On the Design of Distributed Generation Policies: Are Common Net Metering Policies Optimal?

45 Pages Posted: 22 Jan 2016

See all articles by David Brown

David Brown

University of Alberta - Department of Economics

David E. M. Sappington

University of Florida - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 21, 2016

Abstract

Electricity customers who install solar panels often are paid the prevailing retail price for the electricity they generate. We show that this rate of compensation typically is not optimal. A payment for distributed generation (w) that is below the retail price of electricity (r) often will induce the welfare-maximizing level of distributed generation (DG) when centralized generation and DG produce similar (pollution) externalities. However, w can optimally exceed r when DG entails a substantial reduction in externalities. We demonstrate that the optimal DG compensation policy varies considerably as industry conditions change, and that a requirement to equate w and r can reduce aggregate welfare substantially and can generate pronounced distributional effects.

Keywords: electricity pricing, distributed generation, net metering

Suggested Citation

Brown, David and Sappington, David E. M., On the Design of Distributed Generation Policies: Are Common Net Metering Policies Optimal? (January 21, 2016). USAEE Working Paper No. 16-234, Available at SSRN: https://ssrn.com/abstract=2719902 or http://dx.doi.org/10.2139/ssrn.2719902

David Brown (Contact Author)

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

David E. M. Sappington

University of Florida - Department of Economics ( email )

224 Matherly Hall
Gainesville, FL 32611-7140
United States
352-392-3904 (Phone)
352-336-1420 (Fax)

National Bureau of Economic Research (NBER)

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United States

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