Eurelectric - Network tariff structure for a smart energy system
Executive summary
The key mission of distribution system operators (DSOs) is to deliver reliability and quality of service to their customers. Within the transition to the low carbon economy, additional network investments will be necessary to maintain the high level of service that European customers expect. Investments by DSOs will account for most future network investments as their networks need to accommodate an increasing amount of distributed generation, including renewables and other distributed energy resources like electric vehicles. Against this backdrop, DSOs’ ability to collect, through network tariffs, the revenue required to cover the network costs and investments allowed by the regulatory authority is key.
Network costs are mainly capacity driven
In most countries, network tariffs make up a significant share of a household customer’s electricity bill, and they are expected to grow further. Most direct network costs are determined by peak demand (kW) and are largely independent of the actual energy delivered – at least in the short term. Those costs are unlikely to fall with the rise of decentralised generation: the grid must still be designed to cover peak demand when there is no local production.
Current volumetric (€/kWh) network tariffs do not provide the right incentives to customers
Today, recovering network costs heavily depends on how much electricity is sold. The EURELECTRIC survey has found that, in the majority of countries, network tariffs for households and small businesses are almost entirely based on energy volume (kWh). About 50-70% of the allowed DSO revenue is usually recovered using such volumetric charges. While volumetric tariffs set signals to reduce energy consumption, they do not reflect cost arising from consumption at peak hours.
Integrating renewables and fostering energy efficiency requires cost-reflective network tariffs
The newly adopted Energy Efficiency Directive (2012/27/EU) requires the removal of network tariffs that would impede energy efficiency and/or demand response. EURELECTRIC believes that tariffs encouraging customers to shift their peak hour consumption should gain importance. Network tariff structures should incentivise demand response and energy-efficient behaviour while providing a stable framework for both customers’ bills and DSO revenues.
Appropriate approaches may include more capacity based network tariffs such as two-part network tariffs with a capacity and an energy component or volumetric time-of-use network tariffs with different prices for peak and off-peak energy. Cross-subsidies between different categories of users should be minimised, ensuring that customers only pay for what they use.
Smart meters will open the door to more cost-reflective tariff structures and demand response. They will allow a differentiation of charges according to customers’ impacts on the grid, as DSOs will be able to measure the contribution of domestic consumers to peak load. Different customers’ potential and the outcome of the national cost-benefit analysis for the roll-out of smart meters should be taken into consideration when designing new tariff structures.
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