Quantitative Analysis of Decoupling, Distributed Generation, and Net Energy Metering

Rapidly declining costs of rooftop solar systems and government incentives are helping to put increasing amounts of electricity generation on the customer side of the meter. Deployment of customer owned distributed generation (DG) such as rooftop photovoltaics (PV) fundamentally upends the traditional utility business model. It forces utilities to buy electricity from their customers and therefore reduces their electricity sales and their revenue. In the past, some regulated utilities have managed revenue loss from reduced sales due to implementation of energy efficiency programs through a regulatory policy known as decoupling, which severs the link between retail sales and revenues through an alternative rate setting procedure. Could decoupling also make a utility indifferent to reduced sales due to high penetration distributed photovoltaic generation? In this study, a computer simulation model represents a generic utility from 2012 through 2035, to explore the effects of increased DG penetration with and without decoupling. The model outputs utility financial performance, ratepayer costs and benefits, and environmental emissions performance. Results suggest that under growing penetration of distributed PV generation, decoupling does protect utility financial performance compared with traditional ratemaking. However, in the long run it cannot inure the utility against loss of market share and rate base erosion. While PV imposes increased costs on the grid, ratepayers are better off due to deferral of investments in supply side energy and possibly capacity assets. Emissions of greenhouse gasses and criteria pollutants are reduced with high penetration PV. The study highlights the challenges ahead for updating the traditional utility business model for the 21st century should current trends continue to put customer owned generation within reach.