Eurelectric - Network tariff structure for a smart energy
system
Executive summary
The key mission of distribution system operators (DSOs) is to deliver reliability and quality of service to
their customers. Within the transition to the low carbon economy, additional network investments will
be necessary to maintain the high level of service that European customers expect. Investments by DSOs
will account for most future network investments as their networks need to accommodate an
increasing amount of distributed generation, including renewables and other distributed energy
resources like electric vehicles. Against this backdrop, DSOs’ ability to collect, through network tariffs,
the revenue required to cover the network costs and investments allowed by the regulatory authority
is key.
Network costs are mainly capacity driven
In most countries, network tariffs make up a significant share of a household customer’s electricity bill,
and they are expected to grow further. Most direct network costs are determined by peak demand
(kW) and are largely independent of the actual energy delivered – at least in the short term. Those costs
are unlikely to fall with the rise of decentralised generation: the grid must still be designed to cover peak
demand when there is no local production.
Current volumetric (€/kWh) network tariffs do not provide the right incentives to customers
Today, recovering network costs heavily depends on how much electricity is sold. The EURELECTRIC
survey has found that, in the majority of countries, network tariffs for households and small
businesses are almost entirely based on energy volume (kWh). About 50-70% of the allowed DSO
revenue is usually recovered using such volumetric charges. While volumetric tariffs set signals to
reduce energy consumption, they do not reflect cost arising from consumption at peak hours.
Integrating renewables and fostering energy efficiency requires cost-reflective network tariffs
The newly adopted Energy Efficiency Directive (2012/27/EU) requires the removal of network tariffs that
would impede energy efficiency and/or demand response. EURELECTRIC believes that tariffs encouraging
customers to shift their peak hour consumption should gain importance. Network tariff structures
should incentivise demand response and energy-efficient behaviour while providing a stable
framework for both customers’ bills and DSO revenues.
Appropriate approaches may include more capacity based network tariffs such as two-part network
tariffs with a capacity and an energy component or volumetric time-of-use network tariffs with
different prices for peak and off-peak energy. Cross-subsidies between different categories of users
should be minimised, ensuring that customers only pay for what they use.
Smart meters will open the door to more cost-reflective tariff structures and demand response. They
will allow a differentiation of charges according to customers’ impacts on the grid, as DSOs will be able to
measure the contribution of domestic consumers to peak load. Different customers’ potential and the
outcome of the national cost-benefit analysis for the roll-out of smart meters should be taken into
consideration when designing new tariff structures.