Optimal Retail Tariff Design with Prosumers: Pursuing Equity at the Expenses of Economic Efficiencies?

TL;DR

This paper presents a bilevel model for designing retail electricity tariffs that balance economic efficiency and energy equity, highlighting the limitations of low-income rate programs.

Contribution

It introduces a bilevel optimization framework for tariff design that explicitly considers equity and efficiency trade-offs, providing insights into optimal fixed and volumetric charges.

Findings

Optimal tariff uses fixed charges for fixed costs

Equity-focused programs like CARE may reduce efficiency

Proves solution properties of the bilevel model

Abstract

Distributed renewable resources owned by prosumers can be an effective way of fortifying grid resilience and enhancing sustainability. However, prosumers serve their own interests and their objectives are unlikely to align with that of society. This paper develops a bilevel model to study the optimal design of retail electricity tariffs considering the balance between economic efficiency and energy equity. The retail tariff entails a fixed charge and a volumetric charge tied to electricity usage to recover utilities' fixed costs. We analyze solution properties of the bilevel problem and prove an optimal rate design, which is to use fixed charges to recover fixed costs and to balance energy equity among different income groups. This suggests that programs similar to CARE (California Alternative Rate of Energy), which offer lower retail rates to low-income households, are unlikely to be efficient, even if they are politically appealing.