IDEAS home Printed from https://ideas.repec.org/a/inm/ormsom/v24y2022i1p40-58.html

That’s Not Fair: Tariff Structures for Electric Utilities with Rooftop Solar

Author

Listed:
  • Siddharth Prakash Singh

    (School of Management, University College London, London E14 5AA, United Kingdom)

  • Alan Scheller-Wolf

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

Problem definition : Utility regulators are grappling to devise compensation schemes for customers who sell rooftop solar generation back to the grid, balancing environmental interests and the financial interests of utilities, solar system installers, and retail customers. This is difficult: Regulatory changes made in Nevada in 2015 to protect Nevada’s utility induced SolarCity, the market leader in solar systems, to suspend local operations. We show that the choice of utility tariff structure is crucial to achieving socially desirable objectives. Academic/practical relevance : It is important for regulators to understand how tariff structure interacts with social objectives. This has implications for consumers, regulators, and industry. Methodology : We use a sequential game to analyze the regulator’s social welfare maximization problem in a market with a regulated utility; an unregulated, price-setting, 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. Results : We illustrate that the effectiveness of tariff structures is not governed simply by the number of free tariff parameters, but by the functions 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. Managerial implications : Many utilities in the United States operate tariff structures that are missing at least one of the two identified features. Regulators must overhaul these tariff structures to adequately safeguard all stakeholders.

