Distributed generation and self-consumption

Rapid and far-reaching transformation of the power system requires broad public support and participation. The distributed nature of many renewable energy technologies creates new opportunities for social involvement, expanding the range of stakeholders involved and the possible scales at which power generation can happen. Decentralisation brings socio-economic challenges, as well as benefits.

Traditional power systems have been largely centralised, with large generation assets – owned by public entities or a limited number of private companies – supplying electricity to predominantly passive consumers. A renewable-based system, by contrast, enables the co-existence of centralised generation with distributed generation at the level of households, businesses and local groupings such as energy communities. This distributed generation can either cover supply to the grid or be used for “self-consumption” by any given producer.

The resulting evolution in how electricity is produced and consumed introduces more complex interactions and technical arrangements. Coherent, well-design policy frameworks are needed to harness the various synergies in distributed generation and minimise barriers to it. Specific self-consumption policies may target different groups – households, SMEs, industry and energy communities – with distinct motivations and constraints that shape the policy approach needed.

Modern self-consumption differs from traditional stand-alone power-generation systems because it maintains a dynamic relationship with the grid. The alignment of self-consumption with grid interaction, furthermore, facilitates the integration of distributed generation and storage into retail market structures, creating economic incentives at the point of demand-side grid parity, or when the levelised cost of self-generated electricity falls below the variable component of retail tariffs. This new power-system paradigm reduces reliance on long-term support schemes for all generated electricity and instead encourages self-reliance for direct power needs and remuneration for surplus generation.

The treatment of surplus electricity is a central design feature for the energy transition. Under net metering, surplus is typically valued at retail prices, while net-billing schemes often value surplus at levels between retail and wholesale prices. As distributed generation expands, surplus valuation may decline, and additional network charges or technical constraints may in some cases limit or discourage injections into the grid.

Localised energy communities dedicated to collective self-consumption are an important emerging factor in the energy landscape, enabling households, SMEs and municipalities to pool resources and share benefits. By aggregating small-scale participants, these models can address space constraints, reduce costs through economies of scale, enhance accessibility and strengthen social inclusion. Their effective integration into the power system requires dedicated regulatory frameworks that clarify community rights, responsibilities and interaction with other market participants.

Net metering

Households or businesses with rooftop solar panels or other distributed generation can interact as prosumers – meaning they produce and consume electricity in concert with the wider power system. This dynamic hinges on net metering, whereby each prosumer receives credit for excess electricity exported to the grid based on a variable component of the retail electricity price.

In effect, the prices paid for electricity drawn from the grid or received for surplus generation are equal. This arrangement allows the grid to function as a virtual storage system, with self-generated electricity that is exported as surplus being offset against consumption, regardless of whether the generation and the demand are simultaneous.

Arrangements to consider for net metering include:

The length of the netting period – when prosumer bills are balanced – determines the extent to which the grid functions as a virtual storage system. A longer window, such as annual, allows seasonal balancing and maximises the value of surplus generation, while shorter windows limit the duration of implicit storage, better aligning compensation with immediate system costs.
When surplus electricity is credited at retail rates that include network and policy costs, net metering can create cross-subsidisation and weaken cost recovery for grid infrastructure. Aligning tariff design with underlying cost structures helps preserve financial sustainability, avoid unintended subsidies, and reduce the risk of declining utility revenues that could trigger tariff feedback effects.
Individual net-metering arrangements may disproportionately benefit households with sufficient capital and rooftop space, potentially creating regressive distributional effects. Enabling collective self-consumption and shared facilities broadens access, enhances inclusivity, and increases the social value of distributed generation.
As technology costs decline and distributed generation grows, retail-rate compensations may come to exceed the actual value of surplus electricity for the system. Periodic adjustments of valuation mechanisms can help maintain cost efficiency and align compensation with evolving market conditions.
Interaction between distributed and utility-scale generation depends on broader market and pricing structures. Clear policy alignment and transparent communication can prevent perceived distortions, lower competitive tensions between different sources of renewable power and support coherent system development.

