Massachussets Institute of Technology. Cambridge (United States of America)
September 1st, 2019
Summary:
Electricity tariffs typically charge residential users a volumetric (that is, per-unit of
electricity consumed) price that recovers the bulk of the costs of generating, transmitting,
and distributing electrical energy. These tariffs also often include taxes and
recover other costs associated with regulatory or policy measures. The resulting
prices do not reflect the true social marginal costs of generating, transmitting, and
distributing energy, capturing little or none of the temporal and geographic variability
of marginal electricity costs. These inefficient rates incentivize customers to
over-consume power during periods of peak system stress and under-consume power
during periods of relatively low demand; this dynamic drives up power system costs,
costing Americans and Europeans tens of billions of dollars annually. Critically, it
leads to investments in long-lived and low-utilization infrastructure needed to meet
peak demands.
Economists have long argued for reforming rates, but progress has historically
been slow. Today, less than one quarter of one percent of residential electricity customers
in the United States pay a tariff that reflects the real-time price of energy.
The emergence of distributed energy resources - such as solar photovoltaics and
battery energy storage - has sparked renewed interest among regulators and utilities
in reforming electricity tariffs. Efficient rates hold the potential to improve the
economic efficiency of distributed energy resource installation and operation decisions.
However, the economic pressure to redesign electricity rates is countered by concerns of how more efficient rate structures might impact different socioeconomic
groups. In particular, regulators have been dubious of efforts to reform how the
costs of network infrastructure (that is, transmission and distribution networks) are
recovered, rejecting more than 75% of such efforts in the U.S. in 2017.
Focusing on developed power systems in contexts like the U.S. and Europe, this
Thesis examines the distributional impacts of rate reform and proposes methods to
improve the economic efficiency of rates without creating undesirable distributional
impacts. This Thesis also explores the distributional impacts of rooftop solar photovoltaics
adoption under alternative rate designs. This Thesis leverages data on
electricity consumption measured half-hourly for more than 100,000 customers in
the Chicago, Illinois area, paired with Census data to gain unprecedented insight
into the impacts of reforming electricity pricing across customers of varying socioeconomic
statuses. This Thesis then builds a simple model of the local utility's -
Commonwealth Edison's - cost of service, and simulates solar PV adoption under
alternative rate designs, measuring the impacts on customers of differing income
levels.
This Thesis demonstrates that low-income customers would face increases in expenditures
on average in a transition to rates that recover residual network and policy
costs through economically efficient fixed charges. However, this Thesis demonstrates
that simple changes to fixed charge designs can mitigate these disparities while preserving
all, or the vast majority, of the efficiency gains. These designs rely exclusively
on observable information and could be replicated by utilities in many geographies
across the U.S. Rooftop solar PV adoption under tariffs with inefficient, volumetric
residual cost recovery are shown to create substantial distributional challenges: PV
adoption under such tariffs increases expenditures substantially for non-adopters,
which tend to be predominately lower income customers; efficient tariffs prevent this
regressive cost shifting. In short, failing to reform rates may lead to worse distributional
outcomes than reforming rates, even if reforms are implemented naively.
Collectively, the findings in this Thesis underscore the need for regulatory reform
around electricity pricing, and chart a path forward for balancing economic efficiency
and distributional equity in public utility pricing.
Citation:
S. Burger (2019), Rate design for the 21st century: improving economic efficiency and distributional equity in electricity rate design. Massachussets Institute of Technology. Cambridge (United States of America).
