A Valuation-Based Framework

for Considering Distributed

Generation Photovoltaic Tariff
Design
Preprint
Owen R. Zinaman

National Renewable Energy Laboratory

Nam R. Darghouth

Lawrence Berkeley National Laboratory

To be presented at India Smart Grid Week
Bangalore, India
March 26, 2015

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A Valuation-based Framework for Considering

Distributed Generation Photovoltaic Tariff Design
Owen R. Zinaman, M.S.E

Nam R. Darghouth, Ph.D.

21st Century Power Partnership

National Renewable Energy Laboratory
Golden, Colorado, USA
[email protected]

Environmental Energy Technologies Division

Lawrence Berkeley National Laboratory
Berkeley, CA, USA
[email protected]
grows in India. This framework can make use of existing
evaluations of the technical issues that will need to be
addressed in Indian states (such as those found in Magal et al.,
2014 [1]) to quantify the C&B of DGPV.

Abstract Distributed generation photovoltaic (DGPV) costbenefit analyses (CBAs) can provide substantive insights into
understanding the potential flows of value among stakeholders
that grid-connected DGPV programs might induce. Tariff design
has a significant impact on the level and accrual of such value
thus, a cost-benefit analysis is a robust starting point for
stakeholder engagement and discussion on DGPV tariff design.
To that end this paper outlines a holistic, high-level approach to
the complex undertaking of DGPV tariff design, the crux of
which is an iterative cost-benefit analysis process. We propose a
multi-step progression that aims to promote transparent,
focused, and informed dialogue on CBA study methodologies and
assumptions. When studies are completed, the long-run marginal
avoided cost of the DGPV program should be compared against
the costs imposed on utilities and non-participating customers,
recognizing that these can be defined differently depending on
program objectives. The results of this comparison can then be
weighed against other program objectives to formulate tariff
options. Potential changes to tariff structures can be iteratively
fed back into established analytical tools to inform further
discussions.

This paper offers a high-level approach to the complex

undertaking of a DGPV tariff design process, the crux of which
is a program cost-benefit analysis (CBA) study.
In the context of a larger regulatory framework, we choose
to focus on tariff design because of the significant impact this
DGPV program design component has on the various flows of
value (benefits, costs, and risks) among power sector
stakeholders. In that context, this paper is organized into a
series of steps that can be taken during the design of a DGPV
tariff. These steps are intended to serve as a roadmap of
iterative or cyclical activities rather than an explicit, linear
schedule.
II. STEP 1: DECLARE THE OBJECTIVES OF THE PROGRAM
The energy regulator and other relevant government bodies
should consider publicly declare their objectives with respect
to the DGPV program, as informed by public policy mandates
and other goals. Objectives typically take the form of either
desired aspects or desire outcomes of the program they range
not only in importance but in tangibility and measurability.
Establishing such objectives ex-ante enables tariff design
discussions and options to be appropriately assessed for
alignment with a transparent set of values. Table I lists
examples of potential objectives of a DGPV program.

Keywordstariff design, ratemaking, distributed generation,

photovoltaic, solar valuation, value of solar, cost-benefit analysis

I. INTRODUCTION
Stakeholders contributing to ongoing discussions over
distributed generation photovoltaic (DGPV) tariff design will
often have different perspectives on how export tariffs should
be structured. This divergence of perspectives may at some
level stem from disparate stakeholder interests and assessments
of the net costs and benefits (C&B) of DGPV programs, as
well as the distribution of how and to whom those C&B
accrue. As Indian regulators look to emulate recent progress in
certain states in India and quickly accelerate DGPV growth, a
common analytical framework, which hinges on a transparent
cost-benefit analysis process, might be employed to encourage
more open, informed, forward-looking discussion over tariff
design. A number of Indian states, including Gujurat, Tamil
Nadu, Uttarakhand, Andhra Pradesh, West Bengal, Kerala,
Karnataka, among others, have set up forms of net energy
metering for DGPV, and many more are in the process of
designing regulatory structures to compensate DGPV. It is by
applying frameworks such as the one proposed in this paper
that Indian policymakers can gain a system-wide understanding
of the C&B of DGPV programs given their objectives,
ensuring a sustainable solar market as DGPV penetration

TABLE I.
Focus Areas

Utility

PV Owner

Ratepayer
Grid / Technical

POTENTIAL OBJECTIVES OF A DGPV PROGRAM

Taxonomy of Potential Objectives
Example Objectives

preserve financial health of utility; ensure fair recovery

of administrative and network infrastructure costs;
establish new utility investment opportunities; efficient
rate-making to ensure proper price signals to customers
simplicity and attractiveness of DGPV value
proposition; ease of application process; incentivize
deployment; responsiveness to consumer demand and
financibility
protection from unjust rate increases or allocation of
risk; mitigation of cross-subsidization impacts among
participants and non-participants; protection of lowincome customers
deployment goals and timeframes; alleviation of supply
shortfalls, network congestion reduction, inducing of

