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DISTRIBUTED PHOTOVOLTAICS TOOLKIT

As jurisdictions around the world initiate or revise distributed 

photovoltaic (DPV) policies and regulations amid changing 

market conditions, they may benefit from understanding the 

interaction of compensation mechanisms and installed capacity 

caps—two important aspects of DPV program design. This brief 

discusses common practices, design options, and lessons learned 

pertaining to these two topics. It includes examples largely derived 

from the experience of U.S. jurisdictions. 

When it comes to compensation mechanisms for DPV projects, 

the only constant is change. Compensation mechanisms refer to 

the way distributed solar generation is paid for, whether through 

bill credits or cash payments.1 The type of mechanism in place 

is a key component to the investment decision to install a solar 

energy system. The common compensation mechanisms include:

• Net energy metering (NEM)

• Net billing

• Buy-all and sell-all rates, which can include feed-in tariffs

(FITs) and the value of solar tariffs.

As of October 2018, sixty-five policy actions related to compensation mechanisms and the value of DPV took place in the United 

States.2 These occurred across dozens of states and other jurisdictions. And, they followed on the heels of 94 similar actions in 

2017.3 Outside the United States, FITs are subject to adjustments 

as installed capacity of distributed solar increases and the cost of 

solar decreases. Figure 1 shows the evolution of the German FIT 

over time as installed capacity in the country increased.4

The general trends for these policy actions related to compensation mechanisms primarily center on the following concerns:

• Over-subsidization of distributed solar as installed system costs

continue to decrease

1. Zinaman, Owen, Alexandra Aznar, Carl Linvill, Naïm Darghouth, Timon Dubbeling, and Emanuele Bianco. 2017. Grid-Connected Distributed Generation: Compensation Mechanism

Basics. Golden, CO: National Renewable Energy Laboratory. NREL/BR-6A20-68469. https://www.nrel.gov/docs/fy18osti/68469.pdf.

2. Proudlove, Autumn, Brian Lips, and David Sarkisian. 2018. 50 States of Solar. Q3 2018 Quarterly Report. Raleigh, NC: NC Clean Energy Technology Center, p. 8. https://nccleantech.

ncsu.edu/2017/10/18/the-50-states-of-solar-report-for-q3-2017-now-available/. 

3. Proudlove, Autumn, Brian Lips, David Sarkisia, and Achyut Shrestha. 2018. 50 States of Solar. 4Q17 and Annual Review. Raleigh, NC: NC Clean Energy Technology Center, p. 12. 

https://nccleantech.ncsu.edu/2018/01/24/the-50-states-of-solar-report-2017-annual-review-q4-update-edition-now-available/.

4. Adapted from data contained in Wirth, Harry. 2018. Recent Facts about Photovoltaics in Germany. Freiburg, Germany: Fraunhofer Institute, 2018, p. 10. https://www.ise.fraunhofer.de/

content/dam/ise/en/documents/publications/studies/recent-facts-about-photovoltaics-in-germany.pdf .

• Cross-subsidization across rate classes

• Potential grid impacts of higher levels of DPV penetration

• Loss of utility revenue and the ability of the utility to recover

the costs of investments in the grid.

Evolution of German FIT for Small PV (€/kWh)

60

50

40

30

20

10

0

20002001200220032004200520062007200820092010

2011

20122013201420152016

Figure 1. Evolution of German FIT for small-scale solar

€/kWh = euro cents per kilowatt-hour

Given these concerns, policymakers often build in program 

triggers or caps (which are not to be confused with system size 

caps—see Figure 2) to reevaluate existing policies to determine 

whether any adjustments are warranted. The primary triggers for 

reevaluating compensation structures and rate design are:

• When a jurisdiction hits its previously determined cap on

aggregated DPV systems

• When a previously determined date in the future is reached

• When a utility requests a policy review

• Any combination of any of the above.

