Three Types of Feed-in Tariffs for the Residential Sector

Abstract

To incentivize households to adopt a photovoltaic (PV) system, there are three types of feed-in tariffs with respect to what part of PV electricity is priced: all PV electricity, surplus PV electricity, and the difference between PV generation and electricity consumption. In this chapter, we refer to these as FITs for all PV electricity, FITs for surplus PV electricity, and net metering, respectively. This study aims to compare these mechanisms with respect to retail electricity rates, including the cost to an electric utility of purchasing PV electricity and with respect to social welfare. A simple microeconomic model is developed. The findings are as follows. First, the mechanism that yields the lowest surcharged electricity rate is not clear; it depends on the parameter values. If households are more homogeneous in terms of parameter values, the difference in the surcharged electricity rates will be small. Second, the mechanism that produces the largest social welfare is FITs for all PV electricity. These results are confirmed by means of a simulation. If we take account of some reductions in electricity consumption in the case of FITs for surplus PV electricity or net metering, the results for social welfare should be slightly modified. If the reduction is significantly large, FITs for surplus PV electricity or net metering may produce greater social welfare compared with FITs for all PV electricity.