The structure of utility rates significantly impacts how quickly solar customers will recoup their investment. Similar to most other industries, public utilites generally make more profit as they sell more product, in this case electricity. However, building more electricity generation and transmission infrastructure often conflicts with conserving energy and the use of solar and other on-site generation technologies. Under this structure, a utility has no incentive to allow or encourage their customers to generate their own energy on-site.
However, it is possible to design utility revenue policies and rate structures so that utilities and their shareholders are rewarded for working with their customers to encourage conservation and distributed generation of electricity, while at the same time sending price signals that more closely reflect the real-time supply and demand of energy on the grid. The goal is to provide more options for utilities and consumers - no one solution is perfect for every situation. Smart policy and informed public utility regulators can structure utility rates to provide win-win approaches for utilities, their shareholders, and customers.
If utilities' incentives are changed to encourage them to conserve energy rather than sell it in ever-increasing amounts, they become free to encourage energy efficiency improvements and on-site generation among their customers, while continuing to earn healthy profits for their shareholders. When rates are decoupled from profits, utilities and customers are incentivized to work together to conserve energy and build new generation assets as efficiently as possible. Under those conditions, often the best choice for new generation is distributed generation like solar.
Under most conditions, utilities face very different costs for generating electricity at different times. However, in most places utility customers pay the same price for electricity regardless of when it's purchased. These markets are divorced from the basic principles of supply and demand. As a result, homeowners and businesses have no particular incentive to minimize their use of grid-supplied electricity during peak demand hours. If consumers received price signals that more accurately reflected the supply and demand of electricity, they might choose to conserve energy or generate their own. As the demand for peak energy grows, utilities are forced to build costly generation assets that sit idle during non-peak demand hours. These generation assets impose unnecessary costs on ratepayers.
Commercial Demand Charges
Demand charges are based on maximum electrical demand over time. If electricity were water, demand charges would be based on the size of the pipe, not on how much water flows through it. High demand charges, particularly those calculated over periods of months or years, significantly undermine the economics of commercial solar systems. Some utilities have adopted optional rate schedules that eliminate these charges in lieu of very high peak demand charges. This structural change to rates provides a strong incentive to solar system owners to maximize production during peak hours when it is most valuable to the utility and its ratepayers.