European Distribution System Operators
for Smart Grids
Adapting distribution network tariffs to a
decentralised energy future
September 2015
Key messages
The European Union’s 2009 energy policy objectives have triggered the rapid growth of distributed
renewable energy sources (DRES) across Europe. By the end of 2013, installed capacity of photovoltaic
systems and wind turbines in Europe reached 81 GW1 and 117 GW2 respectively.
In most European countries today, the costs incurred by DSOs are generated by the grid they build to
be ready for any supply and demand situation and its maintenance, whereas revenues are most
commonly based on the energy flowing through the grid and delivered to final consumers. The
variability of electricity generation resulting from the larger integration of DRES and prosumers,
together with increasingly variable electricity consumption, are significantly impacting the ability of
distribution system operators (DSOs) to perform their duties in a business as usual scenario.
Uncertainty regarding DSO costs and revenues is rising, and debate in ongoing at European and
member state level on how to guarantee that grids are prepared for any situations while encouraging
the integration of DRES in a way that is socially and economically fair.
Reviewing and updating current distribution network tariffs will ease the transition towards a more
decentralised energy system. Tariff structures vary across Europe reflecting local grid conditions and
consumer needs, nonetheless European Distribution System Operators for Smart Grids (EDSO)
encourages national regulatory authorities (NRAs) and policy makers to consider the following highlevel recommendations when designing distribution network tariffs.
Grid users should be able to:
 Self-generate and self-consume energy as long as the costs induced by their use of grid
services, including insurance against periods when it is not possible to consume one’s
own generated electricity, is reflected in their bill.
 Receive compensation from DSOs when adapting their energy consumption/generation
in response to signals (eg. at peak times).
 Sign up for “smart contracts” with DSOs, granting them a quicker and cheaper
connection, in exchange for occasional and limited curtailment/grid
disconnection/activation of storage at peak times.
 Receive clear and appropriate information before and after new distribution network
tariffs are implemented.
Operators of (non-residential) DRES should:
 Be offered reduced locational connection charges in order to incentivise them to connect
in areas requiring less grid reinforcement, and thus costing less to society.
NRAs are invited to:
 Make distribution network tariffs more capacity based, and less volumetric based, in order
to limit revenue uncertainty for DSOs.
 Set up short price periods, ideally one year. The regulatory period, however, should not
be shortened.
1
2
EPIA, Global Market Outlook for Photovoltaics 2014-2018, June 2014
EWEA, Wind in Power 2013 European Statistics , February 2014
1
Table of Content
Key messages .......................................................................................................................................... 1
Introduction............................................................................................................................................. 3
1.
Understanding distribution network tariffs .................................................................................... 4
a.
What are network tariffs? ........................................................................................................... 4
b.
Understanding capacity versus volumetric tariffs ....................................................................... 5
c.
Why should distribution network tariffs be rethought? ............................................................. 6
2.
Designing network tariffs for a smooth energy transition .............................................................. 9
a.
Reconciling the interests of utilities, prosumers and DSOs ........................................................ 9
b.
Optimising renewables integration ........................................................................................... 10
c.
Building consumer support for changes in network tariffs – Netherlands case study ............. 11
Annex – Effect of the switch to capacity tariffs in the Netherlands in 2009 ......................................... 13
2
Introduction
The European Union’s 2009 energy policy objectives have triggered the rapid growth of distributed
renewable energy sources (DRES) across Europe. By the end of 2013, installed capacity of photovoltaic
systems and wind turbines in Europe reached 81 GW and 117 GW respectively.
The use of PV is likely to continue to grow worldwide and users to become more active, increasingly
reflecting on the way they consume and produce energy. In a business as usual scenario, this translates
into huge investments by electricity distribution system operators (DSOs) to increase hosting capacity
in the low and medium voltage networks. In a more cost-efficient “smart” scenario it means DSOs will
be actively involved in the management of power flows instead of merely carrying out traditional
reinforcements such as installing more cables or larger transformers.
Meanwhile, electric vehicles and the development heat pumps could also challenge distribution
networks, while on the other hand could offer grid support if smartly reactive.
