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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2022 Annual Theme: Stakeholder Capitalism
Market-Based Solutions to Vital Economic Issues
Sep 27, 2018

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


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. In fact, based on this understanding, there have been various lobbying campaigns against the net-metered distributed solar energy. In contrast to this common belief, our analysis shows that the presence of net-metered distributed renewable energy can result in a strictly larger expected profit for utilities when wholesale market dynamics are factored in. Specifically, we prove that when the equilibrium wholesale price is sufficiently sensitive to the changes in the wholesale demand, there exists a critical market reliance level above which the net-metered distributed generation strictly improves the utility’s expected profit. Our analysis also suggests that under certain conditions, it can be favorable for utilities to motivate their customers to adopt distributed renewable energy technology as increased adoption strictly improves the utility profitability. Our numerical study uses data for distributed solar energy in California and the CAISO’s wholesale electricity market, and demonstrates that our results are valid when the parameters are set to realistic values.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.

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