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Efficient tariff structures for distribution network services


  • Brown, Toby
  • Faruqui, Ahmad
  • Grausz, Léa


This paper reviews different methods for ensuring economic efficiency when devising tariffs for distribution network services while meeting the revenue constraint.11For further discussions about different regulatory frameworks in regulating network tariffs, the reader can refer to Nepal et al. (2014). There is a long tradition in welfare economics which suggests that prices should be based on long run marginal costs to achieve economic efficiency. However, network revenue requirements are often based on embedded costs, which are typically higher than long run marginal costs. This creates the problem of recovering residual costs. There are several methods available for doing so. Of course, economic efficiency is not the only criterion for designing tariffs. Fairness and gradualism are two other criteria that play heavily in the design of electricity tariffs. By drawing upon representative data from Australia, we illustrate the various methods and evaluate their likely performance on these criteria.

Suggested Citation

  • Brown, Toby & Faruqui, Ahmad & Grausz, Léa, 2015. "Efficient tariff structures for distribution network services," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 139-149.
  • Handle: RePEc:eee:ecanpo:v:48:y:2015:i:c:p:139-149
    DOI: 10.1016/j.eap.2015.11.010

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    References listed on IDEAS

    1. Nepal, Rabindra & Menezes, Flavio & Jamasb, Tooraj, 2014. "Network regulation and regulatory institutional reform: Revisiting the case of Australia," Energy Policy, Elsevier, vol. 73(C), pages 259-268.
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    2. Simshauser, Paul, 2018. "Price discrimination and the modes of failure in deregulated retail electricity markets," Energy Economics, Elsevier, vol. 75(C), pages 54-70.
    3. Abada, I. & Ehrenmann, A. & Lambin, X., 2018. "Unintended consequences: The snowball effect of energy communities," Cambridge Working Papers in Economics 1828, Faculty of Economics, University of Cambridge.
    4. Osaru Agbonaye & Patrick Keatley & Ye Huang & Motasem Bani Mustafa & Neil Hewitt, 2020. "Design, Valuation and Comparison of Demand Response Strategies for Congestion Management," Energies, MDPI, vol. 13(22), pages 1-29, November.
    5. Passey, Robert & Haghdadi, Navid & Bruce, Anna & MacGill, Iain, 2017. "Designing more cost reflective electricity network tariffs with demand charges," Energy Policy, Elsevier, vol. 109(C), pages 642-649.
    6. Simshauser, Paul & Whish-Wilson, Patrick, 2017. "Price discrimination in Australia's retail electricity markets: An analysis of Victoria & Southeast Queensland," Energy Economics, Elsevier, vol. 62(C), pages 92-103.
    7. Küfeoğlu, Sinan & Pollitt, Michael G., 2019. "The impact of PVs and EVs on domestic electricity network charges: A case study from Great Britain," Energy Policy, Elsevier, vol. 127(C), pages 412-424.
    8. Tim Nelson & Stephanie Bashir & Eleanor McCracken-Hewson & Michael Pierce, 2017. "The Changing Nature of the Australian Electricity Industry," Economic Papers, The Economic Society of Australia, vol. 36(2), pages 104-120, June.
    9. Li, Na & Hakvoort, Rudi A. & Lukszo, Zofia, 2021. "Cost allocation in integrated community energy systems - A review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 144(C).
    10. Jessica Thomsen & Christoph Weber, "undated". "How the design of retail prices, network charges, and levies affects profitability and operation of small-scale PV-Battery Storage Systems," EWL Working Papers 1903, University of Duisburg-Essen, Chair for Management Science and Energy Economics.
    11. Beaufils, Timothé & Pineau, Pierre-Olivier, 2019. "Assessing the impact of residential load profile changes on electricity distribution utility revenues under alternative rate structures," Utilities Policy, Elsevier, vol. 61(C).
    12. Timothé Beaufils & Pierre-Olivier Pineau, 2018. "Structures tarifaires et spirale de la mort : État des lieux des pratiques de tarification dans la distribution d’électricité résidentielle," CIRANO Working Papers 2018s-27, CIRANO.
    13. Neuteleers, Stijn & Mulder, Machiel & Hindriks, Frank, 2017. "Assessing fairness of dynamic grid tariffs," Energy Policy, Elsevier, vol. 108(C), pages 111-120.
    14. Sigurd Bjarghov & Hossein Farahmand & Gerard Doorman, 2021. "Grid Tariffs Based on Capacity Subscription: Multi Year Analysis on Metered Consumer Data," Papers 2111.06253,
    15. Schittekatte, Tim & Momber, Ilan & Meeus, Leonardo, 2018. "Future-proof tariff design: Recovering sunk grid costs in a world where consumers are pushing back," Energy Economics, Elsevier, vol. 70(C), pages 484-498.

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