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Designing Compensation for Distributed Solar Generation: Is Net Metering Ever Optimal?

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  • David P. Brown
  • David E.M. Sappington

Abstract

Electricity customers who install solar panels often are paid the prevailing retail price for the electricity they generate. We demonstrate 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 the fixed costs of centralized electricity production and the network management costs of accommodating intermittent solar DG are large, and when centralized generation and DG produce similar (pollution) externalities. w can optimally exceed r under alternative conditions. The optimal DG compensation policy varies considerably as industry conditions change. Furthermore, a requirement to equate w and r can reduce aggregate welfare substantially and can generate pronounced distributional effects.

Suggested Citation

  • 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.
    • Handle: RePEc:sae:enejou:v:38:y:2017:i:3:p:1-32
    DOI: 10.5547/01956574.38.3.dbro
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    References listed on IDEAS

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    1. Couture, Toby & Gagnon, Yves, 2010. "An analysis of feed-in tariff remuneration models: Implications for renewable energy investment," Energy Policy, Elsevier, vol. 38(2), pages 955-965, February.
    2. Koichiro Ito, 2014. "Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing," American Economic Review, American Economic Association, vol. 104(2), pages 537-563, February.
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    Cited by:

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    5. Matthew E. Oliver & Juan Moreno-Cruz & Kenneth T. Gillingham, 2025. "Microeconomics of the Solar Rebound Under Net Metering," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 12(5), pages 1317-1353.
    6. Wang, Guanghao & Wan, Hongtao & Sbai, Erwann, 2025. "Nonlinear impacts of distributed generation on extreme electricity prices under policy shocks: Evidence from New Zealand's oil and gas exploration ban," Energy, Elsevier, vol. 335(C).

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