Association for Public Policy Analysis & Management

As more distributed energy resources (DERs) are adopted – including solar, electric vehicles, storage, and demand response – simple approaches such as flat electric rates and net metering do not provide the best price signals to minimize overall system cost and maximize net social benefit. Historically, regulators have focused on issues related to simplicity, economic efficiency, equity, revenue stability, bill stability, and customer satisfaction when assessing rate designs. However, new schools of thought are emerging as technologies have shifted the role of the consumer to be more actively engaged in power generation. The spatial and temporal distribution of DERs impose varying costs on the grid that are not reflected in uniform pricing schemes. Alternatives range from tiered rates based on demand to technology-specific approaches to real-time dynamic pricing. This research provides a framework for evaluating principles of electric rate designs in terms of private versus social benefits for new technologies. Ultimately, this research asks - How do different rate design structures compare in terms of private and social benefit for combinations of distributed energy technologies?

We intend to address this question in both theoretical and empirical terms. This work-in-progress is developing theoretical models to represent the rate-payer, utility, and regulator perspectives. Initial work is focused on model development for economic efficiency with solar technology. Social benefit is estimated in terms of reduced system cost (based on locational marginal price) and private benefit is estimated in terms of reduced utility bills. Rate-payers desire to minimize their bills while meeting their energy needs, the utility is responsible for meeting all rate-payers’ energy needs and paying system costs, and the regulator aims to minimize rate-payer burden while assuring the utility is able to achieve a reasonable rate of return.

Based on this work, we intend to derive new principles for electric rate design that are theoretically and empirically motivated. In addition, this work lays a foundation for future experimental work related to the impacts of technology stacking, location-specific incentives, and consumer choice.