Assessing fairness of dynamic grid tariffs

Abstract

The surge in the supply of intermittent renewable energy creates new challenges for electricity networks. The high variation in the supply either requires costly network extensions or the implementation of incentives that reduce peaks. One variant of the latter are dynamic tariffs. While dynamic pricing provides an efficient tariff scheme, people may perceive it as unfair. This paper examines to which extent such peak pricing is actually unfair and, if so, how this unfairness can be lessened by adapting the tariff design. We discuss the efficiency arguments for dynamic pricing and subsequently the acceptability and perceived fairness. In addition, we contrast these perceptions with fairness criteria derived from ethical theories. We conclude that dynamic pricing does not necessarily need to be unfair. In particular, the fairness depends to a significant extent on the concrete tariff implementation. The perceived fairness of dynamic pricing can be strengthened by using the revenues for measures related to the grid, providing clear common-language arguments, mediating adverse consequences for the least well-off, and minimizing unpredictability. 1 This paper is written as part of the research project "Redesigning the electricity market in order to facilitate the transition towards a sustainable energy system", financed by NWO and various stakeholders in the energy sector. The authors thank the members of the Valorisation Board as well as the Scientific Advisory Board for their input during this project. The authors, however, are fully responsible for the contents of this paper.

Energy Transition and the Electricity Market: An Exploration of an Electrifying Relationship

“…These conclusions are in line with the findings in behavioural economics and ethics literature (Neuteleers et al, 2016). Behavioural economics teaches us that people react negatively to price changes which are not based on changes in costs but on, in their view, arbitrary conditions, such as scarcity in the market.…”

“…A survey among a panel of Dutch consumers 29 has shown that, on average, people do not consider dynamic tariffs, which are depending on the congestion in the network, unfair (Neuteleers et al, 2016). The percentage of people considering dynamic tariffs as (very) unfair is about the same as the percentage considering these tariffs as (very) fair (Figure 3).…”

“…Note: fairness score = % "(very) fair" -% "(very) unfair" Source: Neuteleers et al (2016) Dynamic tariffs may be efficient in economic terms, the question is to what extent citizens perceive them as fair. A survey among a panel of Dutch consumers 29 has shown that, on average, people do not consider dynamic tariffs, which are depending on the congestion in the network, unfair (Neuteleers et al, 2016).…”

Energy Flexibility from Large Prosumers to Support Distribution System Operation—A Technical and Legal Case Study on the Amsterdam ArenA Stadium

“…As discussed by Neuteleers et al the concrete tariff implementation plays an important role in setting prices that clearly associates with revenues needed to maintain the grid, in providing predictable prices, and in using clear arguments [48]. In setting such tariffs for the future electricity system, this is likely to result in a complex puzzle.…”

Impact of Grid Tariffs Design on the Zero Emission Neighborhoods Energy System Investments

“…However other problems could arise such as fairness or cost recovery. Reference [9] studied the fairness of dynamic grid tariffs and pointed that it is important to remember all the principles of tariff design when assessing them.…”