Elsevier

Energy Policy

Volume 39, Issue 9, September 2011, Pages 5243-5253
Energy Policy

The impact of rate design and net metering on the bill savings from distributed PV for residential customers in California

https://doi.org/10.1016/j.enpol.2011.05.040Get rights and content

Abstract

Net metering has become a widespread mechanism in the U.S. for supporting customer adoption of distributed photovoltaics (PV), but has faced challenges as PV installations grow to a larger share of generation in a number of states. This paper examines the value of the bill savings that customers receive under net metering, and the associated role of retail rate design, based on a sample of approximately two hundred residential customers of California's two largest electric utilities. We find that the bill savings per kWh of PV electricity generated varies by more than a factor of four across the customers in the sample, which is largely attributable to the inclining block structure of the utilities' residential retail rates. We also compare the bill savings under net metering to that received under three potential alternative compensation mechanisms, based on California's Market Price Referent (MPR). We find that net metering provides significantly greater bill savings than a full MPR-based feed-in tariff, but only modestly greater savings than alternative mechanisms under which hourly or monthly net excess generation is compensated at the MPR rate.

Highlights

► We examine the value of bill savings under net metering to PV owners in California. ► Bill savings per kWh of PV generation varies by a factor of four with net metering. The variation is attributable to rate design, the unique inclining block structure. ► The median value of bill savings is reduced by 40–67% with MPR feed-in tariff. ► The median value of bill savings is reduced by 6–12% with hourly netting.

Introduction

An increasing number of states use net metering to compensate electricity produced by photovoltaic (PV) system owners.1 Though specific design details vary, net metering allows customers with PV systems to reduce their electric bills by offsetting their consumption with PV generation, independent of the timing of the generation relative to consumption—in effect, selling PV generation to the utility at the customer's marginal retail electricity rate (Rose et al., 2009).

Though net metering has played an important role in jump-starting the PV market in the United States (U.S.), challenges to net metering policies have emerged in a number of states and contexts, and alternative compensation methods are under consideration. Moreover, one inherent feature of net metering is that the value of the utility bill savings it provides to customers with PV depends heavily on the structure of the underlying retail electricity rate, as well as on the characteristics of the customer and PV system. Consequently, the bill-savings value of net metering – and the impact of moving to alternative compensation mechanisms – can vary substantially from one customer to the next. For these reasons, it is important for policymakers and others that seek to support the development of distributed PV to understand both how the bill savings benefits of PV vary under net metering, and how the bill savings under net metering compare to savings associated with other possible compensation mechanisms.2

To advance this understanding, we analyze the bill savings from PV for residential customers of California's two largest electric utilities, Pacific Gas and Electric (PG&E) and Southern California Edison (SCE), based on actual hourly load data from 215 customers within the two utilities' service territories. We focus on these two utilities, both because we had ready access to a sample of high temporal resolution load data, and because their service territories are the largest markets for residential PV in the country.

We first compute the bill savings based on current net metering rules and retail electricity rates, and then examine a number of critical underlying issues that influence the value of bill savings under net metering, including retail rate design, PV system size, PV orientation, and customer load characteristics. Next, we compare the value of the bill savings under net metering to three potential alternative compensation mechanisms, each of which credits some or all PV production at prices based on the state's Market Price Referent (MPR)—the price intended to represent long-run avoided generation costs uses to evaluate wholesale contracts with renewable generators (CPUC, 2009).

