WG C5.16, Costs of Electric Service, Allocation Methods, and Residential Rate Trends.

Governments and others often use global comparisons of the cost of electricity to rank the relative efficiencies of their electricity supply systems.  However, these are often difficult to interpret due to hidden subsidies and the lack of alignment with wholesale cost drivers.  As the penetration of consumer level roof top PV’s rapidly increases and competition between all generation is encouraged, cost alignment with retail rates becomes more and more important.  Working Group C5.16 has recently produced Technical Brochure 747 to examine this topic and how it is being applied in a number of countries around the world.  The Australian member of the working group was Alex Cruickshank. 

The Technical Brochure examines the alignment of retail rate structures with wholesale cost drivers, by clarifying costs of electric service, its components beyond and including energy, and the methods of cost allocation applied in practice. Retail rate structures are examined for alignment with costs incurred in the provision of electric service, along with enabling technology developments supportive of cost alignment.

Based on the key factors of affordability, sustainability, fairness and impact signaling, the brochure establishes a set of principles for retail rate pricing.  The brochure then examines the information from an international survey on wholesale costs, cost allocation methods, and residential retail billing structures and focuses on factors impacting electric service billing to end-use customers.  The survey took into account the differing contexts of deregulation around the world in order to achieve an international view

The drivers of electricity costs are a mix of fixed (capacity) and variable (energy) costs. Dominant cost components vary by region and depend on the installed capacity mix relative to network and other costs incurred in electric service provision. Considering these classifications of costs, cost-aligned retail rate structures include a balanced mix of: fixed charge (for costs shared commonly by customers) + demand charge (for capacity costs) + energy charge (for fuel and other operating costs) + policy charge (for taxes and riders like energy efficiency and renewable energy).

Technology is an enabler of cost-effective rate structures. Cost-reflective rate structures require the ability to measure or otherwise charge for those aspects of customer’s usage that drive the costs to serve. These aspects can include connection size, maximum observed demand, maximum demand coincident with system peak, and power factor, among others.

Retail rate structures can better achieve alignment with wholesale costs to the extent retail rate structures are aligned with cost drivers incurred in the provision of electric service, and enabling technology developments are supportive.

The brochure concludes with remarks on the need for advances that may better align rate structures with costs to support sustainable cost recovery for utilities, affordability of electric service for consumers, and efficient and effective outcomes for society. Advances include employment of advanced metering infrastructure to enable more cost-reflective retail pricing structures and technology innovations that better inform customers and help them manage their costs.

The Technical Brochure reference  ELT_302_2 can be downloaded from e-CIGRE HERE and  is free to members and  €20  to non members.