Economic inefficiencies of pricing distributed generation under novel tariff designs

Abstract

A common principle of electricity pricing is ensuring that costs and benefits are aligned such that economic efficiency is optimized. Deviations from this principle are commonplace in residential pricing, especially for distributed generation (DG). Here, subsidizing renewable energy sources can sometimes precede economic considerations, causing a divergence between the real value of a household’s DG electricity and the credits a household receives. Hence, many households install DG larger or smaller than optimal. Few studies have investigated the impact of various electricity tariffs on efficiency and welfare consequences of mis-pricing DG. We study this matter for multiple tariffs, including flat-rate feed-in pricing, net metering, and net metering with different time windows for volumetric accumulation. We use a unique set of 2016 DG generation, installation costs, and value data that allows us to calculate DG installation size changes without making ex ante assumptions regarding household discount rates and with consideration of the entire value chain of DG electricity. We find that using a flat-rate (per-kWh) tariff creates some efficiency losses comparable to that of a net metering setup with yearly accumulation. Lower accumulation windows show drastically lower rates of DG installation and higher welfare losses. Sensitivity analyses show that these results are somewhat agnostic to DG system size and the benefit of DG systems for distribution grid support costs. These results provide a crucial measure of the social ramifications of DG installations, particularly solar panels.