Pricing electricity from residential photovoltaic systems: A comparison of feed-in tariffs, net metering, and net purchase and sale

Abstract

Three mechanisms are commonly employed to enable households to sell electricity from grid-connected residential solar photovoltaic (PV) systems to utilities or grid companies: feed-in tariffs (FIT), net metering, and net purchase and sale. This study aims to compare these mechanisms with respect to social welfare and to retail electricity rates that include the cost to electric utilities of purchasing residential PV-generated electricity. The study presents a simple microeconomic model that shows, first, that the mechanism that produces the most social welfare is different depending on the amount of reduction in electricity consumption achievable under net metering or net purchase and sale (which are shown to be essentially similar). If the reduction is relatively small, FIT is likely to produce more social welfare than net metering/net purchase and sale; if the reduction is large, the opposite is the case. Second, the model shows that the mechanism that yields the lowest electricity rate is not definite, and differs depending on the homogeneity of households: when households are more homogeneous, the electricity rate under net metering/net purchase and sale is more likely to be higher than that under FIT.