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Focus Areas

Society
Environment
a.

methodologies and input assumptions employed thus, careful

consideration of these aspects is key to producing credible
valuation estimates. For example, when quantifying the
economic value of DGPV, should it displace the costs of a
marginal or average generator? Will DGPV be incorporated in
integrated resource planning, or will it be layered on top of
already-planned systems? At what level of spatial and temporal
granularity will DGPV be valuated? What stakeholder
perspectives will be considered? If included, how will societal
benefits such as the health impacts of reduced particulate
emissions from conventional generation or improved water
quality be quantified?

Taxonomy of Potential Objectives

Example Objectives

load-shifting behavior; implementation feasibility;

discourage illegal interconnections
economic development and job creation; empowerment
of small- or medium-size enterprises; energy security;
address environmental justice concerns
global and local emissions reductions; water use and
quality impact reduction

Some of the listed example objectives could be classified under more than one focus area

III. STEP 2: CONSIDER PROGRAM COSTS AND BENEFITS TO BE

ANALYZED

Denholm et. al [6] discusses the range of methodologies

and tools that can be employed to generate estimates of various
DGPV costs and benefits from the system perspective. For
each C&B covered, approaches are described in increasing
order of difficulty, with discussion focused on the relative
accuracy of the approach and tools required.

DGPV exhibits a range of C&B to various stakeholders.

Table II lists a summary of those C&B, as synthesized from [2]
[3] [4]. The costs and benefits of DGPV are highly dynamic
quantities, changing with time and location of energy
production, local (i.e. feeder) and global (i.e. system)
penetration levels, as well as the performance attributes of the
system (e.g. reactive power support). The methodologies
employed to valuate these C&B (see Step 3) range in the
granularity and accuracy for which they characterize this
dynamism [5]. Furthermore, they accrue in a distinct manner to
a diverse set of stakeholders.
TABLE II.
Aspect

Benefits

Costs

Keyes and Rbago [7] outlines key study assumptions

where initial discussions might be focused, such as discount
rates, demand and fuel price projections, stakeholder
perspectives considered, and geographic and system
boundaries. They emphasize that developing a robust set of
base assumptions is critical to any study, and that transparency
in both methodology and assumptions is key for fostering
stakeholder buy-in and program success. Non-disclosure
agreements may be a necessary tool to circumvent sensitivities
with utilities.

COSTS AND BENEFITS OF A DGPV PROGRAM

Range of DGPV Costs and Benefits
Example C&B

Overall, stakeholders must balance a desire for theoretical

accuracy against practical considerations. Table III outlines key
questions for stakeholders to consider while evaluating a
particular methodology as part of the CBA process. These
considerations may change as they are revisited in more mature
DGPV markets. For example, the value of accuracy may not be
paramount when cumulative DGPV levels are still low, but
may gain importance as with increased DGPV capacity.

avoided utility energy costs; reduced consumer

electricity bills; avoided ancillary service costs; reduced
line losses; deferred/reduced utility generation,
transmission, and distribution capacity investments;
fuel price hedging; emissions reductions and air quality
improvements; water use reductions; water quality
improvements; grid security and reliability; economic
development; regulatory compliance benefits
cost of DGPV system; cost of metering infrastructure;
program administration; reduced utility fixed cost
recovery; interconnection cost; lost margin on power
re-sale; changes to conventional generator operations;
distribution system upgrades; cost of enabling
information and communication technology systems

TABLE III.
Aspect

In Step 2, the presence of the various DGPV costs and

benefits in a prospective CBA study (see Step 4) can be
publicly deliberated among relevant stakeholders and evaluated
against the backdrop of the program objectives established in
Step 1. Furthermore, such deliberation should be informed by
the relative difficulty to robustly assess various metrics (see
Step 3).

Accuracy of
Estimate
Value of
Accuracy
Cost of
Estimate
Execution
Feasability

IV. STEP 3: CHOOSE STUDY ASSUMPTIONS AND

METHODOLOGIES TO ASSESS COSTS AND BENEFITS

Implementation
Feasability

Upon selecting which set of C&B will be included in a

valuation exercise, a multi-stakeholder dialogue can then be
focused on how selected costs and benefits are assessed, and
what underlying assumptions will be used to serve as a
foundation for that assessment. C&B quantification and costeffectiveness analyses can vary significantly based on the

KEY CONSIDERATIONS FOR VALUATION

Key Considerations for C&B Valuation
Methodology Selection
Questions

How accurate will the methodology be, relative to

more simple or more complex approaches?
How much value will additional accuracy yield for
the process?
How much will it cost (in time and money) to
execute the methodology in question, relative to
other approaches?
Is there technical capacity available to implement
this methodology? Are adequate models and data
sets publicly available in acceptable timeframes?
How equipped and willing are relevant government
bodies to implement complex study results?

