Center for the Study of Energy Markets

Solar PV panels generate electricity only during daylight hours and generate more electricity when the sun is shining more intensely. As a result, in summer-peaking electricity systems, such as California and most of the U.S., power from PVs is produced disproportionately at times when the value of electricity is high. Thus, a valuation of solar PV electricity production that uses only the average wholesale cost of electricity will tend to undervalue the power. Yet, that is what happens by default in many installations because solar PVs are generally located at the end-user's premises and those end-users are often billed on a flat per kilowatt-hour rate that does not reflect time-varying valuation. As a result, the benefits to many owners of solar PV in reduced electricity bills do not reflect the true time-varying valuation of the power the panels produce. I use solar PV production information in conjunction with wholesale price data and simulations to estimate the actual wholesale value of power from solar PVs and the degree of bias that occurs from using a constant price to value electricity generated by solar PVs. I find that in the California locations I analyze, the most credible long-run valuation of solar PV power is 29%-48% greater than results from valuation at a flat-rate tariff, depending on the location of the PV panels. If the end user is billed on a time-of-use tariff (a simple peak/off-peak price system), however, I find that the misvaluation of wholesale power from solar PVs is approximately zero.