The price is right? How pricing and incentive mechanisms in California incentivize building distributed hybrid solar and energy-storage systems

Distributed energy resources, including photovoltaic solar and energy storage, are seeing increased deployment. The optimal configuration and operation of these resources depend on several external factors, including energy pricing, incentive programs, and the provision of capacity payments. We model, as a mixed-integer optimization problem, the design and operation of a hybrid energy system that consists of photovoltaic solar arrays that are coupled with energy storage using a shared inverter. We apply our optimization model to a case study that considers two locations in California and a variety of pricing and subsidy regimes. We demonstrate that a well designed time-variant retail tariff provides reasonable incentives for building and operating a hybrid energy system. On the other hand, investment tax credits and the provision of capacity payments can be considerably more distortionary. In particular, constraints that govern the investment tax credit in the United States can hamper significantly the deployment of the hybrid energy systems that we examine.