The policy of net-metering allows the operators of residential- and commercial solar PV systems to sell surplus electricity back to their utility at the going retail rate. This policy has recently been criticized on the grounds that it provides a subsidy for solar installations, a subsidy that is paid for by all ratepayers. In response, public utility commissions have begun to take up this regulatory issue. This paper presents a theoretical and empirical analysis of the effects of net metering restrictions. We examine the impact that feed-in tariffs (FiT), set below the going retail rate, will have on the volume of future residential PV investments. Our calculations focus on three representative locations in the states of California, Nevada and Hawaii. We find that a FiT set at or above the levelized cost of electricity (LCOE) for solar PV power would provide sufficient incentives for investors to continue on the current path of residential solar installations, even though the profitability of these investments would be lowered substantially. At the same time, we find that the LCOE is a tipping point insofar as feed-in tariffs set below that level would have a sharply negative effect on the volume of new installations.