In order to cope with the growing variability of electricity consumption and generation, an adapted
regulatory framework is needed. This framework should square the circle by ensuring:
-
Stable and predictable revenues necessary for DSOs to ensure a secure and stable supply of
electricity in all supply and demand situations, while…
Not hampering the development of distributed generation and the achievement of the EU’s
energy policy objectives, and…
Keeping the door open for the development of grid-optimised flexibility services that will help
to reduce grid costs for all network users.
A first step in that direction should be the reviewing and updating of current distribution network tariff
schemes.
In this paper, EDSO presents high-level principles to be drawn upon by national regulatory authorities
(NRAs) and legislators when redesigning distribution network tariffs and which align the interests of
DSOs, owners of distributed generation and society as a whole.
3
1. Understanding distribution network tariffs
a. What are network tariffs?
DSOs are entrusted with a naturally monopolistic activity meaning that their revenues and activities
are overseen by NRAs. Network costs paid by consumers are commonly set to allow the recovery of a
pre-determined revenue by adding a charge to customer bills (network tariff) and fixing a price for
connection to the grid (connection charge). As the electricity network is currently built to be available
to all customers at all times, irrespective of their actual consumption and generation patterns,
questions are arising in the context of the energy transition around how to share the costs among grid
users and of how to determine charges for services.
Typically, the tariff structure aims to obtain the most equitable distribution of costs among consumers.
Given the large number of national, regional and local specificities that influence the costs of
distribution grids across EU Member States, there are various ways to reach this objective. VTT (2011)
highlighted that “it is in practice difficult to estimate and, especially, allocate the marginal costs of
electricity delivery for every period of time for every customer at every location. (…) To deal with this
question, there are options used to allocate costs according to a chosen set of criteria that affect the
actual costs of the power system including: geographical differentiation, voltage level differentiation,
time of use and contribution to system peak”3. To illustrate the existing possibilities, figure 1 below
presents a non-exhaustive list of options that regulators can choose from when defining the tariffs.
Figure 1: Alternative criterion and ways levels of differentiation of tariffs
Source: VTT (2011) modified from4 Petrov and Keller (2009)
As a consequence, network tariffs can vary significantly from one country to another based on the
choices made by the NRA. Different options can be used to influence the behaviour of grid users
(generators and consumers) through the appropriate incentives. In effect, network tariffs are
economic signals. They influence the short-term use of the network to avoid risk of overload. They can
also influence long-term decisions by grid users, such as whether to install PV capacity at home, based
on weighing up future private benefits against network cost. In other words, tariff incentives determine
how and to which extent grid users can influence their energy bill by changing their behaviour.
3
Similä L., G. Koreneff and V. Kekkonen, Network tariff structures in smart grid environment. Research report. Technical
research center of Finland, VTT, 2011.
4 Petrov K. and K. Keller, « Network pricing models in Europe --- From normative principles to practical issues ».
Presentation, Transmission & Distribution Europe, 2009.
4
b. Understanding capacity versus volumetric tariffs
Volume and capacity are two key factors in most network costs making up a consumer’s bill. These are
sometimes referred to as energy and non-energy, or even energy and power. Most total network costs
are composed of a combination of both:
 Volumetric tariffs charge consumers on the basis of the total volume of energy a consumer
withdraws from, or feeds into, the grid. The measuring unit is watt per hour (Wh, KWh, MWh)
 Capacity tariffs are based on the maximum amount of energy withdrawal (and in some cases
feed-in) potential at a connection point at any one time. The measuring unit is the watt (W).
Capacity can be:
- Standard capacity and charges fixed equally across types of grid users (eg. domestic,
medium-significant grid users) and levied per metering point
- Contractually agreed maximum capacity for each consumer and corresponding price
- Variable, i.e. time-Of-Use (ToU) tariffs, where tariffs vary at different times of the day
to incentivise the easing of load peaks and congestion. ToU can be fixed ahead of time
(for a month, or year) on the basis of historical data on grid use in a particular network,
or can be dynamic, responding to real-time signals from the DSO. Smart meters are
required for ToU schemes.
