Pricing Retail Electricity in a Distributed Energy Resources World

Categories: Demand Response, Demand Side Management, Distributed Energy Resources, Pricing, Rate Design -    View PDF

January 6, 2015

Laurence Kirsch

Mat Morey

The traditional integrated electric utility model in the U.S. is threatened by technological and institutional developments triggered by substantial public policy support for renewable energy and by the improving cost-competitiveness of renewable energy.  Part of the threat to the traditional model arises from antiquated retail pricing methods that fail to accurately match the prices and structures of retail power services with the costs and cost causation of those services.  As distributed energy resources (DER), including distributed generation and demand response, gain larger market shares, these cross-subsidies will shift larger and larger shares of costs toward those consumers who do not have their own DER and will incent new forms of uneconomic behavior by consumers, particularly including investment in DER that is expensive relative to other available resources.  In this paper, Mat Morey and Laurence Kirsch describe the principles and elements of a retail pricing structure that can be applied to all electricity consumers regardless of whether they have their own DER.   The basic principle is that the costs incurred by a utility depend solely upon the power flows that a consumer, or group of consumers, imposes or can reasonably be expected to impose upon the utility’s power system.