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Today in Energy

March 25, 2020

Lower compensation rates for residential solar PV generation could reduce overall adoption

residential solar photovoltaic capacity
Source: U.S. Energy Information Administration, Annual Energy Outlook 2020

Electric utilities in some states have recently changed their policies regarding how they compensate electricity generation from solar photovoltaic (PV) systems installed on residential customers’ homes. An Issues in Focus article published as part of the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2020 (AEO2020) discusses the potential effects of alternative utility rate structures for compensating residential solar PV generation.

Most states have net metering utility tariffs that allow residential customers to deduct their solar PV system’s surplus electricity generation from the amount of electricity purchased from the grid. In this way, customers are billed for their total consumption minus their solar PV generation within a specific billing period, regardless of when their surplus PV generation is provided to the grid.

Under net metering tariffs, solar PV generation is usually reimbursed at the same retail electricity rate that consumers would pay to purchase electricity from the grid. EIA assumes retail electricity rate compensation for residential solar PV electricity generation in the AEO2020 Reference and core side cases. The AEO2020 alternative utility rate structure cases instead assume that residential solar PV generation is compensated at wholesale electricity prices, which tend to be much lower than retail prices.

This analysis responds in part to recent policy changes in some states. For example, New York allows residential systems built before 2020 to sign net metering agreements and be paid at retail rates, but new systems will fall under value of distributed energy resources (VDER) compensation, which is closer to the wholesale rate. In Arizona, new residential solar PV generation is valued at a rate based on an avoided cost method that is lower than retail electricity rates but higher than wholesale rates, depending on the utility. In 2019, Maine switched from a policy of gross metering to net metering. Under a gross metering policy, all electricity generation from a residential solar PV system is sent to the grid and compensated at the wholesale price of electricity, and all electricity needed in the home is purchased from the grid at the retail rate.

Wholesale electricity rates—the prices at which electricity is traded on regional electricity markets—are significantly lower than retail electricity rates because they account for generation costs but not transmission or distribution costs. For example, in 2050, EIA projects that the national average residential retail electricity price will be 12.5 cents per kilowatthour (using 2019 cents per kilowatthour) in the AEO2020 Reference case while the national average price for the generation component is 4.8 cents per kilowatthour. Compensating residential customers at lower wholesale electricity rates instead of retail rates leads to longer payback periods for residential solar PV equipment.

EIA applies this assumption change to all of the core cases included in the AEO2020 to create the utility rate structure cases. In the AEO2020 core cases, the most adoption of residential solar PV is in the Low Renewables Cost case. In this case, installed equipment costs decline faster than in the Reference case and by 2050 are 40% lower than in the Reference case.

With lower installed costs, residential solar PV capacity increases to 115 gigawatts (GW) by 2050 in the Low Renewables case, compared with 96 GW in the Reference case. However, adjusting the Low Renewables case so that customers are compensated at lower wholesale rates results in residential PV capacity growing to only 88 GW in 2050, even with lower installed equipment costs.

Principal contributor: Kevin Jarzomski