According to the latter two types of capacity tariffs, two consumers with the same volume of
consumption or generation pay differently to use different levels of grid capacities, as shown in the
figures below. This allows to account for the different levels of strain on the grid, irrespective of total
volume passing through the network.
5
Figure 2 – Cases exemplifying inefficiency of volumetric system to address capacity
Depending on the EU Member State, the network tariff paid by the customer in low voltage (LV)
distribution networks can be predominantly based on capacity, for example in Finland, the
Netherlands, and Spain, but is more commonly heavily based on total volume.
c. Why should distribution network tariffs be rethought?
The ‘standard’ household consuming approximately 3,500 kWh per year is progressively disappearing.
Electricity consumption and local peak loads are being significantly impacted by increasing
electrification and decentralisation of electricity generation. Further technological progress, for
example, energy storage appliances, is expected to reinforce this trend. As such, the fact that LV
network tariffs in most Member States are volumetric is becoming problematic.
Volume-heavy tariff structures - Energy consumption impacts DSO income and
investment/planning ability
Where the make-up of tariff structures is volume-heavy, i.e. in most of Europe, matching costs and
revenues is not an issue for DSOs when electricity consumption remains stable or steadily increases by
a few percent every year. However, consumption patterns are changing, with various factors
contributing to diminishing overall volumes of energy used.
On the one hand, energy efficiency targets have driven measures, new technologies and behavioral
change that all contribute to reducing energy use while performing the same tasks. Households are
increasingly generating a greater share of their own consumption as a result of widespread uptake
DRES such as solar panels, meaning a reduction in the amount of energy taken from the grid.
In some countries, an additional challenge is stemming from net metering which applies to consumers
with their own renewable production unit and which in effect deducts the volume of self-generated
energy fed into the grid from the total volume consumed by that prosumer from the grid. The off-set
is either full or part depending on the policies in the Member State. Under net metering, a PV system
owner receives credits for at least a portion of the electricity he generates, then how long one can save
credits, and how much they are worth vary from country to country.
6
Therefore, lower consumption and lower off-take from the grids translate to a lower billing basis for
DSOs while the grid development and maintenance costs, determined by the network capacity, do not
vary.
On the other hand, although heat pumps and electric vehicles tend to trigger higher energy
consumption, they also contribute significantly to higher local peak loads if unmanaged. All these
factors create revenue uncertainty for the DSO, on top of balance-related issues on the grid. Each NRA
creates a method of setting the amount of money (allowed revenue) that can be earned by the network
companies over the length of a price control. The revenues have to be set at a level which covers the
companies’ costs and allows them to earn a reasonable return if they perform well in their tasks. In
this respect, whatever the regulatory period is (3, 4, 6 years), the price period should be one year, in
order to match closely the DSOs’ expenses and revenues.
Lowered social welfare due to inefficient investments
Traditionally-designed network tariffs can lead to inefficient investment, either because of a lack of
demand management incentives, or a lack of proper incentives for connecting generators at the right
location.
On the demand side, the more customers subscribe to market or system-driven demand response
plans, the more simultaneous their energy consumption could become at certain moments in time
when signals from both could raise electricity peaks higher. This challenge is amplified by heat pumps
and electric vehicles. Growing peak loads should be a signal for the DSO to reinforce the grid, but the
cost of adapting the network to a few peak periods is high and is paid by all consumers. A cheaper
solution for society would be to avoid sudden electricity consumption spikes by slightly adapting
electricity consumption habits, in other words, shifting peaks. However, volumetric tariffs only
7
encourage grid users to reduce their overall energy consumption, but do not incentivise them to limit
their immediate consumption to a specific level. Specific incentives are needed for that purpose.
