# On the Efficiency of Connection Charges---Part II: Integration of Distributed Energy Resources

## TL;DR

This paper analyzes how integrating distributed energy resources affects retail electricity tariffs, welfare, and cross-subsidies, comparing decentralized and centralized models and providing empirical insights using real data.

## Contribution

It introduces a comprehensive framework for understanding DER integration impacts on tariffs and welfare, highlighting the equivalence of social welfare under different models and the effects on connection charges.

## Key findings

- Net-metering tariffs are optimal and reflect expected wholesale prices.
- Decentralized DER integration generally results in higher connection charges.
- Consumer welfare decreases with increased DER integration under current retail pricing.

## Abstract

This two-part paper addresses the design of retail electricity tariffs for distribution systems with distributed energy resources (DERs). Part I presents a framework to optimize an ex-ante two-part tariff for a regulated monopolistic retailer who faces stochastic wholesale prices on the one hand and stochastic demand on the other. In Part II, the integration of DERs is addressed by analyzing their endogenous effect on the optimal two-part tariff and the induced welfare gains. Two DER integration models are considered: (i) a decentralized model involving behind-the-meter DERs in a net metering setting, and (ii) a centralized model involving DERs integrated by the retailer. It is shown that DERs integrated under either model can achieve the same social welfare and the net-metering tariff structure is optimal. The retail prices under both integration models are equal and reflect the expected wholesale prices. The connection charges differ and are affected by the retailer's fixed costs as well as the statistical dependencies between wholesale prices and behind-the-meter DERs. In particular, the connection charge of the decentralized model is generally higher than that of the centralized model. An empirical analysis is presented to estimate the impact of DER on welfare distribution and inter-class cross-subsidies using real price and demand data and simulations. The analysis shows that, with the prevailing retail pricing and net-metering, consumer welfare decreases with the level of DER integration. Issues of cross-subsidy and practical drawbacks of decentralized integration are also discussed.