The Hidden Impact of Prosumers and Its Fair Mitigation

We investigate the burgeoning trend of prosumers, who have transformed from traditional consumers into active renewable energy producers. While prosumers help reduce greenhouse gas emissions and reliance on fossil fuels, they often remain connected to the grid as a backup. This practice requires that utility companies reserve capacity, and conventional consumers share these associated costs. We develop a stylized model to comprehensively assess the impact of prosumers. Our findings demonstrate that, although prosumers contribute to diminishing nonrenewable energy consumption and offer potential cost savings to utility firms, they simultaneously introduce negative externalities. Specifically, they inject uncertainty into the grid, resulting in higher electricity prices and increased utility bills for regular consumers, even when fixed costs incurred by utility firms are not considered. As the intermittency of prosumer energy generation increases, the socially optimal proportion decreases while the self-selected equilibrium proportion of prosumers increases. Furthermore, we examine the potential implications of a conventional linear incentive scheme for prosumers, exemplified by the 2023 U.S. federal tax credit for solar panel installation costs. We find that such schemes may exacerbate social disparity. To address this issue, we propose a reverse-linear subsidization approach, which paradoxically requires less funding to achieve equivalent prosumer adoption rates and results in smaller social disparity.