Installed solar photovoltaic (PV) capacity more than tripled in the past three years, and industry analysts forecast that PV capacity will double from current levels within two years. The growth in PV capacity–driven by decreasing costs, improving performance, increasing consumer preference for clean energy resources, and a favorable policy environment in many states–is part of a larger trend where the role of the consumer is fundamentally changing. Customers are transitioning from being passive recipients of power sector services, to being active participants in both providing and receiving grid services. Distributed generation tariffs need to evolve.

While the improved capabilities of customer resources sounds like an economic, policy, and marketing success story, not everyone is celebrating. Some utilities are concerned that distributed generation adopters are undermining the financial foundation of the electric system. They argue that distributed generation adopters still rely on grid services and do not pay their fair share with current tariffs. Distributed generation developers and advocates argue that the value being provided to the electric system exceeds the credit received under net metering or the price paid under feed-in tariffs. And, some consumers argue that they unfairly subsidize distributed generation early adopters.

In its new report, Designing Distributed Generation Tariffs Well, the Regulatory Assistance Project provides regulatory options for addressing these concerns. The report outlines current tariffs and ponders what regulators should consider as they weigh the benefits, costs, and net value to distributed generation adopters, non-adopters, the utility system, and society as a whole. The paper offers rate design and ratemaking options for regulators to consider, and includes recommendations for implementing tariffs and ratemaking treatments to promote the public interest and ensure fair compensation.

“Regulators charged with protecting the public interest by fairly balancing the interests of stakeholders and consumers are listening and asking whether the compensation mechanisms established when penetration of distributed generation was relatively low remain appropriate at higher penetration levels,” said Dr. Carl Linvill, RAP principal and contributor to the paper.

“There is no silver-bullet solution applicable to every system and all regions. Regulators need to recognize that value is a two way street where customers both provide and receive services. We recommend that regulators establish a valuation methodology to determine whether cross-subsidies are present, whether they are significant in magnitude, and whether they are justified to stimulate clean energy development,” added Linvill.

The paper establishes 12 principles to guide regulators as they evolve their distributed generation tariffs. The overriding principle is one of fair compensation: fair compensation for all who provide power sector services, based on the value delivered for services provided, and with an eye toward ensuring that customers are neither overcharged nor undercharged for the services they receive.

Visit our Regulatory Principles page to learn more about rate design fundamentals.