Installed Capacity Caps for Distributed Photovoltaics 

and their Impacts on Compensation Mechanisms
Installed Capacity Caps for Distributed Photovoltaics and their Impacts on Compensation Mechanisms 2

Figure 2. Difference between DPV system size caps and

program caps

Aggregated net-metering caps are one of the more common 

triggers for reevaluating compensation mechanisms in the United 

States. The cap itself can be set in several ways,5 including:

• Percent of peak demand, capacity, or load met by 

net-metered PV generation: The most common program cap 

is based on a percentage of the utility’s or jurisdiction’s peak 

demand, capacity, or load in a given reference year (e.g., the 

5. Heeter, J., R. Gelman, and L. Bird. 2014. Status of Net Metering: Assessing the Potential to Reach Program Caps. Golden, CO: National Renewable Energy Laboratory, p. 3.

https://www.nrel.gov/docs/fy14osti/61858.pdf.

6. Heeter, Gelman, and Bird. 2014, p. 8.

7. “Freeing the Grid 2017.” Accessed May 21, 2018. http://freeingthegrid.org.

8. NREL. High Penetration PV: How High Can we Go? Golden, CO: National Renewable Energy Laboratory. https://www.nrel.gov/docs/fy16osti/65591.pdf

previous year). In U.S. states with program caps, caps were 

initially typically set at 5% or less, but not always, as illustrated 

below in the case of Vermont.

• A fixed megawatt (MW) cap: An example would be 100 MW 

of installed capacity of distributed solar.

• Some other trigger mechanism such as percent of retail sales.

In the United States, caps have historically been increased over 

time, as illustrated in Figure 3.6

Despite the preponderance of caps and utility concerns, there 

are arguments against having any aggregated caps at all.7 For 

example, some have argued that caps may:

• Limit customers from generating their own electricity

• Stifle market growth

• Hinder jurisdictions from meeting their renewable energy goals.

In Hawaii, a systemwide cap of 4% was removed entirely in 2011 

and the state initially migrated to a system of distribution circuit 

caps of 15% (of peak demand), but upon further testing, the 

Hawaiian Electric Companies raised its distribution circuit cap on 

distributed PV from 120% to 250% of minimum daytime load.8

In 2013, California legislation established a net-metering policy 

cap for three of the largest investor-owned utilities in the state 

DPV System Size Cap

• Sets the maximum 

individual system 

size that is eligible 

for a compensation 

mechanism (e.g., NEM)

• Can affect the customer 

class that is that is eligible 

for a compensation 

mechanism (e.g. NEM)

• Can be capacity or 

percentage-based

DPV Program Cap

• Limits the total amount 

of net-metered (or 

other compensation 

mechanism) 

distributed generation 

systems installed in a 

region or utility service 

territory

• Includes many types 

of caps

• Is political in nature

0%

2%

4%

6%

8%

10%

12%

14%

Washington

Virginia

Vermont

New York

New Hampshire

Nevada

Nebraska

Massachusetts

Maryland

Kentucky

Kansas

Indiana

Illinois

Delaware

California

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Peak demand or load (except CA and DE)

Figure 3. History of net-metering caps in the United States
Installed Capacity Caps for Distributed Photovoltaics and their Impacts on Compensation Mechanisms 3

such that either installed DPV capacity reached 5% of aggregate 

customer peak demand or a deadline of July 1, 2017 was reached, 

whichever came first (AB 327 2013).9 In two instances, utilities 

reached their cap before the deadline, whereas in the third 

instance, the deadline was reached first.10 In 2014, Vermont’s 

aggregated net-metering cap increased from 4% to 15% of the 

distribution utility’s prior year peak demand.11 Upon reaching 

the previous 4% cap, utilities had obtained less than 1% of total 

energy from distributed resources. The cap was subsequently 

eliminated in 2017.12 Alternatively, in Minnesota, when total 

net-metered generation reaches 4% of total utility sales, the utility 

can request a review by the utility regulator to see whether net 

metering should be limited.13

In Mexico, according to distributed generation regulations 

published in July 2017, policies were to be reviewed either by the 

end of 2018 or when aggregate installed DPV capacity in Mexico 

reaches 5% of total installed capacity, or before then if deemed 

necessary by the regulator.14

9. “AB-327 Electricity: Natural Gas: Rates: Net Energy Metering: California Renewables Portfolio Standard Program,” California Legislative Information. Accessed May 21, 2018.

http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201320140AB327.

10. “Former NEM Tariff,” California Public Utilities Commission. Accessed May 23, 2018. http://www.cpuc.ca.gov/General.aspx?id=3800

11. “No. 99. An Act Relating to Self-Generation and Net Metering,” State of Vermont. Accessed May 21, 2018. http://www.leg.state.vt.us/DOCS/2014/ACTS/ACT099.PDF.

