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

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. In this presentation we develop a bi-level 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 bi-level 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.

Speaker Bio

Yihsu Chen is Professor in Technology Management in Sustainability at the Baskin School of Engineering, University of California Santa Cruz. He is also affiliated with the Environmental Studies Department of Science Division at UCSC. His research centers on electric power systems and energy markets. His work explores the impact of energy and environmental regulations on the electricity, biofuel, and transportation sectors. Adopting an interdisciplinary approach, his research combines bottom-up quantitative models grounded in economic theory with operations research methodologies. He has authored over sixty-five peer-reviewed journal articles across diverse fields, including management, economics, engineering, science, and public policy. His work has received several INFORMS ENRE awards: 2004 best student paper (first place) and best publication in sustainability in 2013 (second place) and 2014 (first place). His work has been supported by NSF, CEC, and California Air Resources Board.