On the generation side, producers are usually not charged for using the network. They might only be
subject to a connection charge, which can be shallow (only the direct cost of the connection is
charged), shallow-ish (direct connection cost and a share of grid reinforcement costs) or deep (full
connection and network reinforcement costs). Unless where deep connection charges are applied,
there are no incentives for distributed generation project promoters to install their generation units in
places where only limited network reinforcement will be necessary. For prosumers, traditional
network tariffs at low voltage do not incentivise them to reduce their injection at peak production
times by aligning their own consumption to their own production.
Questionable distribution of costs among citizens
While costs incurred by the DSO are not lowered, the costs of distributed energy sources connected
to the grid translate into higher tariffs paid by non-generators. Costs of maintaining the grid secure
act as a kind of insurance against the maximum potential grid use at any moment, which remains
unchanged unless these generators are completely independent from the grid. Prosumers may offset
the effect of an increasing bill due to more self-consumption or net-metering while their share of the
network costs will be transferred to other, and sometimes more vulnerable, consumers who cannot
afford to invest in their own production units. On the other hand, if prosumers were able to contribute
to grid stability through “smart contracts” with the DSO or in response to capacity based tariff
incentives, they could help to keep network costs under control for themselves and their neighbours
by reducing the peak loads that drive the network costs.
Key messages
•
Grid Users should be able to self-generate and self-consume energy as long as the costs
induced by their use of grid services, including insurance against periods when it is not
possible to consume one’s own generated electricity, is reflected in their bill.
•
NRAs are invited to set up short price periods for DSOs, in order to match closely the DSOs’
expenses and revenues.
8
2. Designing network tariffs for a smooth energy transition
Based on the shortcomings of current network tariffs, EDSO invites policy makers and regulators to
take into account the proposals below when designing future tariff structures.
a. Reconciling the interests of utilities, prosumers and DSOs
Driving fairer, more predictable and cost-reflective network tariffs
Today, in countries where smart meters have not been deployed, a tariff based predominantly on a
fixed or contracted capacity can help to better reflect real DSO costs and avoid discrimination between
users owning distributed generation and those who do not. This type of tariff also benefits customers
who can anticipate more easily the network-related part of their bill: a cold winter or a hot summer
will have a lesser impact, as the variable part of their network costs is reduced on their bill.
Furthermore, capacity tariffs allows consumers to reduce their bill in the longer-term if they limit the
maximum individual peak use they contract. To help consumers adapt, retailers, consumer
associations, public authorities, and DSOs can provide guidance 5 which can, for example, advise on
how to better stagger consumption over time or promote the uptake of smart appliances and home
energy management systems.
With smart meters, another option could be envisaged: a distribution tariff component based on the
actual capacity used by each grid user. This system would be more conducive to flexibility than tariffs
based on contracted capacity.
Rewarding consumer responsiveness - carrots without sticks
ToU capacity-based schemes require that the times at which different tariffs apply are communicated
to consumers in advance, for example, for the following month or year. These predictable variations
in tariffs would help consumers to identify times at which running their appliances will cost less money.
ToU schemes have been used by suppliers in a number of Member States and have shown to be
manageable and economically rewarding for consumers. ToU for the network tariffs could also benefit
consumers.
In contrast, dynamic tariffs try to solve congestions that are imminent. In this case, tariffs vary on short
notice until a sufficient number of grid users change their usage to solve a peak-load or congestion
issue. Dynamic tariffs implemented as the main network cost recovery component run the risk of
penalising consumers who are unable to react to the signals. Also for reasons of complexity, much like
for some approaches to demand response tested across Europe so far, interest in such systems can be
lacking among regular households. Part automated options can be deemed preferable.
A relatively flat tariff system (based on contracted capacity) is simpler to administer and to understand,
as well as ensuring the DSO can develop and maintain the grid to the required standard, but is not the
most conducive to consumer flexibility. However, a flat capacity-based tariff system with an element
5
See for instance http://www.bajatelapotencia.org/como-bajar-la-potencia/ for Spain
9
of ToU, or specific rebates, can prove a win-win solution that offers tangible rewards to the
consumer. This is the case in France for LV and MV users6 where the distribution tariff structure
present both a capacity component and ToU rates for energy consumption. Also being simple to
explain and master, uptake of the solution is increased.
