Feature – How the design of electricity distribution tariffs can support the energy transition
Regulators periodically reassess how tariff structures are designed. CEER’s paper on Electricity Distribution Tariffs Supporting the Energy Transition helps national regulators, Distribution System Operators (DSOs) and others to re-think the design of electricity distribution tariffs in the context of issues such as digitalisation, decarbonisation and decentralisation. It addresses key challenges such as developing smart and cost-reflective distribution tariffs, energy storage, and tariff structures that take into account developments in the field of Electric Vehicle charging.
What are distribution network tariffs?
Network (transmission and distribution) tariffs are the prices that network users (households, companies, etc.) pay for having electricity transported from the point of production to where the electricity is used. The purpose of network tariffs to recover the amount of allowed/target revenues set by the regulator. There are multiple ways in which these tariffs can be designed. Different tariffs designs have different consequences e.g. on how costs are allocated to network users, how they react to tariff signals and how fair tariffs are perceived by network users.
Cost-reflective network tariffs
EU energy law requires distribution tariffs to be cost-reflective, taking into account the use of the distribution network by system users including active customers. Furthermore, network tariffs should not include unrelated policy objectives. Distribution tariffs should send price signals that incentivise network users’ behaviour. But for this to happen, first consumers must be able to observe the price signal and, even more importantly, be able to react to the price signal. Secondly the price signal, in this case the tariffs, should reflect the relevant costs of the service (cost-reflective tariffs). Cost-reflectiveness implies that the cost a network user imposes on the distribution network should be reflected by the distribution tariff, i.e. one should pay the price for the cost of one’s own actions. When trying to create a cost-reflective tariff structure, one needs to know what costs to reflect. This paper sets out the different costs of a DSO and explores the issue of sending price signals for future infrastructure network costs.
What’s in the paper?
This latest paper on tariffs builds on CEER’s principles of network tariff-setting (see the 2017 paper) Traditionally, energy-based network tariffs have been the predominant design in Europe. The energy transition and significant electrification (e.g. of heat and transport) put a higher importance on capacity utilisation, and will require different and more precise price signals, to achieve electrification at least cost. This CEER paper presents various tariff types that give more precise price signals regarding capacity utilisation. It considers different tariff types, including static and dynamic network tariffs, and how tariffs could support the energy transition – including the areas of interaction with the procurement of flexibility, storage and electric vehicles – and the impact of the (2019) EU Clean Energy for All Europeans legislative package.
Some of the challenges addressed in this paper include:
• billing consumers
• developing smart and cost-reflective distribution tariffs
• cost cascading and the generation-load split
• energy storage
• the integration of electric vehicles
Recommendations in CEER’s Electricity Tariffs Distribution paper
The paper explored how current tariff structures can be improved e.g. to create stronger incentives for efficient usage of the grid. CEER concludes that:
• There is not a one-size-fits-all tariff model that is appropriate for all Member States.
• For cost-reflective tariffs, it is important to be aware of the cost structure in the short term (losses and congestion costs) and over the long term (infrastructure costs).
• The tariff structure of one or various components can be further differentiated, such as by time (static or dynamic), location and interruptibility.
• Advanced differentiation in time and location will most likely increase how cost reflective tariffs are and potentially incentivise beneficial network behaviour but more advanced differentiation is complex and can have a negative impact on other goals.
• The procurement of flexibility and dynamic tariffs can both incentivise network-beneficial customer behaviour but must be carefully considered if applied simultaneously.
• National regulators should consider if increased decentralised generation requires the introduction or increase of tariffs for production, without the network charges discriminating between production connected at the transmission and distribution level.
• Smart distribution tariffs should strike an adequate balance between reflecting the cost drivers of distribution networks and ensuring that network users equipped with smart technologies are able to react to the signals.
• Distribution tariffs applied to customers with energy storage facilities should reflect the use of the network in terms of both energy withdrawal and injection, while any double charging for storage facilities should be avoided.
• CEER calls on national regulators to review the current tariff structures to identify how they can be improved, for example, to create stronger incentives for efficient usage of the grid or to take into account EV charging.
Please read the full paper here.