This section describes (1) the operation and regulation of the electricity system and (2) advances in technologies available to customers that allow them to generate, store, and manage their consumption of electricity. The electricity system involves four distinct functions: electricity generation, electricity transmission, electricity distribution, and grid operations. As shown in figure 1, electricity is generated at power plants, from which it flows over high-voltage, long-distance transmission lines to transformers that convert it to a lower voltage to be sent through a local distribution system for use by residential and other customers. Because electricity is not typically stored in large quantities, grid operators constantly balance the generation and consumption of electricity to maintain reliability. In addition, electricity suppliers sell electricity to residential and other customers. Continuously balancing the generation and consumption of electricity can be challenging for grid operators because customers may use sharply different amounts of electricity over the course of a day and throughout the year. For example, in many areas, customer demand for electricity rises throughout the day and reaches its highest point, or peak demand, in late afternoon or early evening (see figure 2 for an example of how demand changes throughout the day). As we noted in a prior report, throughout the day, grid operators direct power plants to adjust their output to match changes in demand for electricity. Grid operators typically first use electricity produced by the power plants that are least expensive to operate; operators then increase the use of electricity generated by more expensive power plants, as needed to match increases in electricity demand. As a result, providing electricity to meet peak demand is generally more expensive than during other parts of the day, because to do so, grid operators use power plants that are more expensive to operate. In general, grid operators perform planning to ensure that grid infrastructure has sufficient capacity—the maximum capability in megawatts to generate and transmit electricity—to meet future peak demand, as we found in our review of reports from DOE and industry sources. To accomplish this, grid operators typically develop forecasts of future electricity demand based on historical information about customer electricity use combined with assumptions about how customer demand will change in the future based on population growth, economic conditions, and other factors. In general, grid operators assess the adequacy of existing grid infrastructure, identify any capacity needs, and evaluate the cost and effectiveness of potential solutions to address these needs. Potential solutions could include building a power plant to generate additional electricity, building a new transmission line to transport electricity to an area with estimated high future electricity demand, or implementing a program to encourage customers in a high- demand area to use less electricity. Responsibility for regulating the electricity industry is divided between the states and the federal government. Most customers purchase electricity through retail markets. State regulators, often called public utility commissions, generally oversee these markets and the prices retail customers pay for electricity (see sidebar). Before electricity is sold to retail customers, it may be bought, sold, and traded in wholesale electricity markets. The Federal Energy Regulatory Commission (FERC), which oversees wholesale electricity markets, among other things, has statutory responsibility for ensuring that wholesale electricity prices are just and reasonable, and not unduly discriminatory or preferential. Technological innovation in recent years has led to the development and increased availability of new and more advanced technologies that can be deployed where customers live and that give customers greater control over how they use electricity. These technologies can be deployed by customers, electricity suppliers, or third-party providers—independent entities that sell specific products and services to customers. Figure 3 illustrates the deployment of these technologies at a residence. Distributed generation systems. Distributed generation systems are relatively small-capacity electricity generation systems, such as those installed at residences or other customer locations throughout the grid, generally at or near the site where the electricity will be used. A common type of distributed generation system is a solar system, such as solar photovoltaic panels installed on a roof. Solar systems installed at a customer’s location allow the customer to generate electricity for their own use and send excess electricity to the grid that electricity suppliers can use to meet other customers’ electricity needs. Solar systems utilize inverters—devices installed with the system to convert the electricity it generates into a form usable by the customer and the grid. Advanced meters and associated infrastructure. Advanced or “smart” meters are deployed at residences and other customers’ locations by grid operators to allow them to collect data on customers’ electricity use at more frequent intervals than is possible with traditional meters. Advanced meters are integrated with communications networks to transmit meter data to grid operators. This integration can reduce or eliminate the need for grid operator personnel to read meters at a customer’s location. Data management systems store, process, and receive data from advanced meters. Certain advanced meters can be enabled to communicate directly with customers’ smart devices by sending information, such as electricity prices, that these devices use to take actions such as reducing consumption. Distributed storage systems. Distributed storage systems—such