Energy Compensation Mechanisms for Distributed Generation
NREL provides resources on energy compensation mechanisms, such as net metering, designed to reward distributed generation (DG) system owners for generating self-consumed and exported electricity to the utility grid.
Well-designed compensation mechanisms are one of several policy and regulatory options that can address challenges associated with deploying customer-owned DG systems, such as small wind or rooftop solar systems. They can strongly influence the value proposition of a DG investment for individual customers.
Additionally, all other factors being equal, the design of DG compensation mechanisms may impact the ability of state, local, or tribal communities to achieve their clean energy goals. Mechanisms that compensate customer-owned DG at a higher value are likely to support more clean energy resources being added to the grid and more rapid decarbonization, whereas reduced compensation rates may hinder progress toward those goals.
In Grid-Connected Distributed Generation: Compensation Mechanism Basics, NREL identified three components of compensation mechanisms—metering and billing arrangement, sell rate design, and retail rate design—and options available under each mechanism.
Net Metering and Billing Arrangements
In most states, policymakers have specified which metering and billing arrangements may be offered in their states or have provided guiding principles to utilities and regulators to decide. Choosing a single metering and billing arrangement is not the only option. Policymakers, regulators, and utilities can provide multiple options to customers, offer specific arrangements to certain customer classes and/or DG system sizes, and set limits on overall participation in a program.
Net Energy Metering
Net energy metering (also referred to as net metering) allows DG system owners to export excess energy to the utility grid, receiving a credit in kilowatt-hours. The credit can be applied to offset consumption of electricity within the current billing cycle (e.g., 1 month) or future billing cycles. As a result, with net metering the value of every kilowatt-hour produced—whether self-consumed or exported—reflects, at a minimum, the retail rate the DG owner would otherwise pay their utility for electricity they consume.
A buy-all, sell-all arrangement does not allow DG owners to consume any of the electricity their system generates or otherwise use it to offset purchases from the utility. Instead, this arrangement requires that all on-site demand is met through purchases of electricity from the utility at the retail rate and offers a standard sell rate to the DG system owner for all of the DG electricity they generate. Under this arrangement, the sell rate is typically set at the utility's avoided cost rate but may also be set at a higher rate that reflects the value of DG to the utility and/or grid as determined by regulators or the utility.
In net billing, DG system owners can consume electricity generated by their systems in real time (either instantaneously or at an hourly or subhourly frequency) and export any generation exceeding on-site consumption to the utility grid. Unlike net energy metering, banking of kilowatt-hours within a billing cycle to offset future consumption is not typically allowed with net billing. Additionally, credits are not granted in kilowatt-hour terms, but rather all net energy exports are metered and credited at a predetermined sell rate—often reflecting the utility's avoided cost rate—the moment they are injected into the grid, or, as in some cases, at the end of each monthly billing cycle. Under this arrangement, all electricity produced by the DG system that the owner consumes over the determined netting period will be valued at the retail rate. Meanwhile, all excess energy exported to the grid will typically be valued and compensated at a lower standard sell rate provided by the utility.
Sell Rate Design
Avoided Cost Rate
A utility's avoided cost rate reflects the amount the utility would have to pay to generate the power itself or purchase from another source if the utility was not purchasing electricity from a DG owner. At a minimum, the avoided cost reflects the price of wholesale power, but also often includes the value of any demand savings benefits to the utility, and/or ancillary benefits, resulting from having distributed resources on its grid.
Many utilities seek to encourage DG investment by their customers but believe that a net metering arrangement results in an unfair cost shift onto non-DG owners. To balance those interests, they offer a sell rate below the retail rate but still high enough to encourage DG investment. Another strategy is to provide retail rate compensation but add a monthly service charge to recover the utility's fixed costs for serving the DG owner, thereby avoiding any cost shift.
Regardless of whether a DG owner had previously been on a standard rate or a time-of-use (TOU) rate, many utilities now require new and even existing DG owners to be placed on a DG-specific TOU rate. Under such a rate the cost of purchasing electricity from the utility—and thus the potential value of electricity produced by the DG owner—varies based on the utility's cost of providing electricity to customers at different times throughout the day and across seasons. DG system owners on a TOU rate will be compensated at the applicable rate at the time the generation from their system occurs and could be worth more during times of high ("peak") electricity demand or less during lower ("off-peak") demand.
A value-of-solar tariff is a sell rate that a solar DG system owner receives for exported DG electricity designed to reflect the value of the electricity to the utility and/or society.
Retail Rate Design
A retail rate design defines the retail tariff structure and exact purchase rates the DG system owner must pay for electricity from the grid and, thus, which costs the DG system owner can avoid if they self-consume the electricity produced by their DG system. There is a large diversity of retail rate design options.
Utility Fee Issues
Utility fee issues may impact a DG investment decision. For instance, many utilities charge DG owners monthly non-bypassable administrative or standby fees that may reduce the overall cost savings for the DG owner and extend the investment recovery period. Many utilities also charge a one-time application, interconnection, inspection, and/or meter fee. All of these costs can add up, and while they ultimately may not serve as a significant barrier to investment, they do impact the value proposition.
Proposed Solutions to Regulatory Barriers to Tribal Solar Development, NREL Presentation (2022)
Distributed Solar Photovoltaic Cost-Benefit Framework Study: Considerations and Resources for Oklahoma, NREL Technical Report (2019)
Grid-Connected Distributed Generation: Compensation Mechanism Basics, NREL Technical Report (2017)
Status of Net Metering: Assessing the Potential To Reach Program Caps, NREL Technical Report (2014)
Strategic Sequencing for State Distributed PV Policies: A Quantitative Analysis of Policy Impacts and Interactions, NREL Technical Report (2012)
Solar Cost-Benefit Studies, Solar Energy Industries Association