Distributed Renewable Energy Investment: The Effect of Time-of-Use Pricing

This paper examines the effects of time-of-use (TOU) pricing on distributed renewable energy (DRE) investment for a non-power generating firm. We develop an electricity consumption cost-minimization model by considering the intermittent generation as well as the firm's electricity consumption. It has been found that implementing full retail prices compensation for the surplus renewable electricity is probably not good as it may lead to DRE over-investment. Moreover, we find that the firm's optimal investment strategy is not necessarily sensitive to the price signal of TOU pricing (i.e., the ratio of peak to off-peak price). Particularly, when the service-level difference in meeting a firm's electricity consumption between peak and off-peak periods by adopting DRE technology is above a critical threshold in relation to the peak time, a strong price signal will not promote the firm's optimal DRE capacity investment. This paper yields a policy insight that "getting the time right" may be more important than "getting the price right" in terms of enabling DRE investment for TOU pricing design.