as batteries located at homes—allow customers to store electricity from the grid or from a distributed generation system for use at a later time. For example, customers with distributed storage systems may store electricity produced from an on-site solar system during the day when their electricity consumption is lower than the amount of electricity the solar system produces. Customers may then use this stored electricity generated by the solar system later in the day, for example, during peak demand periods. Electricity management technologies. Smart devices—such as smart thermostats, smart appliances, and electric vehicles with automated charging controls—contain electronics capable of automatically adjusting electricity consumption. Smart devices may be controlled by energy management systems that allow customers to automate control of their devices and respond to changing grid conditions. For example, customers could choose to program their electric vehicle to charge at night to avoid charging during peak demand periods. Federal and state policymakers have used a variety of policies to encourage deployment of solar systems, advanced meters, and other residential electricity storage and management technologies. Specifically, policymakers have used (1) federal financial incentives and state electricity policies to encourage residential deployment of solar systems; (2) federal grants and state requirements to encourage residential deployment of advanced meters; and (3) federal and state financial incentives and state deployment targets to encourage residential deployment of electricity storage and management technologies. Federal and state policymakers have used financial incentives and other policies to encourage residential deployment of solar systems. Many of these policies shorten the expected payback period of solar systems—the period of time it takes customers to realize savings equal to the cost of installation. These policies typically do so by reducing the up-front costs of installation or by increasing the level of expected savings from the system. At the federal level, the government has established tax incentives encouraging residential deployment of solar systems. For example, the Investment Tax Credit provides a tax credit, equal to 30 percent of the cost of installing a solar system, to the owner—either a customer that owns the system or third-party provider that installs and owns the system on behalf of a customer. This tax credit can generally be claimed in full in the tax year during which the system is completed, allowing the customer to immediately offset a large portion of the installation costs. Data are not available on the amount of revenue losses attributable to the use of the federal tax credits for residential solar systems. However, the federal government is expected to forgo billions of dollars in tax revenue as a result of individuals and corporations claiming federal tax credits for installing solar systems and other renewable energy technologies. At the state level, policymakers have used several types of policies to encourage residential deployment of solar systems. Net metering policies. Net metering policies implemented by state regulators generally require electricity suppliers to offer net metering programs that credit customers for the electricity they send to the grid from their solar or other distributed generation system. As of July 2016, 41 states had established policies that require electricity suppliers to offer net metering programs to electricity customers, according to the Database of State Incentives for Renewables and Efficiency. Under net metering programs, electricity suppliers generally subtract the amount of electricity customers send to the grid from the amount of electricity they purchase from the grid to determine the net amount of electricity for which customers are billed. This reduces or in some cases eliminates customers’ payments for electricity they obtain from the grid. Net metering programs can provide more value for customers who pay high electricity prices because these programs often credit customers for electricity they send to the grid at the same retail price they pay to purchase electricity from the grid. For example, a customer facing an electricity price of 23 cents per kWh would receive a $23 bill credit for each 100 kWh increment of electricity sent to the grid, whereas a customer facing a price of 10 cents per kWh would be credited $10 for sending the same amount of electricity to the grid. Policies allowing third-party-owned solar systems. Some states have adopted policies that make it possible for third-party providers to install solar systems, which the providers own and operate, on residential customers’ private homes—thereby allowing solar systems to be deployed on the homes of customers who could not otherwise pay the up-front costs of installing the systems. Under these arrangements, the third-party provider pays to install the solar system, and the customer agrees to buy electricity generated by the solar system or to make lease payments on the system to the third-party provider. As of July 2016, at least 26 states authorized third-party providers to enter into agreements to sell electricity in this way to homeowners, according to the Database of State Incentives for Renewables and Efficiency. Third-party providers may be able to obtain federal tax incentives that are not available to individual homeowners, in addition to claiming the federal Investment Tax Credit. These tax benefits may be passed through, in part, to residential customers in the form of lower prices for electricity purchased from the solar system or more favorable system lease terms. Incentives. State financial incentives encourage the residential deployment of solar systems by offsetting some of the up-front cost of deploying the systems.