Optimal electricity tariff design with demand-side investments

Abstract

This paper proposes a method for evaluating tariffs based on mathematical programming. In contrast to previous approaches, the technique allows comparisons between portfolios of rates while capturing complexities emerging in modern electricity sectors. Welfare analyses conducted with the method can account for interactions between intermittent renewable generation, distributed energy resources and tariff structures. We explore the theoretical and practical implications of the model that underlies the technique. Our analysis shows that a regulator may induce the welfare maximizing configuration of the demand by properly updating portfolios of tariffs. We exploit the structure of the model to construct a simple algorithm to find globally optimal solutions of the associated nonlinear optimization problem; a computational experiment suggests that the specialized procedure can outperform standard nonlinear programming techniques. To illustrate the practical relevance of the rate analysis method, we compare portfolios of tariffs with data from two electricity systems. Although portfolios with sophisticated rates create value in both, these improvements differ enough to advise different portfolios. This conclusion is beyond the reach of previous techniques to analyze rates, illustrating the importance of using model-based data-driven approaches in the design of rates in modern electricity sectors.