said. "It will not be easy to come to an agreement to adapt the utility business to these changes, but it will be a whole lot cheaper than letting the train derail."

Efficiency and Equity

Maintaining the infrastructure of the grid is built into every monthly utility bill. But nearly every state allows the owners of distributed generation systems to reduce — possibly even eliminate — their utility bill when they make more power than they use. The full cost of maintaining the grid — which Edison Electric Institute estimates at $25 billion a year — gets shifted to everyone else.

A recent study issued by the California Public Utilities Commission estimated that this so-called "cost shifting" will exceed $1 billion a year by 2020, raising energy costs on average $60 a month. Not surprisingly, the study found that those bearing the brunt of the cost increase earned just more than half the annual income of the households with distributed generation equipment.

"There is no simple solution to these problems, but I think there is a simple idea that should drive the process: people should pay for what they use," Hunter said.

The Striking Success of Net Metering

When distributed generation was still in its infancy, states created a host of subsidies and incentives to encourage it.

One of the most popular incentives is "net energy metering" where the meter rolls forward when energy is used from the grid, stands still when the building is self-sufficient and rolls backward when the solar panels produce more power than it needs.

The distributed solar generators sell power to utilities at retail rates, which can be anywhere from five to 15 times higher than wholesale, EEI reported.

It proved enormously popular, and 43 states, the District of Columbia and three territories have some kind of net-energy metering regulations in place.

The problem is that less than half the cost of providing energy comes from generating it. A power plant by itself doesn't do anyone much good until it is connected to the hundreds of thousands of miles of transmission and distribution line, and the tens of thousands of substations that make up the grid. Building and maintaining that system costs a great deal: 37 cents of every dollar charged by utilities, according to EEI.

"There is value just in the connection to the grid, but it is not appropriately valued in the rate structure," said Hamel from the Electric Power Research Institute.

Signs of a Solution

The broad outlines of a market redesign are not complicated, Hunter said, but getting rates to reflect grid use has been a tough sell. Efforts to require state regulators to allow utilities to charge for grid access and services have been met with opposition from environmentalists and the companies installing roof-top solar systems — nearly all of which use nonunion workers.

One of the biggest fights has been in Arizona, home of the highest per capita ownership of roof-top solar in the nation. There were more than 18,000 residential roof-top solar arrays installed by the end of last year and 500 permits are requested every month.

Last summer, the utility Arizona Public Service requested approval from regulators for a monthly grid-use fee based on a solar systems size. Environmentalists worried that increasing the cost would drive new solar installs down. Installation and sales companies worried the same would happen to profits.

The request was ultimately approved, but much lower than APS had asked for. Instead of $60 to $100 a month for the average 7-kilovolt system, the fee was set at about $7 a month.

Other states have imposed access fees — including California — but Hunter says other models can be created to ensure fairness without increasing rates. In Massachusetts, for example, instead of a fee that would raise rates for everyone, regulators established a minimum bill amount to make sure everyone paid something. Other states are considering paying for distributed solar production at the wholesale, not retail, rate.

"States across the country are taking a second or third look at the whole range of incentives and utility rate structures," Hunter said. "In every case though, regulators need to hear from us that keeping the grid reliable and affordable is not negotiable."