In pursuit of a long-lasting distribution network tariff design
This paper addresses the question of how distribution fixed costs can best be priced, in the context of technological disruptions in the power sector. The vast majority of network utility costs to serve residential and small commercial and industrial customers are fixed, and this means a first-best solution is unattainable. This is because distribution is a natural monopoly, meaning that it has a peculiar cost structure, of declining average costs. In this setting, marginal costs are lower than average costs, which suggests that efficient pricing -where prices equal marginal costs- would not lead to cost recovery. At the same time, generation technologies and the operating environment of electricity distribution networks are changing which suggest that tariff design would need to be in line with wider trends in the sector. In this paper, we aim to propose a tariff mechanism for access and utilization of network that (i) allows for a more permanent and more stable solution (ii) is resistant to technological changes (iii) does not impede an efficient decentralization and decarbonisation.