On the Efficiency of Connection Charges---Part I: A Stochastic Framework

This two-part paper addresses the design of retail electricity tariffs for distribution systems with distributed energy resources such as solar power and storage. In particular, the optimal design of dynamic two-part tariffs for a regulated monopolistic retailer is considered, where the retailer faces exogenous wholesale electricity prices and fixed costs on the one hand and stochastic demands with inter-temporal price dependencies on the other. Part I presents a general framework and analysis for revenue adequate retail tariffs with advanced notification, dynamic prices and uniform connection charges. It is shown that the optimal two-part tariff consists of a dynamic price that may not match the expected wholesale price and a connection charge that distributes uniformly among all customers the retailer's fixed costs and a price-volume risk premium. A sufficient condition for the optimality of the derived two-part tariff among the class of arbitrary ex-ante tariffs is obtained. Numerical simulations quantify the substantial welfare gains that the optimal two-part tariff may bring compared to the optimal linear tariff (without connection charge). Part II focuses on the impact of two-part tariffs on the integration of distributed energy resources.