The avoided cost rate is the price a utility company pays for electricity generated by customer-owned renewable systems, typically through net metering programs. This rate represents the marginal cost the utility avoids by not generating that electricity themselves. Avoided cost rates vary significantly by region and utility, ranging from $0.08 to $0.15 per kilowatt-hour in most U.S. markets.
Rate Structure and Calculation
Utilities calculate avoided costs based on their avoided generation, transmission, and distribution expenses. These rates are often lower than retail electricity rates because they exclude certain utility overhead costs. Some states mandate specific avoided cost methodologies under Public Utilities Commission regulations, while others allow utilities to set their own rates within regulatory guidelines.
Impact on Solar Economics
The avoided cost rate directly affects solar system return on investment and payback periods. Higher avoided cost rates improve the financial viability of grid-tied systems. In states like California and Massachusetts, competitive avoided cost rates have accelerated solar adoption, while regions with lower rates may require larger system sizes to achieve equivalent returns.