The Role of Cost-Reflective Distribution Tariffs and Flexibility Contracts in Supporting the Energy Transition

17 November 2020
By Richard Druce, George Anstey, Dr. Laura T.W. Olive, Dr. Will Taylor, and Leen Dickx

The energy transition is changing radically how electricity is produced and consumed. Meeting decarbonization goals will require substantial electrification of transport and heating demand to displace oil and natural gas use, which will require substantial investment in electricity distribution networks. However, some distribution investments may be avoided if customers can use smart meters, smart appliances, flexible scheduling of consumption, and on-site generation and storage to reduce their use of the distribution system at times when it is constrained.

To achieve an economically efficient balance between distribution investments and the use of these new technologies to avoid them, tariffs will need to reflect the costs that their production or use of electricity imposes on the grid. In many jurisdictions, creating such signals requires substantive reform of distribution tariffs. The Council of European Energy Regulators (CEER) released a paper discussing electricity distribution tariffs and required reforms to support the coming energy transition.

While helpful to European regulators in meeting the requirements of EU regulations, the CEER paper is not ground-breaking. In their white paper, NERA Directors Richard Druce and George Anstey, Associate Directors Dr. Laura T.W. Olive and Dr. Will Taylor, and Senior Consultant Leen Dickx, building on a large body of established literature and regulatory precedent, demonstrate how regulators around the world can achieve more efficient tariff design. The NERA authors also address two topics covered by CEER (for which there is less extensive precedent) that are likely to prove more challenging to regulators: 1) the use of dynamic distribution pricing and 2) the development of “flexibility services.”