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How are residential network tariffs changing in Europe? The DSOs' perspective

“The way that residential customers pay for distribution networks is set to change. In summary, we’re likely to see more charges based on capacity (kW), compared to the current system which is largely based on energy (kWh).”

This blog article will discuss how the opinions captured in December’s online survey regarding network tariffs compare with the key findings from the report we published on residential network tariffs.

At the beginning of December 2021, I published a blog describing the results of a survey on the status and evolution of residential network tariffs in Europe. Energy experts with diverse backgrounds participated in this survey.

We recently published a report on the evolution of residential network tariffs in Europe for Delta-EE’s Distribution Network Service, which looked into the topic in-depth analysing the current trends in tariff structures in Europe.

The participants in December’s survey almost entirely agreed that a capacity element will become an increasing part of the residential network tariffs in Europe. The findings of our report also support this view: although volumetric charges still dominate the European tariff models today, more countries introduce models based on capacity charges or increase the relative weight in determining the final charge for consumers. The reforms in Norway and Flanders (in Belgium) starting from 2022 are prominent reflections of this trend.

When asked whether they foresee dynamic time-of-use charges being introduced in this decade, the majority of our respondents agreed it will, with the minority having a negative response or not being sure. In principle, dynamic network tariffs would be a strong incentive for customer behaviour that ensures efficient use of the network and would ensure higher levels of reflection of the actual costs to operate networks. However, DSOs have reservations about adopting such tariffs.

The main argument against dynamic time-of-use charges is the complexity of such models, both with regards to the interaction between energy retailers and network operators, but also with regards to residential consumers and transparency. In any case, it requires a level of automation and infrastructure that is likely not yet in place. Such advanced network tariff models require smart meter roll-outs (which are not yet completed in every European country), Home Energy Management systems and smart appliances that would enable automated responses to such price signals are only just emerging.

Lastly, the survey participants did not have a dominant opinion on whether residential tariffs will ever have a locational element to reflect physical network costs. Slightly over half of the respondents had a positive reaction, believing in its adoption. This is in contrast with the DSOs’ opinion; they strongly oppose locational pricing for residential customers, in particular for social fairness reasons. Locational charges might penalise customers for where they live, independently of their energy behaviour.

It is difficult to draw a strong conclusion from the results of our survey as it might not represent all the views from participants interacting with the energy system. Residential network tariffs are a hot topic in the energy world, as many are the views and opinions on its possible approaches and outcomes.

The reality is that we are evolving towards new network tariffs schemes in response to the energy transition, opening multiple approaches, therefore, offering space to debate and disagreement even within DSOs themselves. Evolving tariff structures such as dynamic pricing show potential for improving the operation of the network. However, major constraints need to be addressed first to benefit the electricity network rather than hindering its operation.

For the near future, more capacity and more sophisticated ToU charges will mean incentives for customers to manage their demand and help to accelerate the emergence of smart demand and home energy management systems. Our complete analysis on this topic is available to subscribers at the following link. If you would like to access the subscription research service, get in touch at stefano.nebiolo@delta-ee.com.

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