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Rate Design for the Distribution Edge

A decade and a half into the 21st century, the U.S. electricity grid still largely reflects 20th century infrastructure, investment patterns, retail pricing, and regulatory frameworks. However, that electric grid is rapidly evolving, and not only because its aging infrastructure requires new waves of investment to upgrade. Accelerating adoption of customer-facing distributed energy resources (DERs) will have increasingly important implications for grid operation and investment, and fundamentally changes the utility-customer relationship to become a two-way exchange of values and services.

This paper explores what a series of evolved rate designs could look like, and what form a pathway from here to there might take. Download the Report

Key Takeaways

This paper discusses deliberately and gradually increasing rate sophistication along three axes for (residential and small commercial) customers:

  • Attribute unbundling (what)—shifting from fully bundled pricing to rate structures that break apart energy, capacity, ancillary services, and other components
  • Temporal granularity (when)—shifting from basic or inclining block rates to pricing structures that honor the time-based aspects of electricity generation and consumption (e.g., peak vs. off-peak, hourly pricing)
  • Locational granularity (where)—shifting from pricing that more or less treats all customers within a distribution network equally to one that recognizes that their location within the system impacts the cost of delivering electricity to them and the value their DERs can provide

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These more sophisticated options need not introduce unnecessary complexity for the customer experience—third-party aggregators, energy management software, smart thermostats, and other technologies can maintain a simple customer experience even as greater differentiation gets built into the rate structures.

Transitioning to some of these rate structures is possible today or will be realistic in the next few years in some markets (especially where utilities have already transitioned to advanced metering infrastructure), while some of the more advanced rate structures will take more time—possibly even legislative and regulatory reform—to achieve. The transition to a future of more sophisticated electricity pricing won’t be easy, but it is an important and essential shift well worth its metaphorical price of admission in order to more optimally direct investment in a rapidly changing grid.

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