The use of progressive tariff structures to align the interest of Utilities and of individual customers with the societal goal of enhanced end-use efficiency

Panel: Panel 4: Environmental Perspective (externalities and life cycle approaches, local and global impacts and incentatives)

Authors:
Lorenzo Pagliano, Dipartimento di Energetica, Politecnico di Milano
Pierluigi Alari, Andrew Pindar and Luca Ruggieri, Energy Consultant

Abstract

As to a tool to promote end use energy efficiency following the introduction of retail competition in newly liberalised markets much attention is often given to the creation of energy saving funds to finance DSM the activities. We argue here that the adoption of market and regulatory tools to align Utilities' shareholders interest and customers interest with end-use energy efficiency objectives continues to be of paramount importance.

The presence of elevated marginal profits connected to the sale of electrical energy (far superior to the marginalaverage unitary gains) not only discourages Utilities from undertaking DSM actions, but rather provides incentives to follow policies which aim to increase sales. To offset the such disincentives and incentives it is necessary to introduce suitable tariff mechanisms which decouple either partially or totally Utility profits from electricity sales (e.g. NLRA, Revenue Cap). In addition it can also prove extremely useful to develop a electricity price structure which provides Utilities and the end users with an additional economic signal to reduce energy use.

In the present article we propose a new enhanced progressive structure for the domestic customers tariff of electricity, where however that the part of the tariff which goes directly to the Utility is a flat or even regressive. The result would be that customers still receive a strong signal of high marginal economic savings when undertaking energy saving activities, while most of the disincentives for Utilities to decrease sales are removed. In this way the we decouple the price signal provide to the Utility and the end user.

The fundamental characteristic of the proposed structure is that reductions in Utility sales (due to DSM activities) provide variations in only marginal and not average economic returns; total Utility incomes and "the national energy bill" therefor remain unchange.

Though the analysis in made in respect of the Italian domestic tariff structure the results are of global applicability. Even when energy prices (not just electricity) are completely liberalised as long as these (prices) contain government imposed taxes and industry regulatory authority defined fuel clauses the proposed structure is of relecance.