Traditionally, electricity tariffs have been designed by defining a tariff structure – a fixed monthly charge ($/month) and a volumetric charge ($/kWh) – that is compatible with the existing metering capabilities – typically an electromechanical device whose number of turns is proportional to the energy consumed – so that the total estimated costs of electricity supply for any given year could be paid by the application of the tariff to the customers.
Large industrial or commercial customers – and also residential customers in some countries – usually were subject to more complex tariff structures, including a capacity component ($/kW) where kW might correspond to the maximum contracted utilisation capacity or the individual demand coincidental with the system peak, for instance. Advanced tariff designs also include time differentiation (seasonal, weekdays and weekend, day and night, even hourly). The total estimated annual supply cost had to be allocated to the three components of the tariffs. Therefore tariff design consisted of i) computing the total costs of generation, the transmission and distribution networks, retail, system operation, the regulatory authority and any other costs included in the tariff (the “regulated revenue requirement, RRR” for each activity and the total amount), and ii) efficiently allocating these costs (using cost-causality criteria) to the (two or three) components of the tariff of each customer, so that the application of the tariff to all customers over a year could recover the total estimated annual supply cost.
The presence of distributed energy resources (DERs) has changed this picture radically, because these DERs can also provide electricity services with economic value. Therefore, the tariffs must be designed now with a different perspective, in terms of the services provided or received by each agent. Each agent must be remunerated for the services that the agent provides, and it should pay for the services that the agent consumes. Again, the corresponding costs must be allocated to the (two or three) components of the tariff. Any costs that the regulatory authorities consider that must be included in the tariff and that cannot be attributed to the energy consumed (kWh) or the capacity required (kW) by the agents must be recovered by the fixed component of the tariff ($/month) as a “residual charge”.
It is therefore important to think now in terms of the provision of electricity services. What services exist, and what the costs of providing them are.
Indispensable definitions.
The supply of electricity requires that various ”electricity services” must be provided. Costs are incurred in providing these services, to be recovered with regulated charges or with market prices.
“Prices” result from electricity services supplied under market conditions.
“Regulated charges” are determined by a regulatory authority to recover the costs of a regulated activity.
“Charge” is frequently used to designate any component of the tariff.
The electricity services of relevance for the study of DERs are energy service, network service, operating reserves and firm generation capacity. There are other services, of lesser relevance for this study.
