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