Case study: Net metering in Pakistan

Pakistan introduced net metering in 2015, with distributed solar PV deployment accelerating rapidly from 2018 onwards. Amid falling PV costs and high overall retail electricity prices, generous surplus valuation under the net-metering scheme proved decisive. Payback periods of around two years, combined with concerns about grid reliability, made self-consumption highly attractive. By 2025, net-metered capacity exceeded 6 GW, out of around 46 GW of total installed generation capacity.

Net metering has succeeded in Pakistan despite regulatory constraints, such as eligibility being limited mainly to three-phase consumers, resulting in the concentration of solar PV among higher-income households and commercial users with sufficient technical and financial capacity.

Pakistan's retail electricity tariffs rely heavily on volumetric charges to recover fixed system costs. As self-consuming users have reduced their grid purchases, utilities have faced declining revenues, prompting tariff increases for the remaining consumers. This has raised concerns about cross-subsidisation and regressive impacts, as traditional users reliant solely on power from the grid bear a growing share of fixed costs.

As of 2026, Pakistani policymakers have sought to reduce surplus-generation subsidies, with the National Electric Power Regulatory Authority (NEPRA) replacing net metering with net billing, adhering to wholesale or avoided-cost rates, to address utility revenue pressures. However, NEPRA's new Prosumer Regulations 2026 (SRO 251(I)/2026) have encountered strong public opposition, reflecting growing appreciation of the economic and reliability benefits of self-consumption for users.

Self-consumption has also served as a channel for expressing dissatisfaction with utility performance and system development plans. Issues such as high technical and non-technical losses, supply interruptions, non-transparent tariffs, and rigid fossil-fuel capacity contracts continue to affect electricity prices and system finances, beyond the influence of distributed generation alone.

Pakistan now faces a critical policy choice over the relationship between distributed and utility-scale power generation. Abrupt or poorly communicated restrictions on self-consumption risk accelerating grid defection, particularly by large consumers with electricity storage capabilities. For an inclusive and sustainable energy transition, the country may need to find a balanced approach combining tariff reform, improved utility governance, and stakeholder engagement to foster synergies between distributed solar and the public grid.

Legislation and policy documents

NEPRA (Pakistan). NEPRA Net Metering Regulations. National Electric Power Regulatory Authority. 2015.

Secondary literature

Isaad, Haneea, and Syed Faizan Ali Shah. Net metering reforms and grid challenges amid Pakistan's solar rise. Institute for Energy Economics and Financial Analysis. 2025.

Qayyum, Saadia. "Pakistan's solar journey is feeling the heat from cost shifting." Dawn. 28 May 2025.

Net billing

The net-billing approach represents an evolution of net metering, maintaining incentives for self-consumption while aligning compensation for surplus generation more closely with value to the power system. Under net billing, self-generated electricity offsets retail consumption, while excess generation exported to the grid is compensated at a rate typically below retail prices and closer to wholesale market conditions. This approach reduces the risk of overcompensation as distributed generation costs fall and renewable penetration rises.

System values for surplus electricity can fall very low and even become negative during periods of congestion. When they do, the net-billing price deterrent drives higher self-consumption rates and the use of electricity storage to manage excess generation more efficiently.

Several factors come into play in designing a net-billing scheme:

The compensation rate for exported electricity determines the balance between maintaining investment incentives and avoiding overcompensation. Aligning surplus valuation with actual system value supports cost efficiency while preserving the economic rationale for self-consumption.
Adjustment mechanisms that reflect declining technology costs and overall inflation can help align support with market conditions over time. Differentiating between new and existing installations preserves investment certainty, as the cost structure of a project is fixed at the time of investment.
The billing cycle defines the effective time window for offsetting consumption and exports. Shorter billing periods reduce implicit storage through the grid, while longer ones increase power-system flexibility but may raise cost allocation concerns.
Limits on maximum bill credits can prevent excessive seasonal cross-compensation and protect utility cost recovery. Such caps help align compensation with time-dependent system value and infrastructure requirements.
When retail tariffs embed network and policy costs within variable charges, self-consumption can reduce contributions to fixed grid costs, creating cross-subsidies and revenue imbalances. Cost-reflective tariff structures support financial sustainability and limit unintended distributional effects.
Self-consumption by individual prosumers may disproportionately benefit higher-income households or businesses with access to capital and space. Enabling collective arrangements broadens participation, enhances inclusivity, and increases the social value of distributed generation.

