Designing Distributed Energy Resource Rates

Distributed Energy Resources and Rate Design

Distributed energy resources (DERs) including solar panels, battery storage, and small wind systems are transforming how utilities design rates. Three primary mechanisms compensate DER owners for energy sent back to the grid: net metering, power purchase agreements (PPAs), and feed-in tariffs (FITs).

Net Metering

Net metering allows customers to receive retail rate credit for excess electricity exported to the grid. When a customer's solar panels produce more power than needed, their meter runs backward, offsetting future consumption.

Advantages: Simple to administer, encourages DER adoption, provides maximum customer benefit

Challenges: May not reflect actual grid value, can shift fixed infrastructure costs to non-solar customers, doesn't account for time-of-day value variations

Power Purchase Agreements (PPAs)

Under PPAs, utilities or third parties purchase energy from DER owners at predetermined rates. These contracts specify capacity, duration, and compensation structure, providing certainty for both parties.

Key Features:

• Long-term contracts (typically 10-25 years)
• Fixed or escalating pricing structure
• Performance guarantees and operational requirements
• Clear ownership and maintenance responsibilities

Feed-in Tariffs (FITs)

FITs guarantee DER owners a fixed price per kilowatt-hour for electricity fed into the grid. Unlike net metering, FITs don't offset consumption—they pay producers for all generated energy.

FIT Design Considerations:

• Rate based on technology type and system size
• Reflects actual grid value and avoided costs
• May include time-of-day variations
• Typically set below retail rates but above wholesale power costs

Evolving Toward Value-of-Solar Tariffs

Many utilities are moving beyond simple net metering toward value-of-solar (VOS) tariffs that compensate DER owners based on actual grid benefits:

• Avoided generation costs
• Reduced transmission and distribution losses
• Environmental benefits
• Grid support services

This approach aims to balance DER incentives with equitable cost allocation across all customer classes.