Reallocating risks and returns to scale up adoption of distributed electricity resources

• We analyze schemes used to induce owners of distributed assets to make them available for electricity generation.
• We show that power purchase agreements used in solar PV “misallocate” electricity price risk to owners/consumers.
• We propose new contracts forms that shift price risk from consumers to parties that are better able to manage it.
• Full-fledged distributed generators are created by unambiguously rewarding owners and de-coupling consumption/ownership.
• We argue that our analysis can be used to assess scale up schemes in other domains of distributed electricity resources.

Deployment of distributed electricity resources requires bringing together assets that belong to diverse and geographically diffuse owners. Using the example of distributed solar PV, we analyze the schemes used to encourage/induce owners of distributed assets to make them available for electricity generation. The dominant model in the U.S. is long term power purchase agreements (PPA) offered to owners/consumers by solar developers. We show that these agreements (mis)allocate the electricity price risk to owners/consumers and impose limitations on the scale up of distributed solar. By proper use of financial markets it is possible to shift the electricity price risk from owners/consumers to parties that are better positioned to manage it. The proposed contracts simplify the adoption decision for owners/consumers and can lead to a wider adoption. Removing barriers to scale up requires (i) eliminating the tight coupling between consumers and owners and (ii) rewarding the owners unambiguously for the assets they provide. These necessitate the transformation of the current intermediary firms into full-fledged distributed generators. We discuss the implications of such a transformation and argue that the broad outline of our analysis can be used to assess scale up schemes in other domains of distributed electricity resources as well.