Other solutions exist in order to incentivise consumers to become more flexible, and be rewarded for
it. In most Member States, if grid capacity is requested by consumers or potential consumers, it must
be provided. So far, the benefits and limitations of different tariff structures have been laid out. While
still relevant, capacity-based tariffs could be used alongside smart contracts with large businesses,
industrial facilities, SMEs or DRES (i.e. significant grid users) to reduce (or defer) the need to reinforce
the grid, thus reducing the network costs. For example, such a contract could stipulate that the DSO is
able to limit the consumption or production of a grid user a certain number of times a year, for a limited
duration, at critical moments under agreed conditions. In exchange, existing grid users could get a
single payment or rebate, while new grid user could benefit from a cheaper and quicker connection
(due to the lack of or limited grid reinforcement).
NRAs should adapt the necessary legislation and codes to incorporate these new flexibility service and
connection options7, while still allowing DSOs to limit grid access as a last resort for maintaining the
operational security of the grid and its users. However, the choice of whether to offer such contracts
in certain situations and areas should always be left to the DSO, backed up by a well-designed incentive
scheme. Furthermore, NRAs should ensure that DSOs are allowed to recover these types of payments.
Key messages
•
Grid users should receive compensation from DSOs when adapting their energy
consumption/generation in response to signals (eg. at peak times)…
•
… and be able to sign up for “smart contracts” with DSOs, granting them a quicker and
cheaper connection, in exchange for occasional and limited curtailment/grid
disconnection/activation of storage at peak times.
•
NRAs are invited to make distribution network tariffs more capacity based, and less
volumetric based, in order to limit revenue uncertainty for DSOs.
b. Optimising renewables integration
Incentivising DRES to connect where less costly
In most EU countries today, when project promoters decide to build a wind farm or to install a large
quantity of solar panels, they first select a location, and then ask the network operator for further
6
http://www.erdf.fr/sites/default/files/documentation/TURPE_4_Plaquette.pdf (in French)
See chapter 5.8 (Demand-side management) as an example of these arrangements approved by GEMA
http://www.scottishpower.com/userfiles/document_library/SPD_LC14_Statement_14-15_(FINALS).pdf
7
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information on the connection charges. A system providing locational signals reflecting network
development costs is needed to coordinate the long-term developments of the network and of
distributed generation. Differentiated connection charges, based on the location of the connection
point could be a way to take advantage of specific characteristics of grid users while avoiding market
distortions that might be the result of differentiated tariffs for generators in different locations. In
particular, these one-time payments would have an influence on the choice of the location of
generation without altering the marginal cost of the generation unit.
Application of differentiated connection charges to many users with distributed generation (e.g.
photovoltaics), electric vehicles and other appliances that use intelligent solutions (based on their
utilisation patterns and controllability) although more complex, could become a solution in the
medium to long term.
Key message
•
Grid users should be offered reduced locational connection charges in order to incentivise
them to connect in areas requiring less grid reinforcement, and thus costing less to society.
c. Building consumer support for changes in network tariffs – Netherlands
case study
Capacity-based tariffs are already used today in some countries. In 2008, the Dutch government
decided to switch from a mixed tariff (combination of volumetric and capacity) to a system inherently
based on flat capacity for household consumers. Three arguments justified the change:
 Network costs are mainly capacity driven and determined by peak demand
 New tariffs were considered necessary to introduce a retailer-centric model (only one bill sent
by the retailer, compared to separate bills sent by DSOs and retailers)
 Capacity tariffs simplified (aggregated) billing between DSOs and retailers.
A large media campaign was organised in order to prepare citizens for the change. Among other
initiatives, an awareness website was created by the DSOs and the government, informational sheets
were published in national newspapers, and customers with a large connection and little consumption
received a letter inviting them to check their real capacity needs.
In 2009, the capacity tariff was introduced for all connections in the retail market, both for electricity
(≤ 80A) and gas (≤ 40m3/h). In order to limit the number of disgruntled customers and avoid a public
backlash, the effects of the introduction of the capacity tariff were compensated through a revision of
the “energy tax”.
