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Assessing distribution network tariff design in a changing context

Written by Tim Schittekatte

In this topic of the month, I argue that the ideal distribution network tariff does not exist. The most robust choice for the network tariff structure, being it volumetric with or without net-metering (€/kWh), capacity-based (€/kW), a fixed charge (€/connection) or a combination of those, is a function of the context to which it is applied. As a general statement, an ideal network tariff should be:

  • Efficient, i.e. it should reflect the cost a consumer inflicts on the network and by doing so guiding the adoption and operation of distributed energy resources (DER) by consumers to a mutually beneficial outcome.
  • Equitable (fair), i.e. consumers not being able to invest in DER or to react to price signals, e.g. vulnerable consumers or having space restrictions, should not see their network charges unduly increase because of other consumers’ behaviour.

Additionally, a distribution network tariff should be comprehensible, transparent, relatively stable (avoiding the introduction of ‘’bill shocks’’) and allow the distribution system operator (DSO) to recover its efficiently incurred costs. Another, often overseen, general regulatory principle for tariff design is additivity. With additivity is meant that the final electricity bill should be the result of the sum of rates designed for each activity along the electricity value chain (generation, transmission, distribution and retail).[1] In my opinion, what is also meant by this principle is that sustainability (e.g. PV adoption) and energy efficiency goals are not objectives of the distribution tariff design in the strict sense. Instead, a distribution tariff should be technology agnostic and facilitate reaching sustainability or energy efficiency goals, but neither overly spur nor block them which would in its turn lead to inefficiencies. Other, more explicit policies (e.g. targeted subsidies) should be designed for such purposes.

As mentioned at the beginning of this blog, the most appropriate tariff design, in this series ‘’measured’’ by an efficiency and equity metric, will be a function of its context.[2]  For this research the two context related dimensions considered are:

  • Technology cost, i.e. the lower the cost of DER, the higher the potential of a consumer to react to tariff design. Different technologies can elicit different consumer reactions. Two technologies are considered in this blog series: PV and batteries. PV adoption leads to a decrease in the volume of electricity consumed (kWh) from the grid, while batteries allow consumers to reduce their needed network capacity (kW).[3] Some estimates suggest that in 2050 over 80% of EU households would contribute to renewable energy production, demand response and/or energy storage in 2050.[4]
  • State of the network, i.e. a distribution network can be over-dimensioned due to the application of a fit-and-forget approach in the past while consumption remained stable or decreased. In the other extreme, a distribution network can be close to being constrained or in expansion. In the former, the main goal of the tariff is to socialise costs, while in the latter, steering consumer behaviour to avoid costly grid investment is more important.

It should be added that both dimensions are not fully mutually exclusive. Low technology cost can lead to more adoption of DER, while this could lead to a gradual shift from an over-dimensioned network to a constraint network or the other way around. Other import context related dimensions that can be thought of are the relative magnitude of the different components of the electricity bill (e.g. the inclusion of taxes and levies and the wholesale price of electricity) and typical demand profiles of consumers.[5]

In the coming weeks, I will first discuss distribution network tariff design in a state of the world with low PV investment costs and high battery cost and an over-dimensioned network. This state of the world could be thought of like the situation in Europe today. Second, the same exercise will be done for an over-dimensioned network, assuming low PV costs and low battery costs. This state of the world can be thought of like the situation in Europe in the near future. Lastly, distribution network tariff design will be discussed for an expanding network assuming low PV and low battery costs. This could be the situation we end up for certain parts of the grid or the situation in the near future for emerging countries where the grid is in full expansion.

 

[1] For a more extensive discussion see e.g.  Ortega, M. P. R., Pérez-Arriaga, J. I., Abbad, J. R., & González, J. P. (2008). Distribution network tariffs: A closed question?. Energy Policy, 36(5), 1712-1725.

[2] The discussion will be based on outputs of the model described in: Schittekatte, T., Momber, I., & Meeus, L. (2017). Future-proof tariff design: recovering sunk grid costs in a world where consumers are pushing back. RSCAS Working paper 2017/22. Or on outputs of an extension of the model described in that paper. Electrical vehicles and heat pumps, two other technological developments which can have a strong impact on the distribution system are not included in the quantitative analysis for now, but will be qualitatively discussed if appropriate.

[3] Please note that in this blog series with ‘’cheap PV’’ a low LCOE (Levelised Cost of Energy) in € per kWh of electricity produced is meant. A low LCOE can be obtained by installing a PV panel in a location with a lot of solar irradiation, by having low PV investment costs or a combination of both. There is no direct parallel for batteries.

[4] Kampman, B., Blommerde, J., Afman, M., 2016. The potential of energy citizens in the European Union, Report from CE Delft.

[5] A consumer reacts to the electricity bill as a whole. Commodity costs are usually recovered volumetrically (euro/kWh), either charged at a constant or variable rate. Taxes and levies can be recovered in different ways. The way those are recovered can impact the consumer behaviour and as a consequence also the effectiveness of a distribution network tariff design.