Facilitating a focused, transparent, and pragmatically

grounded multi-stakeholder discourse will help to establish
methodological transparency when CBA studies are conducted.
While consensus may never be reached among stakeholders,
allowing for periods of public comment, addressing concerns,
and encouraging focused discussions on study assumptions and

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TABLE IV.

methodologies will help to articulate areas of disagreement,

leaving room for consensus-building in other areas.

Components

V. STEP 4: CONDUCT COST-BENEFIT ANALYSIS STUDY

Compensation
Structure

The crux of the proposed framework is the DGPV CBA

study the results of which will be used to inform not only
tariff design discussions (Step 5), but continued stakeholder
dialogue over CBA methodologies and input assumptions
(Step 3) as study results are assessed. An iterative process is
envisioned where periodic updates to study assumptions,
valuation methodologies and tariff design are conducted, as
informed by continued stakeholder discussions.

Import/Export
Tariff Building
Blocks
Export
Tariff
Level
Export
Tariff
Contract Terms
Purchasing
Arrangements

Depending on the scale of the geographical and temporal

resolution chosen for the analysis, a variety of approaches,
spanning operations and planning models to power flow
simulations to financial analysis tools, can be integrated to
conduct a DGPV valuation study. No one tool is capable of
accurately characterizing the range of potential technical and
financial impacts of a DGPV program over various timeframes
and system boundaries. Thus, utilizing a combination of tools
and analytical techniques is likely key for conducting a robust
valuation. As a matter of process, outputs from power sector
simulation tools (e.g., bulk planning or operations models,
transmission or distribution power flow simulations) are often
used as inputs to financial analysis tools that assess utility rate
and revenue impacts, as well as stakeholder cost-effectiveness
metrics such as the Utility Cost Test, Ratepayer Impact Metric,
or the Societal Cost Test.

a.

KEY TARIFF COMPONENTS

Key Tariff Components
Examples

NEM; avoided cost compensation; FITa [8]; net FIT

[9]; value-of-solar [9]
variable energy charges; fixed/variable network and
administrative charges; time-varying rates [11];
demand-based rates; standby charges; bi-directional
distribution charges [3]; minimum bills [12]
fixed rate; degression rate; inclining block rates
term length; credit reconciliation terms and limits;
generation limits; exit clauses
utility offtaker; independent buyer office

Many FIT structures exist, including fixed rate FITs, degression rate FITs, and FIT premiums.

For any proposed tariff structure, the long-run marginal

avoided cost of the DGPV program can be compared against
the costs imposed on non-participating customers. This will
yield insight into the amount of cross-subsidization, if any, that
would be expected to occur between non-participants, the
utility and DGPV system owners. In the event that crosssubsidization is occurring, the terms of the tariff or program
might be adjusted, via e.g., increases to fixed charges,
minimum bills, limits on system size, or program caps.
Potential changes to tariff structures can be fed back into
established analytical tools to inform decisions and stakeholder
discussions. On the other hand, some level of crosssubsidization may be tolerable if it results in a simple and easyto-implement program (e.g., NEM), or even desirable if
incentivizing deployment using ratepayer funding is an
objective. CBA studies will likely show a diverse range of
value flow and accrual among customer classes which change
with grid location and time of energy production. Table V lists
potential incentives and pricing mechanisms that can be
explored during ratemaking which may help tariffs better
reflect the various value dimensions of DGPV.

In formulating a DGPV program, regulators may also

consider whether subsidies for DGPV are appropriate, and if
so, the levels, types, and sources of subsidization. To this end,
CBA studies can be used to understand how potential
incentives and subsidies induce different levels and patterns of
deployment or mitigate inequities.
A key question to explore is who will be designated to
conduct the CBA study. An appropriate balance can be struck
between the desire for study transparency and practicalities
around capabilities and data availability. In some contexts, it
may be appropriate or desirable to enroll a third party
consultant, or to install an independent monitor with the utility
modelling teams. Utilities typically hold the grid data
necessary to perform system-perspective valuation studies but
may be perceived as biased towards promoting a lower value
for DGPV.

TABLE V.