The interaction between distributed and utility-scale generation depends on overall market design and pricing rules. Coherent alignment and transparent communication reduce misperceptions and mitigate competitive tensions between larger- and small-scale renewable energy projects.

Case study: Net billing in Poland

Poland introduced net metering in 2016 through amendments to the Renewable Energy Sources Act, supported by substantial investment subsidies co-financed by the European Union. The prosumer framework allowed small-scale renewable electricity producers – primarily rooftop PV owners – to offset electricity injected into the grid against electricity drawn from it.

Combined with rising retail electricity prices after 2019, this framework triggered rapid growth in distributed solar PV. By 2022, self-consumption capacity exceeded 9 GW, accounting for roughly 70% of the country’s total installed PV capacity.

However, as deployment accelerated, challenges became increasingly visible. Surplus generation from rooftop PV was weakly aligned with local grid capacity and system needs, contributing to congestion and operational pressures in distribution networks. At the same time, retail electricity tariffs recovered a large share of fixed network and policy costs through volumetric charges. This meant that prosumers avoided paying part of these costs while still relying on the grid. In effect, this led to increasing cross-subsidisation by non-prosumers, raising concerns about equity and long-term grid cost recovery.

To address these issues, Poland replaced net metering with a net-billing scheme in April 2022. The reform shifted surplus compensation from energy-based netting to monetary settlement at market-linked prices, encouraging higher self-consumption, improving alignment with system value, and reducing tariff distortions. The transition required careful political and social balancing, and the initial design – characterised by lower and more variable remuneration – led to a temporary slowdown in distributed PV deployment as households and installers adapted.

Subsequent amendments to restore investment confidence included a move from average to hourly surplus valuation, expanded eligibility for collective and virtual prosumers, and additional subsidies for PV, battery storage and heat pumps. Incentives were also introduced to encourage voluntary migration from legacy net-metering contracts, while energy cooperatives were allowed to remain under net metering.

By 2025, Poland’s installed PV capacity had reached approximately 25 GW, of which nearly 60% was linked to self-consumption, illustrating the importance of adaptive policy design when scaling up distributed renewables.

Legislation and policy documents

Republic of Poland. Ustawa z dnia 29 października 2021 r. o zmianie ustawy o odnawialnych źródłach energii oraz niektórych innych ustaw [Act of 29 October 2021 amending the Act on Renewable Energy Sources and certain other acts]. Dziennik Ustaw [Journal of Laws] (item 2376). 2021.

Secondary literature

Easysolar. Photovoltaics in Poland – New Settlement Rules and Regulations in 2025.

Bellini, Emiliano. “Poland’s transition from net metering to net billing.” PV magazine. 13 July 2022.

Collective self-consumption and energy communities

Energy communities have gained renewed institutional attention in recent years, with collective self-consumption emerging as one of their core activities. By enabling groups of citizens, SMEs and municipalities to jointly invest in and share the output of a renewable energy installation, the collective approach expands access to the benefits of self-consumption beyond those with suitable rooftops or upfront capital, helping address the regressive effects of purely individual models.

Aggregation can unlock economies of scale, facilitate innovative financing arrangements and support broader objectives such as energy efficiency, electrification and reducing energy poverty. While expectations should remain realistic, energy communities can strengthen participation, improve local governance, and contribute to a fairer distribution of the benefits of the energy transition, complementing rather than replacing public and private responsibilities.

