David Brown Examines the Optimal Compensation for Solar Power Generation

The generation of electricity from sources that are near the point of consumption, or "distributed generation," is expanding rapidly throughout the world. Distributed generation (DG) can reduce electricity distribution costs by moving generation sites closer to final consumers, improving system reliability by ensuring multiple production sources, limiting the amount of capacity, and reducing carbon emissions. A popular form of DG is rooftop solar panels.

Compensation for DG is often at the prevailing retail price of electricity. However, this price is unduly generous if it exceeds the system-wide cost saving that a unit of distributed electricity generation provides. Further, the electricity supply from solar and wind generation depends heavily on weather conditions, and is therefore unreliable so such DG production may not permit a utility to reduce its generating capacity by much, if at all.

The paper Professor Brown presented at the AEA Meetings uses numerical methods to show that DG pricing policies can transfer excessive payments to consumers who install roof-top solar panels at the cost of those without roof-top solar. This study highlights the need for DG compensation mechanisms that appropriately capture the value of roof-top solar resources. For more on this research, see the full study: On the Design of Distributed Generation Policies: Are Common Net Metering Policies Optimal?

See also Professor Brown's video on The Economics of Renewable Energy -- Residential Solar Power.

-