Previously, I’ve written about the potential for a future smart grid, where homes with solar panels and batteries intelligently interconnect to form a cleaner, more-robust distributed power system. While we’re still far from a full-fledged smart grid, recent years have seen wider deployment of distributed energy storage. Today, Germany already boasts over 7,000 home solar plus energy storage systems, and some analysts suggest the U.S. could see similar growth once Tesla’s much-touted battery “Gigafactory” starts producing at scale.

With home battery systems on the rise, it’s worth thinking about how economics might influence the development of storage-equipped smart grids in the future. Consider the example of solar energy tariffs in Germany versus the United States.

In Germany, solar energy delivered to the grid is paid a set “feed-in tariff,” a fixed energy rate established by the government to promote adoption of solar energy. Today, the tariff ranges from about 13 to 14 euro cents per kilowatt-hour of energy—far less than Germany’s typical residential electricity rates of about 22 to 29 euro cents per kilowatt-hour.

Germany’s solar feed-in tariff not only incentivizes a homeowner to install solar panels, but also to store solar energy for later use in the home. (Photo credit: Flickr user thetimchannel)

The difference between these two rates creates an incentive to store solar energy before it can flow to the grid. If solar electricity is stored and then used in the home, it offsets purchase of grid electricity at the cost of not collecting the solar feed-in tariff. The current difference between these rates equates to a net benefit of 10-15 euro cents per kilowatt-hour of solar energy diverted from the grid into batteries.

In the United States it’s a different story. Solar power generated by electricity customers is typically either “net metered” or paid a “value-of-solar” tariff. Under a net metering rate, produced solar energy essentially rolls the electric meter backwards, i.e. it is valued at exactly the price of retail electricity. Value-of-solar tariffs pay for solar at a rate calculated based on its overall environmental and system benefits. Rates calculated by Minnesota’s Public Utility Commission (14.5 cents per kilowatt-hour) and Austin’s municipal electric utility (12.8 cents per kilowatt-hour) both exceed retail energy rates. Under both of these solar tariffs, the economic decision is to send solar electricity directly into the grid, rather than save it for later use in the home.

The Minnesota Public Utility Commission calculated the value of solar energy based on its direct and indirect benefits. Because their approximated value of solar is higher than the cost of grid electricity, a homeowner is not incentivized to store solar energy. (Source: Institute for Local Self-Reliance)

Instead of storing solar energy, U.S. home battery systems are intended to take advantage of time-of-use electricity rates, which charge more for energy use during peak hours. The battery stores extra grid electricity at night, when electricity is cheapest, to offset the purchase of expensive on-peak electricity.

The effect of storage operating under the U.S. rates is that a home uses more grid electricity at night, uses less on-peak electricity, and stores no solar energy for use in the home. Anytime solar power production exceeds the home’s energy demand, the extra power is simply pumped back into the grid, turning the home into a net generator.

The difference between Germany’s energy-independence rate structure and the U.S. grid-centric structure is subtle yet in many ways decisive. Germany’s utility tariffs incentivize a home to minimize its interaction with the wider grid, encouraging a system where individual homes can more-easily operate independently. The U.S. rates incentivize more economic reliance on the grid both to store cheap nighttime energy and sell extra solar energy.

The distinction between these rates illustrates divergent visions for the future smart grid: one that prefers energy independence versus one that prefers reliance on the central grid. Which is preferable? The short answer is: it depends. It will certainly be interesting to see how smart grids develop over the coming years.

Image credits: Flickr user thetimchannel, Institute for Local Self-Reliance.