The Efficiency and Distributional Effects of Alternative Residential Electricity Rate Designs

56 Pages Posted: 19 Feb 2019 Last revised: 15 May 2022

See all articles by Scott Burger

Scott Burger

Massachusetts Institute of Technology (MIT)

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR); National Bureau of Economic Research (NBER)

Ignacio Pérez-Arriaga

Comillas Pontifical University - Institute for Research in Technology (IIT)

Ian Schneider

Massachusetts Institute of Technology (MIT)

Frederik vom Scheidt

Karlsruhe Institute of Technology

Date Written: February 2019

Abstract

Electricity tariffs typically charge residential users a volumetric rate that covers the bulk of energy, transmission, and distribution costs. The resulting prices, charged per unit of electricity consumed, do not reflect marginal costs and vary little across time and space. The emergence of distributed energy resources—such as solar photovoltaics and energy storage—has sparked interest among regulators and utilities in reforming electricity tariffs to enable more efficient utilization of these resources. The economic pressure to redesign electricity rates is countered by concerns of how more efficient rate structures might impact different socioeconomic groups. We analyze the bill impacts of alternative rate plans using interval metering data for more than 100,000 customers in the Chicago, Illinois area. We combine these data with granular Census data to assess the incidence of bill changes across different socioeconomic groups. We find that low-income customers would face bill increases on average in a transition to more economically efficient electricity tariffs. However, we demonstrate that simple changes to fixed charges in two-part tariffs can mitigate these disparities while preserving all, or the vast majority, of the efficiency gains. These designs rely exclusively on observable information and could be replicated by utilities in many geographies across the U.S.

Suggested Citation

Burger, Scott and Knittel, Christopher R. and Pérez-Arriaga, Ignacio and Schneider, Ian and vom Scheidt, Frederik, The Efficiency and Distributional Effects of Alternative Residential Electricity Rate Designs (February 2019). NBER Working Paper No. w25570, Available at SSRN: https://ssrn.com/abstract=3336522

Scott Burger (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
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United States

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR) ( email )

One Amherst Street, E40-279
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ignacio Pérez-Arriaga

Comillas Pontifical University - Institute for Research in Technology (IIT) ( email )

Madrid
Spain

Ian Schneider

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Frederik Vom Scheidt

Karlsruhe Institute of Technology

Kaiserstraße 12
Karlsruhe, 76131
Germany

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