Regulatory Focus: Design Retail Tariffs for DERs | Clean Power Hub

Regulatory Focus: Design Retail Tariffs for DERs

Retail tariffs determine a customer’s bill for electricity consumed from the grid. Tariffs can range from simple flat rates for volumetric energy consumption to more complex arrangements like time-varying rates, inclined block rates based on tiers of consumption, demand charges for maximum use at certain periods, or others.

The interaction of DER technologies and tariff structures have a profound impact on DER customer economics, as it determines the value of avoided consumption of electricity from the grid. As a result, updating retail tariff rates for DER adopting customers can help ensure the adoption and operation of these systems are incentivized in-line with power sector policy objectives

What You Need To Know

  • Retail tariffs influence customer economics of DER by changing the value proposition of avoiding consumption of electricity from the power system.
  • There are many options at regulators’ disposal when designing retail tariffs. These can include time-varying volumetric energy charges, inclined block rates, or demand charges associated with a customer’s maximum consumption in a given period.
  • Retail tariffs can influence the extent of cost-shifting concerns that might occur due to DER. More cost-reflective tariffs, while more difficult to implement, can help address this.
  • Flat volumetric energy rates that charge a single price for all electricity consumed do not provide incentive for customers to shift their consumption behavior throughout the day. More complex retail tariffs can help enlist customers and DER as flexibility resources, but may require changes to metering infrastructure as well as utility data collection, billing and administrative processes.

First, Read This

There are a number of rate options that have been offered to reduce peak demand, increase fairness of consumer pricing, or offer environmental benefits by shifting demand to times when clean power sources can make up a larger share of generation. Some common examples are:

Time-Of-Use (TOU)

A static TOU divides the day into time periods and provides a schedule of rates for each period.... The price would be higher during the peak period and lower during the off-peak, mirroring the average variation in the cost of supply.... With a TOU rate, there is certainty as to what the rates will be and when they will occur.

Critical Peak Pricing (CPP)

Under a CPP rate, participating customers pay higher prices during the few days when wholesale prices are the highest or when the power grid is severely stressed.... Customers are typically notified of an upcoming “critical peak event” one day in advance.

Peak Time Rebate

Instead of charging a higher rate during critical events, participants are paid for load reductions (estimated relative to a forecast of what the customer otherwise would have consumed). If customers do not wish to participate, they simply pay the existing rate. There is no rate discount during non-event hours.

Real Time Pricing

Participants pay for energy at a rate that is linked to the hourly market price for electricity. Depending on customer class, participants are made aware of hourly prices on either a day-ahead or hour-ahead basis. Typically, only the largest customers (above one megawatt of load) in specific regions face hourly prices.

Rate Combinations

The rate options described above can also be offered in combination to take advantage of the relative advantages of each. One common combination is CPP and TOU. The TOU component of the rate reflects the average daily variation in peak and off-peak energy prices. The CPP component during a small percentage of hours each year reflects the cost of capacity during the seasonal system peak. Together, these rates can facilitate greater energy awareness among customers and provide a greater opportunity for bill savings through a more heavily discounted off-peak rate. However, the added complexity of a combination rate design means that additional customer education is necessary for the rate to be effective and improve customer satisfaction.

Text excerpts from pages 13 - 16 of the Regulatory Assistance Project and Brattle Group: Time-Varying and Dynamic Rate Design

Next, Read This

Retail tariffs can have a strong influence on the overall economic viability of DERs (which drives adoption) as well as what is the most profitable use case of DERs (which drives operation). More complex tariffs can better align DER adoption and operation with the needs of the power system. Tariff design can also incentivize different configurations and use of DERs; for example, TOU tariffs can be designed to incentivized DPV plus storage rather than DPV alone.

Now, Read This

When designing tariffs, regulators need to balance the desire to encourage DER adoption and use DERs to provide system services against (1) utilities' needs for revenue sufficiency; and (2) a customer's ability to understand and reasonably respond to the tariffs.

As utilities and regulators consider these strategies, some key practical considerations to keep in mind include:

  • Simplicity—Will the customer be able to understand how they are being charged for electricity under the new tariff? Will the utility be administratively and technologically prepared to implement the new tariff?
  • Responsiveness—Does the customer have both the understanding and the ability to adjust their energy behavior to lower their bill under the new tariff?
  • Stability—Is the customer (and utility) sufficiently shielded from unreasonably high fluctuations in bill costs (and bill collections) between billing cycles?

At a high level, many regulators and utilities are attempting to balance the above considerations with a desire to, among others:

  1. better align customer operational behavior with the technical requirements of the power system;
  2. promote fair utility cost recovery;
  3. reduce cross-subsidization effects between participating and nonparticipating customers; and
  4. promote the deployment of specific technologies to meet other policy objectives.

Text excerpt from page 21 by NREL of: An Overview of Behind-the-Meter Solar-Plus-Storage Regulatory Design - Approaches and Case Studies to Inform International Applications

Finally, Read This

Implementing changes such as time-varying retail tariffs is a major effort that can have significant impacts on all power system stakeholders. It is important to take steps to ensure that such changes go as smoothly as possible and do not have unintended consequences for customers or utilities.

Suggested Actions & Next Steps

  • Find out what tariffs are currently in use in your power system. What sorts of price signals for consumption or purchase and use of DERs do these tariffs send to customers?
  • With the issues facing your power system, think about what elements of retail rate design (e.g., demand charges, time-variant components, minimum bills) might be useful in addressing them. How would these elements impact adopting and non-adopting customers? How might negative impacts be mitigated?
Want to ask questions or share ideas about tariffs for DERs?Join the Discussion in the Clean Power Hub Community.
  • Consider whether it might be possible or desirable to differentiate tariffs, if they are not already, between adopting and non-adopting customers for DER. Would providing adopting customers additional options for tariffs allow them to operate their system to reduce bills while reducing power system operating costs?
  • If pairing DPV with behind-the-meter storage is relevant for your power system, read this to learn more about important regulatory considerations for such customer-sited resources.
Need help getting started in designing tariffs or sell rates for DERs?You may want to talk to an expert. We can connect you.

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