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January 09, 2015
Report by Brattle Principals Evaluates Rate Proposal for Residential Distributed Generation and Identifies Way to Restore Fairness in Rate Design

Brattle principals Ahmad Faruqui and Ryan Hledik have authored a report for the Salt River Project (SRP), an electric utility in Arizona, that provides an evaluation of SRP’s proposal to introduce a new rate for residential customers who are planning to install distributed generation (DG) capability. Through their evaluation of the SRP proposal, the authors identify a way to restore fairness in rate design for DG customers that may be of interest to all utilities with residential DG customers.

The adoption of DG by residential customers consists largely of rooftop solar panels and a practice of electricity pricing known as net energy metering (NEM). Under NEM, DG customers only pay for their net purchases of electricity, i.e., their gross purchases net of their local generation of electricity. NEM credits DG customers for each unit of power they produce at the same retail rate at which they would otherwise buy it.

The authors discuss that with the current NEM pricing model, DG customers do not pay for the fixed costs of delivering electricity or other vital services. Rather, all non-DG customers are forced to pay these costs, therefore creating an economic inequity between customers with and without DG and forcing electric utilities to raise rates to overcome this shortfall in revenue. According to Dr. Faruqui and Mr. Hledik, the best way for restoring fairness in rate design for DG customers is to move the fixed costs out of the volumetric charge and recover them through a fixed charge (i.e., dollars per month) and a demand charge (i.e., dollars per kilowatt of maximum demand per month).

The report evaluates SRP’s rate proposal to address the issues of inequity and fixed cost recovery. SRP’s proposal consists of a three-part rate for its residential DG customers: a fixed monthly charge (based on size of connection to the distribution system), a time-varying variable charge (varying by on- and off-peak periods), and a demand charge (increasing with customer demand). Dr. Faruqui and Mr. Hledik find that SRP’s proposed plan has very significant advantages over the current rate offering, specifically that the proposal’s three-part rate structure aligns much more closely with the underlying cost of supplying electricity to customers. According to the authors, by better reflecting costs, the rate will address the inequities that exist in the current rate designs, particularly as they relate to the under-recovery of fixed costs from DG customers.

The report, “An Evaluation of SRP’s Electric Rate Proposal for Residential Customers with Distributed Generation,” can be viewed here.