Energy communities for self-consumption involve various considerations:

Clear and stable legal frameworks for collective self-consumption and energy communities provide certainty for participants and investors, reducing administrative complexity and transaction costs. Provisions that enable community ownership or participation in larger projects can strengthen local acceptance and advance renewable energy investments in targeted areas. Community representatives or managers with well-defined roles can facilitate coordination with authorities and improve operational efficiency.
Flexibility in eligibility criteria – such as geographic proximity requirements – broadens access and enhances the scalability of collective self-consumption models. Removing unnecessary restrictions allows communities to optimise project siting and participation structures while maintaining grid and system integrity.
Dedicated advisory structures and capacity-building initiatives lower informational and organisational barriers for emerging communities. Targeted financial instruments, such as grants, concessional loans or tax incentives, improve feasibility and inclusivity, particularly for smaller or lower-income participants. Networking platforms and shared resources strengthen knowledge exchange, institutional learning, and the long-term viability of community-based energy initiatives.

Case study: Community energy in Spain

Community energy initiatives have a long tradition in Spain and across Europe. The European Union, recognising the role of citizens in advancing deeper stages of the energy transition and addressing growing challenges around social acceptance of renewables formalised the concept of energy communities through directives adopted in 2018 and 2019 requiring EU member states to actively facilitate and support community energy. Spain partially transposed this framework between 2019 and 2023, creating the national legal basis for energy communities.

Since 2022, Spain has opened around 80 Community Transformation Offices (Oficinas de Transformación Comunitaria, OTCs) to provide technical assistance, guidance, and capacity building for emerging initiatives across the country. By 2024, approximately 660 energy communities were operating nationwide, involving citizens, SMEs and municipalities. Growth has accelerated since 2022, with some provinces aiming to establish at least one energy community per municipality by 2027.

While collective self-consumption is the primary activity of Spanish energy communities, many have also expanded into complementary areas, including shared electric mobility, energy efficiency upgrades in buildings, energy storage, electrification, and demand response and flexibility services, as well as responsible consumption and energy education. Several communities also address broader social objectives such as energy poverty reduction and inclusivity.

Access to finance remains a key barrier, particularly for inclusive participation. Energy communities typically rely on a combination of public subsidies (increasingly complemented by fiscal exemptions), member equity contributions, and loans. The non-profit orientation of many communities enables the provision of affordable PPAs once initial investments are recovered.

Beyond financing, successful energy communities depend on effective governance and meaningful citizen participation. Supportive enabling frameworks, including mechanisms such as insurance products tailored to community energy initiatives, have also become an important component as the ecosystem for energy communities in Spain matures.

Legislation and policy documents

Government of Spain. Real Decreto 244/2019, de 5 de abril, por el que se regulan las condiciones administrativas, técnicas y económicas del autoconsumo de energía eléctrica [Royal Decree 244/2019 of 5 April 2019 regulating the administrative, technical and economic conditions for self-consumption of electricity]. Boletín Oficial del Estado (no. 83). 2019.

Secondary reports

Caramizaru, Aura, and Andreas Uihlein. Energy communities: An overview of energy and social innovation. JRC Science for Policy Report. Joint Research Centre, European Commission. 2020.

Instituto para la Diversificación y Ahorro de la Energía (IDAE). Manual del programa de incentivos a proyectos piloto singulares de comunidades energéticas (Programa CE Implementa) [Manual for the Incentive Programme for Singular Pilot Energy Community Projects (CE Implementa Programme)] (Manual CE Implementa 08/2025). 2025.

Keep reading

6. Power market and flexibility design

Net metering

Case study: Net metering in Pakistan

Legislation and policy documents

Secondary literature

Further reading

Net billing

Case study: Net billing in Poland

Legislation and policy documents

Secondary literature

Further reading

Collective self-consumption and energy communities

Case study: Community energy in Spain

Legislation and policy documents

Secondary reports

Further reading

Keep reading