Challenges for Electricity Distribution Tariff Design in the Smart Grid era: A Conceptual Approach Cherrelle Eid

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1 Challenges for Electricity Distribution Tariff Design in the Smart Grid era: A Conceptual Approach Cherrelle Eid c.eid@tudelft.nl Supervisor: Tutors: Promotor: Rudi Hakvoort Javier Reneses & Pablo Frias (Comillas), Yannick Perez (Paris-Sud 11) Margot Weijnen 1

2 Dynamic Tariffs Home Energy Management Cost reduction Prosumers Aggregators Energy Service Companies (ESCOs) Local Storage Home Automation Bi-directional electricity flows Telecom Operators Virtual Power Plants (VPP) Demand Response Smart Grids? Electric Vehicles Smart Devices Reliable Electricity Supply Electricity Affordability Smart Meters Distributed Generation Renewable Energy Sources (RES) Smart Cities Isolated Systems CO2 Emission Reduction 2

3 A Smart Grid as container concept: 1. Is a marketing strategy (called framing in Process Management) Smart Grids are apparently better than Non-Smart-Grids Smart appears to improve system Environmentally, Economically and Technically 2. Vagueness of such concept: Helps find common grounds between actors to initiate interaction and implementation 3

4 My research: defining the Smart Grid concept and consequences for Energy Policy objectives Smart Grid Network and Retail Tariffs Net- Metering methods Demand Response Load Aggregation Sociotechnical context (market design) 4

5 Why (distribution) tariff design important? Smart Grid changes are mostly tangible at distribution level 5

6 Dynamic Tariffs Home Energy Management Cost reduction Prosumers Aggregators Energy Service Companies (ESCOs) Local Storage Home Automation Bi-directional electricity flows Telecom Operators Virtual Power Plants (VPP) Demand Response Smart Grids? Electric Vehicles Distributed Generation Smart Devices Reliable Electricity Supply Electricity Affordability Smart Meters Renewable Energy Sources (RES) Smart Cities Isolated Systems CO2 Emission Reduction 6

7 Why (distribution) tariff design important? Smart Grid changes are mostly tangible at distribution level Demand response (DR) major justification for Smart Grid investments DR would lead to reduced grid investment DR would support higher DG penetration levels DR would increase efficiency of entire system Dynamic tariffs are seen as the major driver behind Demand Response However, deciding on tariffs is complex... Which way to go? 7

8 Presentation Outline 1. Network Tariff design fundamentals 2. A regulators perspective 3. Tariffs as a tool 4. Combining tariff options 5. Location dependency 6. Challenges for tariff design 8

9 Tariff Design from a Policy Perspective Electricity Network is a natural monopoly DSO = Distribution System Operator Cost-causality : the user charge is reflective of the costs that the user caused to the grid. 9

10 1. Network Tariff design fundamentals Basic tariff fundamentals: Revenue sufficiency economic efficiency Equity Non-discrimination Transparency Simplicity Stability Additivity Additionally now: Cost Causality Sustainability targets like DG and EV penetration (Berg and Tschirhart, 1989; Green and Pardina, 1999; Leveque, 2003; Reneses and Rodríguez, 2013) 10

11 Objectives for Network Tariff Design from the perspective of the Distribution System Operator? Objectives for Network Tariff Design from the Regulators perspective? 11

12 2. Network Tariff design from the Regulators perspective Regulator Objectives for the DSO Quality of Supply Cost Efficiency Sustainability Continuity of Supply Voltage Quality Commercial Quality of Service Cost Recovery Minimize OPEX Minimize CAPEX Reduce losses Decrease CO 2 emissions Increase DG/EV penetration Increase Energy Efficiency Increase Demand Side Response 12

13 2.2 Tariff design from a Regulators Perspective 13

14 3. Tariffs as a tool Behavior Factors of the Network Users Price exposure Dispatch Margins for DSM Price Signal Options Price Elasticity Willingness to react Dispatch margin Dispatch Margin for Production Charging (-) Penalizing (--) Dispatchability Dispatch Margin for Consumption Incentivizing(++) Automation Capability to React Appliances Owned Remunerating (+) Capacity 14

15 3. Tariffs as a tool: Options for different Tariff Components 15

16 Energy charging often applied Except Netherlands Eurelectric

17 4. Combined options: Cost drivers with time and/or location dependency 17

18 5. Location dependency Both Long-Run-Incremental-Cost (LRIC) and Incremental Cost related pricing (ICRP) could be adequate methods to yield locational messages for network users ICRP = incremental cost related pricing Applied in the UK for transmission charging. A method that assumes a fully utilized network, therefore any additional power transaction will require immediate network reinforcement. When applied, these type of tariffs immediately deliver strong signals to network users and are therefore useful for direct behavior modification. 18

19 5.2 Location dependency LRIC long run incremental cost pricing, (Li, 2007). Accounts the deterred or acceleration of required network investment in the future due to current network utilization. In comparison with ICRP, this type of pricing method delivers more realistic but weaker pricing signals to network users. 19

20 5.2 Location dependency: The flip-over from credit to charge For the penetration of DG, both ICRP and LRIC deliver a credit for DG owners if electricity inflows lead to a satisfaction of local demand. However, when this local production surpasses demand, the credit flips into a cost. ( ) Discourages the settlement of new generation units and owners with DG units that are already settled in such location. Especially this latter issue leads to disapproval of such pricing methods taking into account network users inflexibility to alter their location. 20

21 6. Challenges for Tariff design Deciding on distribution tariffs 1. Costs for activating demand response VS (financial) benefits and achieved policy objectives 2. Tariff variability VS network user inflexibility 3. Tariff variability VS inelasticity of network users 4. Dynamic pricing VS network user privacy 5. Distribution need for DSM VS limited impact of distribution cost on final customer bills 21

22 6.2 Challenges for Tariff design Level of needed tariff complexity? 22

23 Thank you for your attention! Contact: 23

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