On the Efficiency of Connection Charges—Part II: Integration of Distributed Energy Resources

This two-part paper addresses the design of retail electricity tariffs for distribution systems with distributed energy resources (DERs). Part I presents a framework to optimize ex-ante two-part tariffs for a regulated retailer who faces stochastic wholesale prices on the one hand and stochastic demand on the other. In part II, the integration of DERs is addressed by analyzing their effect on the optimal two-part tariff and the induced welfare gains. Two DER integration models are considered: a decentralized model involving behind-the-meter DERs and a centralized model with retailer-integrated DERs. It is shown that DERs integrated under either model can achieve the same social welfare and that net metering is optimal. The retail prices for both models are equal and reflect the expected wholesale prices. The connection charges differ and are affected by the retailer's fixed costs and the statistical dependencies between wholesale prices and behind-the-meter DERs. These charges are higher under the decentralized model. An empirical analysis is presented to estimate the impact of DER on welfare distribution and cross-subsidies. It shows that, with the prevailing net-metering tariffs, consumer welfare decreases with the level of DER integration. Issues of cross-subsidy and practical drawbacks of decentralized integration are also discussed.