Smart Tariff Structure Design for a Smart Energy System Smart Tariff Structure Design for a Smart Energy System Thought Leadership SHARE EURELECTRIC March 30, 2016 The key mission of distribution system operators (DSOs) is to deliver reliability and quality of service to their customers. With 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. Hans ten Berge Secretary-General, EURELECTRIC The structure of the distribution network tariffs, and in particular the balance between the capacity (€/kW) and the volumetric (€/kWh) tariff components, is an important issue for the entire electricity system. Distribution network tariffs in low voltage are still largely based on the volume of energy used, while infrastructure costs are mainly driven by the topology of the network and by capacity. Recently, many European countries have been experiencing a significant reduction in distributed energy volumes. This is mainly due to the increase in the number of prosumers, increasing energy efficiency and a prolonged economic stagnation. These changes affect the DSOs’ ability to recover their allowed revenues within reasonable time, which can lead to cash flow issues in addition to potential tariff fluctuations over time. More capacity-based tariffs, better reflecting the nature of distribution costs, would help address this issue by providing more stable revenues and cash flows for DSOs. They would also reflect the higher network costs associated with peak demand and incentivise customers to reduce their peak load, resulting in a more efficient use of the network. Also, as a result of better peak load management, further investment in available grid capacity can be deferred or reduced in the longer run, with a positive effect on overall system cost to the benefit of electricity customers. Capacity-based tariffs should also ensure an efficient and fair allocation of costs among different customer categories, avoiding cross-subsidisation between customer classes. Tariff design should reflect the link between connection and use of system charges, as well as network customer diversity. As long as customers are connected to the grid and use its services, they should contribute to its costs. In addition to increasing the capacity part of the tariff structure, introducing a time-of-use (ToU) dimension for consumers connected to medium or high voltage distribution lines provides a price signal to transfer energy consumption out of peak hours and encourages consumers to moderate their peak demand levels. This would also incentivise consumers to choose energy saving appliances that can help consumption management in order to reduce peak levels. The use of smart meters allows setting different capacity network tariffs for predefined (peak/off peak) time schedules, which is compatible with EU objectives on energy efficiency and active demand response. In conclusion, as DSOs strive to integrate distributed energy resources into their networks in view of changing requirements in terms of network use, they must increase their efficient network expenditure. Regulation must therefore ensure that DSOs can recover their allowed costs in an efficient way, including a fair rate of return that is commensurate with the risk involved by such investment, via network tariffs in an adequate and timely manner. Hans ten Berge is the Secretary General of EURELECTRIC. About the Author Hans ten Berge has been Secretary General of EURELECTRIC since 2007. Mr ten Berge holds a degree in Chemistry from the Rijksuniversiteit in Utrecht and also graduated from the University of Delft in business administration. Following posts in a number of international companies, including Exxon Chemie and Kemira Agro, he joined ENECO Energie in November 1998 as Managing Director of Energiehandelsbedrijf, subsequently serving as a member of the Board of Management from November 1999 until January 2006. He served for several years as Chairman of the EURELECTRIC Markets Committee, before taking on the full-time post of Secretary-General in June 2007.