UCL School of Management is delighted to welcome Siddharth Singh, CMU, to host a seminar discussing ‘That’s Not Fair: Tariff Structures for Electricity Markets with Rooftop Solar’
Utility regulators are grappling to devise compensation schemes for customers who sell rooftop solar generation back to the grid. Regulators seek to induce an optimal level of rooftop solar adoption, trading off between its environmental benefits and the financial burden that it imposes, while simultaneously safeguarding the interests of utilities, solar system installers, and customers. This is a difficult balance to achieve, and numerous failed attempts have received considerable press coverage in the last three years. For example, tariff changes in Nevada induced SolarCity, the market leader in solar systems, to suspend operations in the state. Motivated by this, we formulate and analyze a social welfare maximization problem for the regulator, focusing on how the choice of tariff interacts with its competing objectives. We uncover the structural properties of a successful tariff, finding that the tariff structures used in most states are inadequate: to achieve welfare-optimal outcomes; a tariff must be able to discriminate among customer usage tiers and between customers with and without rooftop solar. We also demonstrate that these flexibilities do not imply more degrees of freedom for the regulator. Finally, we present a tariff structure with these two characteristics and show how it can be implemented as a simple buy-all, sell-all tariff while retaining its favorable properties. We illustrate our findings numerically using household-level data from Nevada and New Mexico.