Net-Metered Distributed Renewable Energy: A Peril for Utilities?

Abstract

Electricity end-users have been increasingly generating their own electricity via rooftop solar panels. Our paper studies the implications of such “distributed renewable energy” for utility profits and social welfare under net metering that has sparked heated debates in practice. The common belief is that such type of generation significantly decreases utility profits because (i) distributed generation reduces utility’s market size, and (ii) under net metering, utilities must buy back the excess generation of their customers at a rate typically larger than their procurement cost. Based on this understanding, there have been various lobbying campaigns against the net-metered distributed solar energy. A distinctive feature of our paper is that it considers supply-side effects of distributed renewable energy on utilities by explicitly modeling the wholesale market dynamics, while also accounting for (i) and (ii). Our analysis shows that in contrast to the common belief, the presence of net-metered distributed renewable energy can strictly increase the expected profit for utilities (compared to the case with no such energy) when wholesale market dynamics are factored in. Specifically, we prove that the net-metered distributed renewable energy strictly improves the utility’s expected profit if and only if the equilibrium wholesale electricity price is sufficiently sensitive to the changes in the wholesale demand and the utility’s expected market-reliance level is above a threshold. Our numerical study uses data on distributed solar energy in California and the CAISO’s wholesale electricity market, and demonstrates that our results continue to be valid under realistic parameters.