12. “Vermont,” NREL. Accessed May 21, 2018. https://www.nrel.gov/solar/rps/vt.html.

13. “Net Metering,” DSIRE. Last updated March 19, 2018. http://programs.dsireusa.org/system/program/detail/282.

14. “Resolución 142. Capítulo 1.3. 2017.” Mexican Energy Regulatory Commission (CRE). Accessed May 23, 2018. http://www.dof.gob.mx/nota_detalle.

php?codigo=5474790&fecha=07/03/2017

15. “Resolución 30. Artículo 4. 2018,” CREG. Accessed May 21, 2018. http://apolo.creg.gov.co/Publicac.nsf/1c09d18d2d5ffb5b05256eee00709c02/83b41035c2c4474f05258243005a1191/$FILE/Creg030-2018.pdf. 

16. Within its net-billing policies, Colombia distinguishes between systems up to 100 kW and those between 100 kW and 1 MW.

17. Using an estimate of 50% self-consumption, 50% export

18. Pena, I. (CREG) March 2018. Phone interview. 

19. Heeter, Gelman, and Bird. 2014, p. 6.

20. Heeter, Gelman, and Bird. 2014, p. 30

21. “Provisional Application Activity and Remaining Capacity,” July 29, 2015. Massachusetts System of Assurance of Net Metering Eligibility. Accessed October 30, 2018.

https://app.massaca.org/allocationreport/report.aspx. 

22. Heeter, Gelman, and Bird. 2014, p. 30.

Design Considerations15 16 17 18

The design of compensation mechanisms (including net-metering) affects both the amount of distributed generation deployed 

in a jurisdiction, and the timing of compensation mechanism 

evaluations. Policymakers should aim to:

• Clearly define the cap: Jurisdictions with established capacity 

caps need to ensure that the cap and all related terms are 

clearly defined to avoid confusion about when a cap has been 

met. Policymakers should provide guidance on how peak 

load or peak demand should be calculated, how a reference 

year is defined, and how solar capacity should be calculated. 

Capacity caps can be simpler than peak demand or peak load 

caps because they do not require calculations based on reference year; however, they also do not account for the relative 

penetration of net metering on the grid.19 Understanding 

whether utilities have the data, tools, and methodologies to 

calculate the cap as defined is also important. Additionally, 

specifying whether systems installed via virtual net metering 

or community solar (if available) contribute to a cap is also 

important because these systems tend to be large—a single or 

several systems can contribute significantly (and quickly) to an 

overall program cap.20 If a jurisdiction wants to allow virtual net 

metering, it might consider increasing the net-metering cap.

• Clearly communicate progress toward reaching the cap: 

Customers and industry need to understand whether their

DPV projects are eligible for net metering. By regularly 

providing transparent data on program cap status, policymakers 

can minimize confusion and market uncertainty. For example, 

Massachusetts displays comprehensive, near real-time

net-metering cap information online (Figure 4).21 Other 

jurisdictions provide information less regularly (e.g., quarterly 

or semiannually). 22

Colombia: New Distributed Renewable

Energy Policy

In February 2018, the Colombian energy regulator (Comisión 

de Regulación de Energía y Gas) released its new distributed 

renewable energy policies.16 They include a net-billing mechanism for exports to the grid along with an aggregated program 

cap for distributed renewable energy systems up to 1 MW in 

size. The aggregated program cap is when annual DG energy 

exports17 reach 4% of the previous year’s energy demand. Once 

this 4% exports to sales cap is reached, the regulator evaluates 

whether the level of compensation paid for exports to the grid 

under the net-billing mechanism should be modified. Given 

the current level of total electricity demand in Colombia, a 4% 

export trigger is equivalent to approximately 2,600 MW of 

installed distributed renewable energy.18
Installed Capacity Caps for Distributed Photovoltaics and their Impacts on Compensation Mechanisms 4

Private and Public, All Utilities (Values in kW-AC)

Capacity (kW)

Net Metering Cap 1,667,250

Interconnected 1,231,815

Reserved Cap Allocations 135,201

Pending Cap Allocations 1,810

Capacity Available under the Cap 298,424

Figure 4. Adapted from a screenshot of the Massachusetts System 

of Assurance of Net Metering Eligibility, as of October 29, 2018

kW-AC = kilowatts, alternating current

• Understand how caps interact with other policies:

Sometimes clean energy or distributed energy goals or requirements cannot be met unless net-metering caps are modified.