PRICING MECHANISM FOR CAPTURING DGPV VALUE

Dimension

Pricing Mechanisms for Reflecting DGPV Value

Dimensions

Time
of
production
Location of
production
Localand
Grid- Level
Penetration
System
Performance
Attributes

VI. STEP 5: PROPOSE TARIFF STRUCTURE

Understanding various flows of value among stakeholders
will enable regulators to allocate costs during a tariff design
process in a manner that is aligned with their stated objectives
(see Step 1). Table IV lists key components of a DGPV tariff
that can be considered.

time-of-use pricing [11], panel orientation incentives

[13], hourly or dynamic pricing [11]
locational incentives [14], distribution locational
marginal pricing [5]
penetration-scaling tariff pricing, system capacity caps
Incentives for allowing system curtailment
encouraging specific inverter functionalities

or

While these mechanisms can be useful to some extent, it may

not be pragmatic to design highly-customized tariff rates to
ensure solar C&B are disbursed at a theoretical financial
optimum (i.e. one which attempts to reflect all value
dimensions fully). Furthermore, if simplicity and feasibility of
implementation are identified as key program objectives (as is
often the case for early-stage programs), using a single tariff
(i.e., NEM or FIT) might be desirable.

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While the tariff structure is key in influencing the flow of

value among stakeholders, tariffs must be formulated in the
context of a larger regulatory framework. For instance, if a
CBA study shows that fixed network and administrative costs
may not be fully recovered from program participants for a
given tariff structure, system or program size limits might be
desirable. Frameworks must also select and allocate costs for
the required meter technology, considering the metering needs
of the proposed tariff and future needs with respect to data
collection and advanced distribution system management.
Smart meter and smart grid targets might be tied to DGPV
deployment to help create new investment opportunity for the
utility and promote longer-term DGPV integration. Sanctioned
business models should also be identified (e.g., virtual NEM,
community NEM, third party leasing, shared utility-consumer
ownership, utility ownership), as aligned with objectives.

also establishes the models, financial analysis tools and other

technical capabilities which could eventually inform shifts
toward more systematically fair apportionments of DGPV
costs and benefits (i.e. a VoS tariff). State Energy Regulatory
Commissions in India might consider investing in building
such capabilities, either internally, within their regulated
utilities, or with a third-party consultant.
VIII. CONCLUSION
A multitude of objectives and stakeholder perspectives are
prioritized and harmonized during a DGPV tariff design
process. CBA studies can provide substantive insights toward
understanding the various flows of value that a program may
create, and can be used directly or indirectly to inform public
consultation processes and formal proposals and decisions. The
framework presented in this paper strives to promote
methodological transparency and active stakeholder
participation in the often iterative CBA study process. The
extent to which independent decisions must be made by
empowered stakeholders (i.e. regulators, utilities) depends on
the specifics of the consultation process, the DGPV program
objectives, and surrounding institutional and governance
arrangements. However, ensuring that stakeholders understand
the full range of issues considered will help to enable focused
and productive engagement.

VII. DISCUSSION
As formal decisions are issued, regulators might bear in
mind that regulatory frameworks are not set in stone. While
honoring existing contracts helps to preserve investment
certainty, new terms can be proposed to steer the market
toward desired levels and spatial distributions of deployment,
as aligned with established and emerging policy objectives. To
begin, and one may design and implement a pilot DGPV
program in order to assess effects of distributed solar on the
electricity grid (potentially calibrating valuation models), while
evaluating and demonstrating new technologies or billing
methods, increasing public acceptance, and gaining stakeholder
buy-in.

ACKNOWLEDGMENT
The author thanks the reviewers of this paper, Paul
Denholm, Liz Doris, Bhargav Mehta, Ravi Vora, Ron Benioff,
Doug Arent, and Karin Haas.

CBAs which holistically consider planning, operational and

financial implications of DGPV programs are being explored
in various contexts, typically under the purview of a value-ofsolar (VoS) tariff formulation process. VoS tariffs are intended
to reflect the principle that DGPV owners can feasibly be paid
for the costs they incur and be paid for the benefits they
contribute to the system, with the understanding that these
benefits can change over time with wholesale electricity
market conditions. Formulating a tariff to reflect this principal
fundamentally necessitates a detailed CBA methodology.

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[1]

[2]

[3]

The U.S. State of Minnesota established a VoS tariff

formulation process where stakeholders were able to review all
aspects of the methodology before a final rate was set [15].
While no true consensus was ever reached on the methodology
employed (or the final tariff level, for that matter), the process
nonetheless successfully garnered open dialogue and
methodological transparency. As well, it will have enabled
stakeholders to continue to meaningfully contribute to VoS
proceedings as the tariff is periodically reevaluated.

[4]
[5]
[6]

[7]

While a VoS tariff formulation process is a sound impetus

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that time and resources (both financial and technical) are
available, establishing the analytical framework to understand
the costs, benefits and expected impacts of a program will lead
to informed decisions that are aligned with the objectives of the
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