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

55 Pages Posted: 10 Oct 2018 Last revised: 18 Sep 2019

See all articles by Nur Sunar

Nur Sunar

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Jayashankar M. Swaminathan

University of North Carolina (UNC) at Chapel Hill - Operations Area

Date Written: September 27, 2018

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.

Keywords: rooftop solar panel, distributed renewable energy, net metering, wholesale electricity market, utility, social welfare

Suggested Citation

Sunar, Nur and Swaminathan, Jayashankar M., Net-Metered Distributed Renewable Energy: A Peril for Utilities? (September 27, 2018). Kenan Institute of Private Enterprise Research Paper No. 18-24, Available at SSRN: https://ssrn.com/abstract=3257925 or http://dx.doi.org/10.2139/ssrn.3257925

Nur Sunar (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Jayashankar M. Swaminathan

University of North Carolina (UNC) at Chapel Hill - Operations Area ( email )

300 Kenan Center Drive
Chapel Hill, NC 27599
United States

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