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

Abstract

Distributed renewable resources owned by prosumers can be an effective way to strengthen the resilience of the grid and enhance sustainability. However, prosumers serve their own interests, and their objectives are unlikely to align with that of society. This article 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 charge to recover fixed costs and to balance energy equity among different income groups. That is, the first-best policy is to leave the wholesale power market intact; any recovery based on a volumetric principle is likely to be inefficient. 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.