Association for Public Policy Analysis & Management

Traditional utility operations are being challenged by the growth of renewable and distributed generation, spurred on by cost reductions, regulations, and incentives. The goal of this analysis is to understand the impact that larger penetrations of solar energy will have on the rates and bills for customers of utilities operating in competitive markets. We examine these effects by constructing a model which incorporates solar profiles, load shapes and rate structures across customer classes, and a market supply curve. While the magnitude of impacts on rates and bills is sensitive to a number of assumptions including stringency of the solar mandate, SREC prices, demand growth, and natural gas prices, all of which are difficult to predict and subject to change, comparing across scenarios provides insight into which factors are significant. Our primary conclusion is that it matters who installs solar. Previous literature has documented that solar participants are subsidized by non-participants. We find evidence of this effect as well with the average residential consumer who installs solar seeing a bill reduction up to 90%.  SREC costs, ancillary services, transmission and distribution costs, and social benefits charges are traditionally allocated across sold electricity. Solar-participants avoid these charges and they are shifted to non-participants who see increases in rates and bills of up to 20% as a result.

In addition, we find evidence that solar installations affect rate class cross-subsidization. The rate class that installs solar at the fastest pace can shift costs to other rate classes because rates are determined by percentage of system peak load.  These impacts are compounded by a time shift in the system peak. Our model results show that installing solar shaves the system peak demand, but also pushes the peak hour from mid-afternoon to evening. This has important implications as residential customers constitute a greater percentage of demand at these later hours. Together, these findings suggest the need for increased attention to and analysis on the potential impacts of solar penetration. Alternative rate designs which change the apportionment of fixed distribution costs and generation service costs could mitigate the subsidization that occurs if high penetrations of solar are installed using current rate structures.