Killing death spiral softly with a small connection charge

The death spiral hypothesis points to the possibility that, with increasing integration of behind-the-meter renewables, the revenue of a regulated utility declines, which forces the utility to increase the price of electricity to maintain revenue adequacy. This in turn drives more consumers to adopt renewable technology, which further erodes the financial standing of the utility. We analyze the interactions between a regulated utility who sets the retail tariff and its price-elastic customers whose decisions to adopt renewable technology are influenced by the retail tariff and the cost of the technology. We establish conditions for the existence of death spiral and the stable diffusion of renewable technologies. We show in particular that linear tariffs always induce death spiral when the fixed operating cost of the utility rises beyond a certain threshold. For two-part tariffs with connection and volumetric charges, the Ramsey pricing that optimizes myopically social welfare subject to the revenue adequacy constraint induces a stable equilibrium. The Ramsey pricing, however, inhibits renewable adoption with a high connection charge. In contrast, a two-part tariff with a small connection charge results in a stable adoption process with a higher level of renewable adoption and greater long-term social welfare. Market data are used to illustrate various solar adoption scenarios.