What Is an Avoided-Cost Rate?
The avoided-cost rate is the price a utility would otherwise have paid to generate or buy the power that a solar system supplies instead. Regulators calculate it, and it often anchors export credits in net billing programs. It is typically lower than the retail rate, which also covers wires and fixed costs.
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The avoided-cost rate is the price a utility would otherwise have paid to generate or buy the power that a solar system supplies instead. Regulators calculate it, and it often anchors export credits in net billing programs. It is typically lower than the retail rate, which also covers wires and fixed costs.
Avoided-Cost Rate explained
Federal law has long required utilities to buy power from qualifying small producers at a price based on avoided cost, and states built models to estimate it: the energy not generated, capacity not built, line losses not suffered, and in some places environmental value. The result varies by hour, season, and year, so it behaves more like a moving market price than a fixed rate card.
Sales teams meet it indirectly. When a state moves from full retail credit to net billing, the new export values are often derived from avoided-cost studies, which is why hourly export numbers look so different from the retail tariff. A closer does not need to calculate it, only to explain in a sentence why exported power earns less than the power the home buys back.
Mistakes include treating it as a constant, calling it the same as spot market prices, and assuming it is what the homeowner pays. The term also appears in utility-scale contracts, where a developer sells output to a utility under a purchase agreement, a different instrument from the residential PPA a homeowner signs with a provider, even though both share the same abbreviation.
Why it matters when you're buying
Being able to explain in one plain sentence why exported power is credited below the retail price defuses the most common objection in net-billing territories: the feeling of being shortchanged. Understanding the logic also signals honesty, which matters when the homeowner is deciding whether to believe the rest of the proposal.
Frequently Asked Questions
Why is the avoided-cost rate lower than my electric rate?
Who sets the avoided-cost rate?
Is avoided cost the same as the wholesale price of electricity?
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