That's Not Fair: Tariff Structures for Electricity Markets with Rooftop Solar
46 Pages Posted: 5 Mar 2017 Last revised: 21 Sep 2018
Date Written: March 2, 2017
(1) Problem definition: Utility regulators are grappling to devise compensation schemes for customers who sell rooftop solar generation back to the grid, while safeguarding environmental interests and the financial interests of utilities, solar system installers, and retail customers. This is difficult: Regulatory changes introduced in Nevada in 2015 to protect Nevada's utility induced SolarCity, the market leader in solar systems, to suspend operations in Nevada. We show that the choice of tariff structure is crucial to achieving socially desirable objectives. (2) Academic/Practical Relevance: It is important for regulators to understand how tariff structure interacts with social objectives. We consider this problem by formulating and analyzing a model to study this interaction, with implications for consumers, regulators and industry. (3) Methodology: We use a sequential game to analyze the regulator's social welfare maximization problem in a market with a regulated utility, an unregulated, monopolistic, profit-maximizing solar system installer, and customers who endogenously determine whether to adopt solar or not, based on utility tariffs, solar prices and their heterogeneous usage profiles and generation potentials. (4) Results: We illustrate that the effectiveness of tariff structures is not governed simply by the number of free tariff parameters, but by the functions that these parameters serve. In particular, an effective tariff must discriminate among customer usage tiers and between customers with and without rooftop solar to achieve socially desirable outcomes. We present a tariff structure with these two characteristics and show how it can be implemented as a simple buy-all, sell-all tariff while retaining its favorable properties. We illustrate our findings numerically using data from Nevada and New Mexico, two states grappling with this issue. (5) Managerial Implications: Many utilities in the U.S. operate tariff structures that are missing at least one of the two identified features. Regulators must overhaul these tariff structures to adequately safeguard all stake-holders.
Keywords: Rooftop Solar, Net Metering, Energy Policy, Game Theory
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