Cost Competitiveness of Residential Solar PV: The Impact of Net Metering Restrictions

The policy of net metering allows operators of residential and commercial solar PV systems to sell surplus electricity back to their utility at the going retail rate. This policy has recently been criticized on the grounds that it provides a subsidy for residential and commercial solar installations, a subsidy that is paid for by all ratepayers. In response, public utility commissions have begun to take up this regulatory issue. This paper presents a theoretical and empirical analysis of the effects of net metering restrictions. We examine the impact that overage tariffs will have on the size of future residential PV investments. Overage tariffs credit electricity generated by the solar system, but not consumed by the household and thus transferred back to the utility, at a rate below the going retail electricity rate. Our calculations focus on three representative locations in the states of California, Nevada and Hawaii. We find that if overage electricity is credited at some rate set at or above the levelized cost of electricity, there would be sufficient incentives for investors in residential solar PV to continue in the current mode of solar rooftop installations, even though the profitability of these investments might be reduced substantially. At the same time, we find that the LCOE is a tipping point insofar as overage tariffs set below that level would have a sharply negative effect on the individual size and overall volume of new rooftop installations.