Policy Brief / Energy
How Future-Proof is Your Distribution Grid Tariff Design?
- The assumption that people cannot react to the way distribution grid tariffs are designed does not hold anymore. This is mainly true due to breakthroughs in two game-changing technologies: photovoltaics (PV) and batteries.
- By investing in PV and batteries, active consumers push the sunk costs towards passive consumers (equity issue). Ironically, the active consumers can even end up paying more (efficiency issue). To avoid being screwed by the others, active consumers could overinvest. They are in a non-cooperative equilibrium.
- We find that the outcome of this game between the DSO (and the regulator) trying to recover sunk costs, and active consumers reacting to the distribution grid tariff, depends heavily on the way the tariff is designed.
- It is clear that current distribution grid tariffs are not future-proof. The historical conventional practice in the EU is net-metering, which creates significant equity issues and is an implicit subsidy for the adoption of PV. The solution that is advocated in the current debate, capacity charges, creates significant efficiency issues and is an implicit subsidy for the adoption of batteries.
- ‘Bi-directional’ volumetric charges can outperform capacity-based charges to recover sunk costs, so they should at least be considered as an option.