Suggested Citation

  • Siddharth Prakash Singh & Alan Scheller-Wolf, 2022. "That’s Not Fair: Tariff Structures for Electric Utilities with Rooftop Solar," Manufacturing & Service Operations Management, INFORMS, vol. 24(1), pages 40-58, January.
    • Handle: RePEc:inm:ormsom:v:24:y:2022:i:1:p:40-58
    DOI: 10.1287/msom.2020.0930
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/msom.2020.0930
    Download Restriction: no
    File URL: https://libkey.io/10.1287/msom.2020.0930?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Darghouth, Naïm R. & Barbose, Galen & Wiser, Ryan, 2011. "The impact of rate design and net metering on the bill savings from distributed PV for residential customers in California," Energy Policy, Elsevier, vol. 39(9), pages 5243-5253, September.
    2. Satchwell, Andrew & Mills, Andrew & Barbose, Galen, 2015. "Quantifying the financial impacts of net-metered PV on utilities and ratepayers," Energy Policy, Elsevier, vol. 80(C), pages 133-144.
    3. Bauner, Christoph & Crago, Christine L., 2015. "Adoption of residential solar power under uncertainty: Implications for renewable energy incentives," Energy Policy, Elsevier, vol. 86(C), pages 27-35.
    4. Vidyanand Choudhary & Anindya Ghose & Tridas Mukhopadhyay & Uday Rajan, 2005. "Personalized Pricing and Quality Differentiation," Management Science, INFORMS, vol. 51(7), pages 1120-1130, July.
    5. David P. Brown & David E.M. Sappington, 2017. "Designing Compensation for Distributed Solar Generation: Is Net Metering Ever Optimal?," The Energy Journal, , vol. 38(3), pages 1-32, May.
    6. Bryan Bollinger & Kenneth Gillingham, 2012. "Peer Effects in the Diffusion of Solar Photovoltaic Panels," Marketing Science, INFORMS, vol. 31(6), pages 900-912, November.
    7. Saed Alizamir & Francis de Véricourt & Peng Sun, 2016. "Efficient Feed-In-Tariff Policies for Renewable Energy Technologies," Operations Research, INFORMS, vol. 64(1), pages 52-66, February.
    8. Ritzenhofen, Ingmar & Birge, John R. & Spinler, Stefan, 2016. "The structural impact of renewable portfolio standards and feed-in tariffs on electricity markets," European Journal of Operational Research, Elsevier, vol. 255(1), pages 224-242.
    9. Rawls, John, 1974. "Some Reasons for the Maximin Criterion," American Economic Review, American Economic Association, vol. 64(2), pages 141-146, May.
    10. Shanshan Hu & Gilvan C. Souza & Mark E. Ferguson & Wenbin Wang, 2015. "Capacity Investment in Renewable Energy Technology with Supply Intermittency: Data Granularity Matters!," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 480-494, October.
    11. Darghouth, Naïm R. & Wiser, Ryan H. & Barbose, Galen & Mills, Andrew D., 2016. "Net metering and market feedback loops: Exploring the impact of retail rate design on distributed PV deployment," Applied Energy, Elsevier, vol. 162(C), pages 713-722.
    12. Peter C. Reiss & Matthew W. White, 2005. "Household Electricity Demand, Revisited," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 853-883.
    13. repec:aen:journl:ej38-3-brown is not listed on IDEAS
    14. Owen Q. Wu & Roman Kapuscinski, 2013. "Curtailing Intermittent Generation in Electrical Systems," Manufacturing & Service Operations Management, INFORMS, vol. 15(4), pages 578-595, October.
    15. Cai, Desmond W.H. & Adlakha, Sachin & Low, Steven H. & De Martini, Paul & Mani Chandy, K., 2013. "Impact of residential PV adoption on Retail Electricity Rates," Energy Policy, Elsevier, vol. 62(C), pages 830-843.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen, Xin & Zhang, Shuibo & Gao, Ying & Feng, Zhuo, 2026. "Striving for a net-Zero emission future: Impact of feed-in tariffs on BOT highway investment and subsidy decisions," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 206(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guo, Qiaozhen & He, Qiao-Chu & Chen, Ying-Ju & Huang, Wei, 2021. "Poverty mitigation via solar panel adoption: Smart contracts and targeted subsidy design," Omega, Elsevier, vol. 102(C).
    2. A. Gürhan Kök & Kevin Shang & Şafak Yücel, 2018. "Impact of Electricity Pricing Policies on Renewable Energy Investments and Carbon Emissions," Management Science, INFORMS, vol. 64(1), pages 131-148, January.
    3. Kubli, Merla, 2018. "Squaring the sunny circle? On balancing distributive justice of power grid costs and incentives for solar prosumers," Energy Policy, Elsevier, vol. 114(C), pages 173-188.
    4. Castaneda, Monica & Jimenez, Maritza & Zapata, Sebastian & Franco, Carlos J. & Dyner, Isaac, 2017. "Myths and facts of the utility death spiral," Energy Policy, Elsevier, vol. 110(C), pages 105-116.
    5. L. (Lisa B.) Ryan & Sarah La Monaca & Linda Mastrandrea & Petr Spodniak, 2018. "Harnessing Electricity Retail Tariffs to Support Climate Change Policy," Working Papers 201822, School of Economics, University College Dublin.
    6. Christian Kaps & Serguei Netessine, 2026. "Residential Battery Storage—Reshaping the Way We Do Electricity," Operations Research, INFORMS, vol. 74(2), pages 596-614, March.
    7. Mittal, Anuj & Krejci, Caroline C. & Dorneich, Michael C., 2019. "An agent-based approach to designing residential renewable energy systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 112(C), pages 1008-1020.
    8. Alessio Trivella & Danial Mohseni-Taheri & Selvaprabu Nadarajah, 2023. "Meeting Corporate Renewable Power Targets," Management Science, INFORMS, vol. 69(1), pages 491-512, January.
    9. Nur Sunar & Jayashankar M. Swaminathan, 2021. "Net-Metered Distributed Renewable Energy: A Peril for Utilities?," Management Science, INFORMS, vol. 67(11), pages 6716-6733, November.
    10. Comello, Stephen & Reichelstein, Stefan, 2017. "Cost competitiveness of residential solar PV: The impact of net metering restrictions," Renewable and Sustainable Energy Reviews, Elsevier, vol. 75(C), pages 46-57.
    11. Satchwell, Andrew & Cappers, Peter & Goldman, Charles, 2018. "Customer bill impacts of energy efficiency and net-metered photovoltaic system investments," Utilities Policy, Elsevier, vol. 50(C), pages 144-152.
    12. Ding, Hao & Zhou, Dequn & Zhou, P., 2020. "Optimal policy supports for renewable energy technology development: A dynamic programming model," Energy Economics, Elsevier, vol. 92(C).
    13. Ahmed S. Alahmed & Lang Tong, 2022. "Integrating Distributed Energy Resources: Optimal Prosumer Decisions and Impacts of Net Metering Tariffs," Papers 2204.06115, arXiv.org, revised May 2022.
    14. Fariba F. Mamaghani & Metin Çakanyildirim, 2024. "Harvesting Solar Power Foments Prices in a Vicious Cycle: Breaking the Cycle with Price Mechanisms," Operations Research, INFORMS, vol. 72(4), pages 1505-1525, July.
    15. Axel Gautier & Julien Jacqmin, 2020. "PV adoption: the role of distribution tariffs under net metering," Journal of Regulatory Economics, Springer, vol. 57(1), pages 53-73, February.
    16. Nikolaidis, Alexandros I. & Charalambous, Charalambos A., 2017. "Hidden financial implications of the net energy metering practice in an isolated power system: Critical review and policy insights," Renewable and Sustainable Energy Reviews, Elsevier, vol. 77(C), pages 706-717.
    17. Chen, Xin & Zhang, Shuibo & Gao, Ying & Feng, Zhuo, 2026. "Striving for a net-Zero emission future: Impact of feed-in tariffs on BOT highway investment and subsidy decisions," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 206(C).
    18. Ossenbrink, Jan, 2017. "How feed-in remuneration design shapes residential PV prosumer paradigms," Energy Policy, Elsevier, vol. 108(C), pages 239-255.
    19. Rui, Zhaobiao & Peng, Weicai & Qin, Ximei & Wang, Jun, 2023. "Assessing carbon cap-and-trade policies on hybrid renewable energy investments: Implications for pricing and capacity decisions," Resources Policy, Elsevier, vol. 86(PA).
    20. Volodymyr Babich & Ruben Lobel & Şafak Yücel, 2020. "Promoting Solar Panel Investments: Feed-in-Tariff vs. Tax-Rebate Policies," Manufacturing & Service Operations Management, INFORMS, vol. 22(6), pages 1148-1164, November.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormsom:v:24:y:2022:i:1:p:40-58. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.