Sustainable, Multi-Segment Market Design for Distributed Solar Photovoltaics
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Overview
Why the Report Is Important
There are two important and distinct markets for solar photovoltaic (PV) investment—a retail market and a wholesale market. In areas of the United States that are experiencing the most significant growth in PV investment, state and local policy makers have taken important differences between retail and wholesale markets into account in establishing policies that promote growth in both of these market segments. This multi-segment approach allows interrelated policies to function best in their designated roles, extending the benefits of PV to the widest possible range of participants.
Issue
Policies that support growth in U.S. PV markets are in many cases different than those that have been used to facilitate PV market development in other countries. While the United States has relied on retail market policies, such as net metering, some other countries have relied heavily on wholesale policies, such as feed-in tariffs (FITs), to facilitate investment in PV. This paper originated as an effort to examine whether U.S. net-metering policy has been evolving in the direction of wholesale policies, such as FITs, that have facilitated PV market growth outside of the United States. There has also been significant interest in developing wholesale policy options to expand market opportunities beyond retail, self-generation markets.
Solar America Board for Codes and Standards Recommendation
Although the details of policy design may vary within the policy categories discussed in this paper, there are three ingredients that appear essential to establishing robust retail and wholesale markets for PV systems at a state level.
- Successful market design makes investment in a PV system cost-effective by closing the gap between PV system costs and relevant retail or wholesale cost-effectiveness benchmarks. In retail PV markets, cost-effectiveness occurs when the levelized cost of PV is at or below the retail rates offered by a retail electricity provider. In wholesale PV markets, cost-effectiveness occurs when the cost of PV production reaches wholesale power prices with similar hourly supply characteristics—that is, daytime generation that is located in proximity to end-use retail electric loads. Achieving cost-effectiveness often requires implementation of a well-considered mix of the policies discussed in this paper.
- Successful policies provide market participants with clarity and stability regarding the financial benefits that will result from a PV system investment. Clarity and stability are particularly important to facilitating PV system investment because the initial investment cost of a PV system is considerable and the benefits of that investment will manifest themselves over an extended period of time. Without transparency and predictability regarding the financial benefits that will result from an investment, market participants will lack the ability to make an economically rational assessment when evaluating a PV system investment opportunity.
- Successful policies structure retail rates to reflect the actual costs and benefits provided by customers who invest in PV systems to meet their onsite electrical energy needs (including transmission costs that may or may not be avoided/added) so as to facilitate wise choices that drive PV markets in a direction that can most quickly move away from incentives.