Reallocating Risks and Returns to Overcome Barriers to Scale Up of Distributed Electricity Resources

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