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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



Load-Following Forward Contracts

David P. Brown and David E. M. Sappington

Year: 2023
Volume: Volume 44
Number: Number 3
DOI: 10.5547/01956574.44.2.dbro
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Abstract:
Suppliers and large buyers of electricity often sign load-following forward contracts (LFFCs). A LFFC obligates an electricity supplier to deliver at a pre-specified unit price a fraction of the buyer's ultimate demand for electricity. We show that relative to more standard ("swap") forward contracts, LFFCs can reduce the variation in the wholesale price of electricity. However, LFFCs also can increase the expected wholesale price and thereby reduce expected consumer surplus and total surplus.





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