Shades of Green: The Hidden Impact of Prosumers and Its Mitigation

Abstract

This paper delves into the burgeoning trend of prosumers, formerly traditional consumers, who have transformed into active renewable energy producers. While prosumers indeed contribute to reducing greenhouse gas emissions and lessening dependence on fossil fuels, it is noteworthy that they often maintain a grid connection as a backup. This practice necessitates utility companies to reserve capacity, and conventional consumers share these associated costs. Our study develops a stylized model to comprehensively assess the impact of prosumers, taking into account variables such as solar panel efficiency and its energy generation volatility. Our findings demonstrate that, although prosumers contribute to diminishing non-renewable energy consumption and offer potential cost savings to utility firms, they simultaneously introduce negative externalities. Specifically, they inject uncertainty into the grid, resulting in higher electricity prices and increased utility bills for regular consumers. Critically, we derive this insight even when fixed costs incurred by utility firms are not considered. Moreover, we derive equilibrium and socially optimal prosumer proportions, revealing a notable disparity between self-selection and societal objectives. As volatility in prosumer energy generation becomes high, the socially optimal proportion decreases while the self-selected equilibrium proportion of prosumers increases. Furthermore, our study examines the potential implications of a conventional linear incentive scheme for prosumers, exemplified by the 2023 U.S. federal tax credit for solar panel installation costs. We find that such schemes may exacerbate social disparity. To address this issue, we propose a reverse-linear subsidization approach, which paradoxically requires smaller funds to achieve equivalent prosumer adoption rates and results in smaller social disparity. In conclusion, this research unveils the negative externalities associated with prosumer behavior and provides mitigation policies for policymakers' consideration.

Keywords: Smart City, Electricity, Prosumer, Subsidy, Negative Externality