Elsevier

Applied Energy

Volume 162, 15 January 2016, Pages 713-722
Applied Energy

Net metering and market feedback loops: Exploring the impact of retail rate design on distributed PV deployment

https://doi.org/10.1016/j.apenergy.2015.10.120Get rights and content

Highlights

  • We examine PV deployment trends under various rate design and net metering rules.

  • We model for two opposing feedback loops between PV deployment and retail rates.

  • Future adoption of distributed PV is highly sensitive to retail rate structures.

  • On the U.S. aggregate level, the two feedback effects nearly offset one another.

Abstract

The substantial increase in deployment of customer-sited solar photovoltaics (PV) in the United States has been driven by a combination of steeply declining costs, financing innovations, and supportive policies. Among those supportive policies is net metering, which in most states effectively allows customers to receive compensation for distributed PV generation at the full retail electricity price. The current design of retail electricity rates and the presence of net metering have elicited concerns that the possible under-recovery of fixed utility costs from PV system owners may lead to a feedback loop of increasing retail prices that accelerate PV adoption and further rate increases. However, a separate and opposing feedback loop could offset this effect: increased PV deployment may lead to a shift in the timing of peak-period electricity prices that could reduce the bill savings received under net metering where time-varying retail electricity rates are used, thereby dampening further PV adoption. In this paper, we examine the impacts of these two competing feedback dynamics on U.S. distributed PV deployment through 2050 for both residential and commercial customers, across states. Our results indicate that, at the aggregate national level, the two feedback effects nearly offset one another and therefore produce a modest net effect, although their magnitude and direction vary by customer segment and by state. We also model aggregate PV deployment trends under various rate designs and net-metering rules, accounting for feedback dynamics. Our results demonstrate that future adoption of distributed PV is highly sensitive to retail rate structures. Whereas flat, time-invariant rates with net metering lead to higher aggregate national deployment levels than the current mix of rate structures (+5% in 2050), rate structures with higher monthly fixed customer charges or PV compensation at levels lower than the full retail rate can dramatically erode aggregate customer adoption of PV (from −14% to −61%, depending on the design). Moving towards time-varying rates, on the other hand, accelerates near- and medium-term deployment (through 2030) but slows adoption in the longer term (−22% in 2050).

Introduction

Deployment of distributed solar photovoltaics (PV) has expanded rapidly in the United States, fueled by steeply declining costs, financing innovations, and supportive public policies. Key among the supportive policies has been net metering, which typically compensates each unit of PV generation at the customer’s prevailing retail electricity rate. The rapid growth of net-metered PV has provoked concerns that this practice allows PV customers to avoid paying their full share of fixed utility infrastructure costs, thus requiring the utility to raise retail prices for all customers [1], [2], [3]. Compounding that concern is the possibility of positive feedback between PV deployment and electricity rates, with PV-driven rate increases making net-metered PV even more attractive and thus accelerating further PV deployment and rate hikes [4], [5], [6]. One proposed solution is to change electricity rate designs [7], [8], [9]. Frequently such proposals entail reallocating a portion of cost recovery from per-kilowatt-hour volumetric charges to fixed customer charges and/or per-kilowatt demand charges [10], [11], while other proposals involve reconsidering net metering rules.

This article, which is based upon a more expansive analysis presented in Darghouth et al. [12], fills key gaps in the literature by examining the impacts of the two competing feedback dynamics on U.S. distributed PV deployment through 2050 for residential and commercial customers. We show whether and under what conditions retail rate changes caused by distributed PV might affect future PV deployment. We also show the impact on PV deployment of changes to retail rate design and net-metering rules. The results are meant to inform regulators and other decision makers as they consider potential changes to retail electricity rates that could affect PV’s role in advancing policy objectives and customer choice. We present both national results as well as disaggregated results by customer segment or by state. The aggregated national results show the overall PV deployment patterns that are relevant to the PV market and industry more generally, whereas the distributions show the ranges in PV deployment results for states or customer segments, which could have implications for particular utilities or states who are interested in these more local possible feedback magnitudes or deployment levels.

The literature on this topic contains important gaps. Prior studies of the feedback between PV deployment and electricity rates have generally remained conceptual and hypothetical, with the notable exceptions of Cai et al. [4], Chew et al. [13], and Costello and Hemphill [5]. Furthermore, analyses of retail rate feedback effects have focused only on the possible positive feedback associated with under-recovery of fixed costs. A separate – and potentially offsetting – feedback may occur when increasing PV penetration shifts the temporal profile of wholesale electricity prices, potentially reduces bill savings for net-metered PV customers on time-varying rates, and thus discourages further PV adoption (Table 1). Numerous studies have demonstrated that the capacity value and wholesale market value of PV erode as penetrations increase [14], [15], [16], and Darghouth et al. [17] explored the implications of this effect for time-based retail rates and the customer economics of PV systems. No studies to our knowledge, however, have estimated the impact of this effect on the deployment of distributed PV or contrasted it with the fixed-cost feedback mechanism. Key gaps also exist with respect to the effect of rate-design changes on PV deployment. Studies have focused on the impacts of retail rate structure on PV customer economics [18], [19], [20], [21] but generally have not translated those findings into deployment effects.

