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

David P. Brown and David E. M. Sappington

Year: 2017
Volume: Volume 38
Number: Number 3
DOI: 10.5547/01956574.38.3.dbro
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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.



Optimal Procurement of Distributed Energy Resources

David P. Brown and David E. M. Sappington

Year: 2018
Volume: Volume 39
Number: Number 5
DOI: 10.5547/01956574.39.5.dbro
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Abstract:
We analyze the optimal design of policies to motivate electricity distribution companies to adopt efficient distributed energy resources (DER) and manage associated project costs. The optimal policy often entails a bias against new DER projects and implements cost sharing when DER projects are undertaken in order to foster cost containment while limiting excessive profit for the utility. Failure to adequately tailor the degree of cost sharing to the prevailing environment can raise procurement costs substantially. The distribution company may optimally be awarded more than the cost saving it achieves.Keywords: Distributed Energy Resources, Procurement, Regulation



Imperfect Competition in Electricity Markets with Renewable Generation: The Role of Renewable Compensation Policies

David P. Brown and Andrew Eckert

Year: 2020
Volume: Volume 41
Number: Number 4
DOI: 10.5547/01956574.41.4.dbro
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Abstract:
We analyze the effects of commonly employed renewable compensation policies on firm behavior in an imperfectly competitive market. We consider a model where firms compete for renewable capacity in an auction prior to choosing their forward positions and competing in wholesale markets. We focus on fixed and premium-priced feed-in tariff (FIT) compensation policies. We demonstrate that compensation policies impact both the types of resources that win the auction and subsequent competition. While firms have stronger incentives to exercise market power under a premium-priced FIT, they also have increased incentives to sign pro-competitive forward contracts. In net firms have stronger incentives to exercise market power under the premium-priced policy. We find conditions under which renewable resources that are more correlated with market demand are procured under a premium-priced design, while the opposite occurs under a fixed-priced policy. If the cost efficiencies associated with the �more valuable� renewable resources are sufficiently large, then welfare is higher under the premium-priced policy despite the stronger market power incentives in the wholesale market.





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