Harvesting Solar Power Foments Prices in a Vicious Cycle: Breaking the Cycle with Price Mechanisms

Published Online:https://doi.org/10.1287/opre.2021.0756

Distributed solar power generation is growing but not necessarily benefiting the utility firms. Reducing the demand, it hinders the coverage of utility costs with reasonable retail electricity prices. Utilities raise prices, unintentionally reducing both demand and affordability of electricity, and are said to be caught in a utility (death) spiral. The reduced affordability adversely affects consumers who cannot invest in solar generation. Environmentally desirable solar power paradoxically can be socially undesirable. Market regulators are challenged to keep prices low within the current pricing mechanisms. We provide a profit maximization formulation for a regulated utility and reveal the interaction between optimal price increases and growing solar power adoption. Iterating with this interaction, we study the utility death spiral for myopic and forward-looking consumers. We consider new pricing mechanisms with a buyback price and a subscription fee paid only by solar power-generating consumers. The fee mitigates the optimal retail price increase by allowing for the coverage of fixed costs in part. We find appropriate values for the buyback price and subscription fee to, respectively, slow or stop the utility spiral. These mechanisms are important not only for the utility and its regulator but also for all electricity consumers.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/opre.2021.0756.

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