Managing the Future of the Electricity Grid: Modernizing Rate Design
74 Pages Posted: 23 May 2019 Last revised: 14 Apr 2020
Date Written: February 26, 2019
Advancing energy technology, increasing penetration of distributed energy resources, and climate change concerns are forcing a transformation of the electricity grid. And, this transformation is making the economic inefficiency of the current rate designs increasingly more apparent. Today’s typical rate designs not only fail to provide efficient price signals for electricity consumption, leading to inefficiently high capital expenditures and air pollution, but also fail to incentivize distributed energy resources, such as solar panels and energy storage, in a socially beneficial manner. As a result, reforming rates to accurately reflect the underlying costs, including external costs related to the emissions of greenhouse gases and other pollutants, is becoming an urgent endeavor.
In this Article, we first explain how current electricity rate designs hamper economic efficiency because they break the link between price signals and underlying costs, especially the costs related to environmental externalities. Based on an economic framework, we highlight how better rate designs would improve economic efficiency, provide accurate price signals for distributed energy resources, and advance the seemingly conflicting interests of the relevant stakeholders. We provide a historical context to show that for almost 140 years of electricity rate design discussions, economic efficiency principles have mostly been ignored; yet, problems that stem from inefficient rate designs have continued to be salient. We then argue that the electricity sector is at a critical juncture, and that a shift to a paradigm with a long-term vision with better, economically efficient rate designs is necessary if we want to realize the clean energy future that the modern grid promises us.
Keywords: electricity rate design, utility regulation, energy policy, distributed energy resources, cost-benefit analysis, utilities, electricity, energy-storage, energy policy, energy regulation
JEL Classification: K, K23, Q4, Q58, D4
Suggested Citation: Suggested Citation