The equity implications of pecuniary externalities on an electric grid

The adoption of rooftop photovoltaic (PV) systems can create upward pressure on retail electricity rates as utilities are forced to spread their fixed costs of generation and transmission across a smaller customer base. Since high-income households are more likely to purchase PV systems, low-income households may be disproportionately impacted by these rate increases. Using a novel combination of agent-based computational economic modeling and a choice experiment of rooftop solar adoption, we show how this pecuniary externality between low- and high-income customers increases low-income electricity bills by 10% in an area with some of the highest poverty rates in the United States. Since high-income solar adoption is less sensitive to electricity bills than low-income adoption, this pecuniary externality also reduces PV adoption inequity by nearly 1 percentage point. However, the reduction in PV adoption inequity, and the bill savings it generates, are not large enough to offset the $7.8 million ($9.86 per customer) annual increase in low-income electricity bills. Low-income assistance programs will likely fail to fully internalize the pecuniary externality due to horizontal and within-income-group vertical equity concerns.