Discussion: Tariff Design for Electricity Distribution

Distribution network operators are facing challenging times. The share of renewable generation is increasing, but this source of power generation is intermittent, while power needs to be balanced at all times. Simultaneously, there is an increase in demand, for example caused by electric cars, heat pumps and electric boilers, since we aim to reduce our fossil fuel consumption. These loads by themselves already significantly increase the strain on the electricity distribution network. On top of that, because these loads are flexible, they may be shifted to the same moments in time, as a reaction to peaks in power generated by renewable sources (supported by aggregators). Many parts of the distribution network will not be able to cope with such new peaks.

To prevent overloading the network capacity, flexible loads can be shifted in time. This figure shows the total planned charge of 10 electric cars (each with own planned departure times, mostly in the morning). Without network capacity limit the cars are mostly charged when electricity prices are low (23:30-02:00), but with limits of 40 and 60kW they are also charged when prices were relatively high (02:00-03:30). (This simulation is about 10x smaller than a typical Dutch neighbourhood with 300 households.)

In the session on Flexibility in Distribution Grids we organized as part of the Sustainable Urban Energy Systems conference in Delft last week, we discussed this challenge with representatives from two distribution network operators (Fons Jansen and Willem van den Reek), a professor on regulation in energy markets (Machiel Mulder) and head of new energy business of an aggregator (Jorg van Heesbeen). First, each of them gave their vision on these challenges.

Willem van den Reek and Fons Jansen proposed the plans of Alliander and Enexis. The core task of these publicly owned distribution systems operators is providing access to the grid, and distributing power at efficient costs. One possible, but very expensive approach to the identified challenge is to reinforce the network. However, this only should be done if this is indeed the most efficient solution. Their plans therefore contained two new ingredients to prevent or postpone such large investments:

1. new tariffs for households that are more related to the capacity used (a capacity charge for a fixed capacity “bundle” with a fixed (high) price for any “outside of bundle” capacity use), and, where this is insufficient to prevent overloading the network,
2. a new market where the network operator pays some of the owners of flexible load to shift their consumption in time.

The discussion in this session focused mostly on the new tariff, because, as I understood, the market for flexibility should only be a temporary solution, at a few places, while the network there is being reinforced. (Also, Laurens de Vries and I shared our opinion on these flex-markets before.)

Machiel Mulder fully agreed with the idea of tariffs that depend on the capacity used. He furthermore explained that the economically most efficient tariff would be to price the use of the network depending on the congestion (peak pricing): when and where there is no congestion, the tariff can be a relatively low fixed amount, but at moments and locations where congestion occurs, the tariffs should be so high that a sufficient volume of flexible loads shift to less congested times. Machiel also presented the results of a study on how fair people consider such a congestion pricing (yes, there is a similarity here to the #vroempoen). In this study (“Assessing fairness of dynamic grid tariffs”, 2017) he showed that people think this is less fair than payments based on the total energy used (transport charge), or on the maximal capacity allowed (capacity charge), but when properly explained (that this leads to the most efficient energy system and that in this way the people/loads that demand the most from the network indeed also pay the most), it is considered “reasonably” fair on average.

Finally, Jorg van Heesbeen explained that Jedlix provides smart charging services to users of electric cars, and how trading such flexible demand on the (wholesale) electricity market reduces costs for users, and helps balancing the system and the integration of renewable generation. He also said that he expects that aggregators like Jedlix will always try to minimise the total electricity costs for their users, and consequently will make use of new opportunities like flex markets, and deal with new tariff systems, even if these are quite involved.

After these introductions, the discussion was kicked off by the observation that there seems to be one main disagreement between the tariff that is theoretically optimal (the dynamic peak tariff), and the capacity charge proposed by the network operators. On the one hand, the network operators prefer a tariff that is fair, and from that conclude that it should not be allowed to be different depending on circumstances such as time and location, while on the other hand the theoretically most efficient solution for the energy system as a whole (and thus on average the cheapest for its users) explicitly differentiates depending on the (peak) use of the network, and thus is different from time to time and location to location.

All parties present seemed to subscribe the need for some kind of (price/tariff) incentive to avoid peaks that could overload the network (at least at places where reinforcement can easily be avoided in this way). To me it didn’t seem like the participants agreed on how to do this, but some criteria for a good tariff design surfaced in the course of the discussion:

• The tariff design should support an efficient electricity system.
• The tariff design should be fair. For example, we don’t want people without electric cars pay more, such that the people with a lot of money can make better use of the network.
• The tariff design should be simple. For example, it should not be too complex for a typical end-user to optimally adapt to the new tariff design.

The most efficient design does not simultaneously seem also the most simple and fair, so we are facing a trade-off among these criteria. My main conclusion from the discussion is that we are missing essential information about the properties of the proposed tariff designs to appropriately make this trade-off. More specifically, for each of the proposed tariff designs, I conclude that we need to answer the following questions:

• What should these tariffs be, given current and future market conditions?
• What is the effect on the total system efficiency?
• What is the effect on the total energy costs for the different user groups? (Including some examples.)
• Can we make decision-making sufficiently easy for all user groups?

Only with this knowledge we can properly continue the discussion about a new tariff design and move forward with a transition to a more efficient and sustainable electricity system.

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