Utility Regulation and Business Model Reforms for Addressing the Financial Impacts of Distributed Solar on Utilities

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Utility Regulation and Business Model Reforms for Addressing the Financial Impacts of Distributed Solar on Utilities

Implementing a range of alternative utility-rate reforms could minimize solar value losses at increasing levels of distributed PV penetration (see Barbose et al. 2016). In conjunction with the technical issues described above, the connections between distributed PV and electric distribution systems hinge on utility business models and regulations. As PV deployment has leapt forward and presaged a truly significant solar contribution, however, it has become clear that utilities’ traditional treatment of distributed PV cannot be taken for granted—nor can the future value and deployment of distributed PV. At the heart of this issue is net energy metering (NEM). Under NEM, PV owners can sell to a utility the electricity they generate but cannot consume on site, often at full retail rates. This widespread policy has helped drive the rapid growth of distributed PV, but the success has raised concerns about the potential for higher electricity rates and cost-shifting to non-solar customers, reduced utility shareholder profitability, reduced utility earnings opportunities, and inefficient resource allocation. The resulting reform efforts have revolved largely around changing NEM rules and retail rate structures. Most of the reforms to date address NEM concerns by reducing the benefits provided to distributed PV customers and thus constraining PV deployment. A new analysis estimates that eliminating NEM nationwide, by compensating exports of PV electricity at wholesale rather than retail rates would cut cumulative distributed PV deployment by 20% in 2050 compared with a continuation of current policies. This would slow the PV cost reductions that arise from larger scale and market certainty. It could also thwart achievement of the SunShot deployment goals even if the initiative’s cost targets are achieved. This undesirable prospect is stimulating the development of alternative reform strategies that address concerns about distributed PV compensation without inordinately harming PV economics and growth.

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