The boundaries and limitations of the analysis presented in this article should be clearly acknowledged. First, the current residential retail rates offered by PG&E and SCE are unique in several respects, and thus the specific findings presented in this report cannot necessarily be generalized to apply to other utilities or states. Second, the analysis is based on a sample of customers that, while geographically diverse, may not be statistically representative of the entire population of residential customers in either PG&E's or SCE's service territories, and may not be representative of the current population of residential customers with PV systems. Third, the analysis focuses exclusively on the value of the bill savings provided to customers with PV; it does not consider the overall cost-effectiveness of distributed PV for an individual customer, nor does it consider the value or cost-effectiveness of distributed PV from the perspective of the utility, non-participating ratepayers, or society-at-large. Finally, in comparing net metering to several alternative compensation mechanisms, we focus exclusively on the value of the bill savings or bill credits provided to customers through each compensation mechanism; net metering may provide other advantages and disadvantages (both financial and otherwise) relative to the alternative compensation mechanisms considered, but these are not covered in the analysis presented here. For example, alternatives to net metering that entail explicit sales of electricity by the customer to the utility may be subject to income taxes, may give rise to federal regulatory compliance requirements, and could potentially interfere with common customer financing mechanisms like third-party power purchase agreements (PPAs)/leases and property assessed clean energy (PACE) financing.

The remainder of this article is organized as follows. Section 2 briefly summarizes the existing literature addressing the impact of retail rate design and net metering on the bill savings from PV. Section 3 describes the data used within our analysis and the basic analytical framework used to calculate customer utility bills and the value of the bill savings from PV under net metering and under each of the alternative compensation mechanisms. Section 4 presents intermediate results showing how the least-cost rate, among the set of residential retail rates offered by each utility, varies with PV system size for customers with net metered PV systems. Section 5 describes the value of the bill savings from PV under net metering and the associated variability across customers, including several sensitivity analyses to explore how different rate choices and PV panel orientations impact the bill savings. Section 4 also examines three alternative compensation mechanisms for distributed PV, and compares the value of the bill savings between each of these alternatives and net metering. Finally, conclusions and policy implications are presented in Section 6.

Section snippets

Literature review

This paper, which is based upon a more expansive analysis presented in Darghouth et al. (2010), builds on a body of literature that has approached different aspects of net metering, rate design, and renewable electricity generation. Most closely related, perhaps, is a recent cost-effectiveness study of net metering in California (Energy and Environmental Economics, 2010), which evaluated the total costs and benefits to the utility and its ratepayers of compensating hourly excess PV generation

Utility tariff descriptions

The analysis presented in this paper is based on the residential retail electricity rates and net metering rules offered by PG&E and SCE, as of March 2010. For both utilities, the default residential tariff is a non-time-differentiated (i.e., “flat”) inclining block rate, with five usage tiers and increasing prices for usage within each successive tier, the E-1 and D rate for PG&E and SCE, respectively. The lowest tier (Tier 1) is referred to as the baseline allotment; its size varies according

Least-cost rate choice

As indicated above, throughout most of our analysis we assume that customers select the least-cost rate, both before and after PV installation. Fig. 1 shows the percentage of customers in the sample for which the TOU rate would be the least-cost option, across PV-to-load ratios, assuming net metering and the base case PV panel orientation. It is important to reiterate that the specific numerical results presented here reflect the composition of our customer sample, and cannot necessarily be

Comparison of bill savings between net metering and alternative PV compensation mechanisms

In this section, we compare the bill savings between net metering and each of three alternative compensation mechanisms described in Section 3.4: a full MPR-based feed-in tariff, MPR-based hourly netting, and MPR-base monthly netting.

Discussion and conclusions

Net metering, in combination with other policy support mechanisms, has been instrumental in jump-starting the market for distributed PV in California and elsewhere in the U.S. One inherent feature of net metering is that the bill savings are dependent on the underlying retail rate structure. Understanding the manner and degree to which retail rate design affects the economics of net metered PV, and the relative value of net metering compared to other potential compensation mechanisms, is

Acknowledgments

The work described in this article was funded by the Office of Energy Efficiency and Renewable Energy (Solar Energy Technologies Program) and the Office of Electricity Delivery and Energy Reliability (Permitting, Siting, and Analysis Division) of the U.S. Department of Energy under Contract no. DE-AC02–05CH11231.

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