Program caps can also have implications for utility revenues

and customer rates. Analysis can shed light on cap levels that

minimize negative financial impacts. Similarly, high-penetrations of distributed PV can have both negative and positive

grid impacts. Distribution circuit level caps could potentially

mitigate adverse impacts.23

• Consider how existing customers are influenced by

compensation changes: Reaching net-metering caps can

trigger changes in compensation mechanisms. The decision to

change the rules for existing solar customers can be contentious.

In general, grandfathering existing DPV customers as well as

those in the interconnection queue who made their investment 

23. Heeter, Gelman, and Bird. 2014, p. 30.

24. “State of New Hampshire Public Utilities Commission,” State of New Hampshire. Accessed May 21, 2018. http://www.puc.state.nh.us/Regulatory/Orders/2017orders/26029e.pdf.

25. Heeter, Gelman, and Bird. 2014, p. 3.

decisions based on previous policies is common and allows 

those customers to benefit from the older policy. Determining 

how existing customers will be treated and making that information available when cap policies are created is a best practice. 

Why Caps Can be Useful

Establishing caps can be critical to getting stakeholder support for 

a new policy such as net metering, net billing, or value of solar. 

Otherwise, open-ended policies might leave utilities concerned 

about getting locked into a long-term policy regime with little 

opportunity to adjust it as the DPV market matures and costs 

decrease. In some cases, upon reaching the cap, the policy actions 

result in less support for distributed solar projects. These actions 

can include a reduction in compensation for excess electricity 

exported to the grid and/or the adoption of fixed charges, demand 

charges, or fees to offset the perceived or real costs associated 

with DPV customers. For example, in 2017, New Hampshire 

reduced the level of compensation for net electricity exports. 

Existing solar customers were grandfathered under the old policy, 

and a study evaluating the use of a value of solar tariff was 

ordered.24 In other instances, caps might increase after announcing 

the transition to a new policy, such as time-of-use or value-ofsolar rates (e.g., Massachusetts in 2014).25

Caps or triggers, such as declining incentives based on installed 

capacity, are a way to track and adjust to changing market 

conditions. Static policies in a fast-growing industry like solar, 

which has seen rapid price decreases, may lead to governments 

and utilities paying more for solar than necessary. An orderly 

process by which existing policies are periodically revisited 

results in positive outcomes for solar consumers, solar companies, 

and investors in the sector. 

Written by Jason Coughlin and Alexandra Aznar, National Renewable Energy Laboratory

Jeff Haeni

U.S. Agency for International Development

Energy Division, Office of Energy & Infrastructure Programs

Tel: +1-202-712-0546 | Email: jhaeni@usaid.gov

Alexandra Aznar

Project Leader

National Renewable Energy Laboratory

Tel: +1-303-275-3224 | Email: alexandra.aznar@nrel.gov

The Distributed Photovoltaics Toolkit provides resources to support developing countries in 

addressing barriers to safe, effective, and accelerated deployment of distributed solar power. 

Greening the Grid is supported by the U.S. Agency for International Development.

The USAID-NREL Partnership addresses critical challenges to scaling up advanced energy systems 

through global tools and technical assistance, including the Renewable Energy Data Explorer, Greening 

the Grid, the International Jobs and Economic Development Impacts tool, and the Resilient Energy 

Platform. More information can be found at: www.nrel.gov/usaid-partnership.

greeningthegrid.org | nrel.gov/usaid-partnership

This work was authored, in part, by the National Renewable 

Energy Laboratory (NREL), operated by Alliance for Sustainable 

Energy, LLC, for the U.S. Department of Energy (DOE) under 

Contract No. DE-AC36-08GO28308. Funding provided by the 

United States Agency for International Development (USAID) 

under Contract No. IAG-17-2050. The views expressed in this 

report do not necessarily represent the views of the DOE or the 

U.S. Government, or any agency thereof, including USAID.

NREL/TP-7A40-71195 | May 2019

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