1 Session 17 Module F Electricity tariffs Prof. Ignacio J. Pérez-Arriaga Engineering, Economics & Regulation of the Electric Power Sector ESD.934, 6.974 2 Study material  Florence School of Regulation (FSR), “Design of electricity tariffs” <Tutorial text>2 3 Readings  Severin Borenstein, Michael Jaske, and Arthur Rosenfeld, “Dynamic Pricing, Advanced Metering and  Demand Response in Electricity Markets”, report CSEM WP 105, UCEI, 2002 4 Outline  General principles  Regulatory principles  Structure  Integral & access tariffs  A conceptual model for tariff design  Specify tariff structure  Assign each cost component  Compute tariffs for end users3 Regulatory principles REGULATORY PRINCIPLES ECONOMIC EFFICIENCY SUSTAINABILITY EQUITY TRANSPARENCY SIMPLICITY STABILITY CONSISTENCY ADDITIVITY 6 Regulatory principles  Sustainability: guarantee of recovery of all regulated costs so that the electrical power sector is economically viable  Equity or Non Discrimination in the allocation of costs to consumers: Same charge should apply to the same provision of a service, regardless the end use of the electricity.  This would be in line with a cost allocation procedure based on cost causality4 7 Regulatory principles  Economic efficiency: Two types are considered:  Productive: produce the good or service at minimum cost & meeting prescribed quality standards  Allocative efficiency: promote efficiency in consumption of the good in the short & long term Tariffs must sent economic signals that promote efficient operation & investment. This requires that costs should be assigned to those who are responsible for them (criterion of cost causality)  Then, use marginal costs / prices whenever possible  If there are still costs to be assigned • apply “cost causality” as far as it is possible • &, finally, try to minimize any inevitable distortion in the economic decisions of the consumers 8 Regulatory principles  Transparency: in the methodology, so that all employed criteria & procedures are made public  Stability: in the adopted methodology, so that the concerned agents have the least possible regulatory uncertainty. Stability is compatible with a gradual process of adaptation of the present tariffs to the new system  Simplicity: in the methodology & its implementation, as far as possible5 9 Regulatory principles  Additivity: derived from the principles of efficiency & sustainability. End user tariffs must be the outcome of adding all applicable cost concepts  Consistency: with the specific regulatory process of each country  Other principles:  Universal service: everybody must have access to electricity  Protection of low income consumers  Protection of the environment 10 Conflicts among principles (1)6 11 Conflicts among principles (2) It is necessary to establish a priority among principles & to reach reasonable agreements on how to proceed. This may depend much on the context within which the regulation takes place. 12 Regulatory principles A pragmatic summary  Tariffs must comply with the accepted regulatory principles. At least they should:  Guarantee recovery of the total regulated cost for each activity  Be additive  Be reasonably efficient  Send adequate economic signals both in the short & the long term  Be simple & transparent7 13 Hints for pragmatic solutions  Adopt tariffs with different components, so that it is possible to send several simultaneous signals:  Time differentiation (since the cost of the system depends on the considered time): time-dependent tariffs  Short-term energy signals (as close as possible to real-time  meant to promote efficient system operation): the marginal cost of energy (€/kWh)  Long-term signals (meant to promote efficient investments & to recover total costs of the activity): by means of a fixed term (€) &/or a capacity component (€/kW)  Locational signals (in the network): geographically differentiated tariffs 14 Outline  General principles  Regulatory principles  Structure  Integral & access tariffs  A conceptual model for tariff design  Specify tariff structure  Assign each cost component  Compute tariffs for end users8 The structure of the tariff must be consistent with the cost function associated to each cost component (e.g.: the procedure for network planning) & with the known characteristics of consumption (via metering &/or estimation) Known!characteristics of !Consumption!(metering):!Capacity(t) &!Energy(t)!Cost function!Cost = f(Pj,Ej)!Tariff structure!a.P + b.E + c!Consistency 16 Example of tariff structure9 17 Outline  General principles  Regulatory principles  Structure  Integral & access tariffs  A conceptual model for tariff design  Specify tariff structure  Assign each cost component  Compute tariffs for end users 18 Integral & access tariffs  There are two basic types of tariffs  Network access tariffs: for qualified consumers  Integral tariffs: for captive (non-qualified) consumers or those who (may) prefer to stay with a regulated tariff  The network access tariff must be a component of the integral tariff  Here it will be assumed that the network access tariff includes  Network charges  Other regulatory charges that apply to all consumers10 19  Energy  Capacity charge (long term guarantee of supply)  Ancillary services costs  Extra costs due to technical constraints  Network losses  Transmission and Distribution network charges  Regulatory charges (some examples):  Institutions (Market Operator, System Operator and Regulatory Commission)  Incentives to promote cogeneration and renewables  Domestic coal support, nuclear moratorium & other nuclear costs  Compensations to non peninsular territories  Stranded costs: competition transition charges  Commercialization (retailing) charges (belong to both types of tariffs) Typical components of integral & access tariffs ACCESS TARIFF (only explicit for qualified consumers) INTEGRAL TARIFF (for non qualified consumers) 22 Outline  General principles  Regulatory principles  Structure  Integral & access tariffs  A conceptual model