This paper contributes to the larger discussion relating the impact of rate design and net metering to the revenue and profitability impacts of distributed solar on electric utilities, though we do not quantify this impact directly. A number of previous studies have identified the potential misalignments between net metering and utility cost structures (Cai et al. [4], Graffy and Kim [6], and Satchwell et al. [43]) have modeled the potential impact of higher PV penetration on revenue and profitability metrics for two prototypical US electricity utilities. For two different utility business models – one vertically integrated utility and one wires-only utility – the authors found that as distributed PV levels increased, utility revenues declined faster than costs. The study also found that the decrease in return on investment was greater for the wires-only utility than for the vertically integrated one, as was the increase in average retail rates (though the magnitudes were modest and nearly equivalent on a percentage basis between the two utilities), but that these impacts could be mitigated by a number of policy measures. Though linkages with this paper can be made, the revenue and utility profitability impacts of distributed PV are not the focus of this paper, and could be the subject of future research.

Section snippets

Data and methods

We build on prior applications of the National Renewable Energy Laboratory (NREL) Solar Deployment System (SolarDS) model (e.g., [22] by incorporating the two key feedback mechanisms between PV adoption and retail electricity prices (Table 1). This section describes the SolarDS model, data sources, and assumptions as well as our analysis scenarios and our methods for modeling electricity rate feedbacks. We do not explore customer defection from the grid owing to combined PV/storage solutions,

Results

This section presents our results for the feedback between electricity rates and PV deployment as well as the impact on deployment of varying rate designs and PV compensation mechanisms.

Discussion and conclusions

In contrast to the increasing concerns about positive feedback linking net-metered PV deployment with higher electricity rates (i.e. the “utility death spiral”), our results suggest that the national net feedback effects of PV are modest and nuanced. There is little change in national PV deployment due to rate feedback under our reference scenario, which includes customers on time-varying rates (mostly in the commercial sector) and flat rates (mostly in the residential sector).

Acknowledgements

The work described in this article was funded by the Solar Energy Technologies Program within the Office of Energy Efficiency and Renewable Energy at the U.S. Department of Energy under Contract No. DE-AC02-05CH11231. We would like to thank the funders, the anonymous reviewers, as well as Jarett Zuboy for excellent editorial support.

References (44)

  • E.L. Ratnam et al.

    Scheduling residential battery storage with solar PV: assessing the benefits of net metering

    Appl Energy

    (2015)
  • R. Borlick et al.

    Net energy metering: subsidy issues and regulatory solutions. Issue brief september 2014

    (2014)
  • E. Graffy et al.

    Does disruptive competition mean a death spiral for electric utilities?

    Energy Law J

    (2014)
  • L. Bird et al.

    Regulatory considerations associated with the expanded adoption of distributed solar. NREL/TP-6A20-60613

    (2013)
  • J. Jenkins et al.

    The Remuneration challenge: new solutions for the regulation of electricity distribution utilities under high penetrations of distributed energy resources and smart grid technologies. CEEPR WP 2014-005

    (2014)
  • E.S. McConnell et al.

    Easing the transition to a more distributed electricity system: the changing role of consumers, utilities, and regulators within the regulatory compact

    (2015)
  • Faruqui A, Hledik R. An evaluation of SRP’s electric rate proposal for residential customers with distributed...
  • NC Clean Energy Technology Center

    The 50 states of solar: a quarterly look at America’s fast-evolving distributed solar policy & regulatory conversation

    (2015)
  • N.R. Darghouth et al.

    Net metering and market feedback loops: exploring the impact of retail rate design on distributed PV deployment. Report LBNL-183185

    (2015)
  • Chew M, Heling M, Kerrigan C, Jin D, Tinker A, Kolb M, et al. Modeling distributed generation adoption using electric...
  • A. Mills et al.

    Changes in the economic value of photovoltaic generation at high penetration levels: a pilot case study of California

    IEEE J Photovolt

    (2013)
  • J. Gilmore et al.

    Integration of solar generation into electricity markets: an australian national electricity market case study

    IET Renew Power Gener

    (2015)
  • Cited by (116)

    • Recovering fixed costs in the presence of prosumers

      2023, International Journal of Electrical Power and Energy Systems
    • Facilitating power system transformation at the distribution network level

      2023, The Future of Decentralized Electricity Distribution Networks
    View all citing articles on Scopus
    View full text