The energy tax had been introduced in 1996 to stimulate energy efficiency, and consisted in a variable
volumetric component. This change was accompanied by a fixed tax reduction on the energy bill. The
more energy a household would consume, the more energy tax it would pay.
11
In 2009, the variable component of the energy tax was increased. A fixed tax rebate ensured that
households with a standard connection would continue to pay approximately the same bill. The
transition towards a new distribution tariff happened in several steps:
1. A compensation arrangement for customers with a connection above 25A was introduced.
These customers were able to reduce their connection capacity for a fixed charge of €50 in 2009
or 2010.
2. If not possible to reduce the real connection capacity, a transitional measure enabled
consumers to get a single sum compensation for 2009 and 2010. The compensation was mainly
for larger connections with a low consumption e.g. buildings with elevators, churches, etc.
3. In 2013, distribution companies agreed to compensate customers who had not understood that
they were paying for an oversized connection, and reduced their contracted capacity for free.
This was mainly applicable to gas connections.
Overall, the impact of this new policy has been positive. It was transparent for consumers, reduced
revenue uncertainty for DSOs and had no measurable negative-impact on energy efficiency (which has
been feared as a side-effect), because there is still an incentive by the energy tax and supplier charge
per kWh.
The change to a new tariff scheme also led to a substantial reduction in administrative costs in the
energy sector, as it is easier for DSOs to bill suppliers: there are few categories of consumers and the
charges paid by all consumers fitting in one category is the same.
Key message

Grid users should receive clear and appropriate information before and after new
distribution network tariffs are implemented.
12
Annex – Effect of the switch to capacity tariffs in the Netherlands in 2009
Effect of tariff change on typical household bills (source: Liander)
Volume
2.000 kW h
2008
2009
32,64
Fixed part
18,00 euro
18,00
Tax reduction
0-10.000 kWh
Volume
0,0336 €/kWh
2.000
-199,00 euro
67,20
-199,00
0,0752 €/kWh
150,40
69,24
16,44 euro
Fixed part
18,00 euro
18,00
115,6000 euro
115,60
Tax reduction
-318,62 euro
-318,62
Capacity charge (25A)
0-10.000 kWh
Fixed part
18,00 euro
18,00
0,0336 €/kWh
-199,00 euro
3.500
117,60
-199,00
0,0752 €/kWh
3.500
263,20
216,12
Tariff
Distribution
16,32
Supply
Distribution
Supply
amount
16,32 euro
0-10.000 kWh
amount
Fixed part
18,00 euro
18,00
115,6000 euro
-318,62 euro
115,60
-318,62
Capacity charge (25A)
Tax reduction
0-10.000 kWh
0,1085 €/kWh
16,44
3.500
379,75
211,17
2009
volume
16,32 euro
amount
Tariff
Supply Distribution
Supply Distribution
Variable costs (kWh)
Tax reduction
volume
16,44 euro
5.000 kW h
Tariff
Fixed part
217,00
48,42
Connection
2008
Connection
2.000
2009
volume
Connection
Volume
0,1085 €/kWh
16,44
3.500 kW h
Tariff
0-10.000 kWh
amount
Connection
2008
Variable costs (kWh)
Tax reduction
volume
Distribution
32,64 euro
Supply
Connection
Variable costs (kWh)
Tariff
amount
Distribution
volume
Supply
Tariff
16,32
18,00 euro
18,00
0,0336 €/kWh
-199,00 euro
5.000
168,00
-199,00
0,0752 €/kWh
5.000
376,00
379,32
13
Connection
Fixed part
Capacity charge (25A)
Tax reduction
0-10.000 kWh
volume
16,44 euro
amount
16,44
18,00 euro
18,00
115,6000 euro
-318,62 euro
115,60
-318,62
0,1085 €/kWh
5.000
542,50
373,92
EDSO for Smart Grids is a European association
gathering leading electricity distribution system
operators (DSOs), cooperating to bring smart grids from
vision to reality.
www.edsoforsmartgrids.eu
14