Tariff structures

As the electricity supply and the distribution are unbundled the customer sees the cost of them separately in the electricity bill. There are different tariff structures for both of them. The supplier’s part consists of small fixed fee and the consumption measured in kWh. In most of the cases, also the distribution’s part includes a fixed fee and the en-ergy in kWh:s but there are also some companies that use power based tariffs already. In Finland and in Sweden the fixed part is relatively small compared to the energy part.

The fixed part varies according to the connection point. In the rural areas it is more ex-pensive than in cities because building the grid in country side and maintaining it is more expensive as the distances are long. The DSO has to do regional pricing within one consistent concession area, a geographically integrated area, the prices have to be the same for all the customers. However, in non-connected concession areas the prices can differ between city and the rural areas. This means that DSO’s business is so called discriminating monopoly as the price of the electricity is different for different custom-ers. This goes against the principle of perfectly functioning market as there the price of the product should be the same for all the buyers. (Begg 2005, pp 137). Customers have difficulties in understanding this and so different pricing structures have been consid-ered. For average household customer the cost of the electricity transmission including the taxes represents 44 % of the total price. This share the customer cannot influence by changing the electricity supplier. In the Figure 2.4 the formation of the price for an aver-age household is presented.

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Figure 2.4. Formation of the electricity price for a household in Finland in 2009 (ET 2011).

In this thesis work the pricing models for the distribution’s share are under discus-sion as they enable the steering of the customers in demand response. It is very likely that the future’s electricity tariffs will be more close to the market prices of the electric-ity. If the demand is reduced the prices reduce too. The system is self-regulating and that is what makes it the market (Söderbom 2011, interview). Still the industry has been in-terested in having fixed fee for the distribution. The common Nordic electricity market drives probably towards more similar price structures in Nordic countries. The extreme options as having completely fixed distribution fee or totally energy consumption based distribution fee can be difficult to have in the future. Introducing new price structures might also be difficult as customers have low interest in energy issues, though the recent debate about the environmental and climate issues could help to raise the awareness of the domestic customers. (Vattenfall, Framtida prisstruktur 2010)

There are many reasons that speak for fixed fee in distribution. About 95 % of the DSO’s costs are fixed so it would be more logical if the price of using the grid would be fixed for the customers, too (Hänninen 2011, interview). For the customer the advan-tages of the fixed fee are that it is simple and easy to understand and also to budget as the price is always the same. In that way also understanding the difference between the supplier’s fee and the DSO’s fee would be easier. The tariff should be constructed so that it would be fair for everybody and not discriminating. There are of course defects in the fixed fee of distribution, too. For example, a summer cottage customer who stays at the cottage only part of the year and heats it with wood could feel to be treated unfairly if he had to pay the same amount of fixed fee as some customer in a cottage with elec-tricity heating and living there all year around. The customers need to be classified somehow in order to make the system fair. With the new smart meters the power limit could be set in a more flexible way and not just the basic Finnish fuse sizes of 16, 25,

14 35, or 50 A for small customers. Then there should be a “fine” if the customer takes higher power from the grid than agreed. (Hänninen 2011, interview). On the other hand, the classification of the customers is difficult and then there is the risk of having too many classes. The administration and the customer service would become complicated.

It depends where the customer is living and maybe it is easier to handle a tariff that has two or three parts than numerous categories for customers. (Rud 2011, interview). In addition, probably the customers do not want to pay for something they do not use. On the other hand, the nature of the fixed fee in distribution is very much similar as of the internet broad band. People are not using internet continuously but they still pay fixed fee for it. Customers do not question that at all. Why should the electricity distribution be any different from this? On the other hand, when the spirit in the electricity branch is very much pro energy efficiency the fee that allows the customer to consume as much as he wants to with the fixed fee seems odd. But then the pure electricity transmission’s and distribution’s part form the customer’s electricity bill is actually about 30 % as can be seen from the Figure 2.4. so it would not be in contradiction with the energy saving policy. There would still be the supplier’s part which encourages saving energy as it is directly connected to the amount of electricity that is consumed. The steering signal may not necessarily be strong enough for all the customers if there is only the supplier’s part that varies according to the electricity consumed. In addition, the fixed fee would be in accordance with the idea that the DSO’s turnover should not be dependant of the amount of electricity that is being consumed. In this way the DSO would have a credible role in advising people in the energy efficiency matters. It does not encourage trust if the advising has influence in the turnover of the company. These facts support the fixed fee of distribution or at least higher share of that. (Hänninen 2011, interview).

In totally energy consumption based tariff the advantages are that the customer pays only for the electricity he uses which seems fair as he can influence his costs directly. It also gives more incentive to energy efficiency. (Vattenfall, Framtida prisstruktur 2010).

This way the customer could be steered with the price and got to participate in demand response. For larger industrial customers with greater than 63 A fuse they already have power tariffs and in that way the demand response exists already.

Then there has been interest from the DSO’s side towards power based tariffs rather than energy based tariffs. The customers would pay for the actual use or the maximum load they take of the grid. The power tariff would still include the environmental saving aspect as the gas or oil fuelled peak power plants do not need to be used if the load in the grid is low and the load curve stays more flat. With energy efficient equipment the customer could save money and the environment. The power tariff would be some sort of time tariff with more variation than just two-time tariff that is currently used in Finland and in Sweden. For grid’s sake the power based tariffs seems interesting as with them the quality of supply could be improved and investments could be postponed or avoided completely when the overall load is more flat in grid. The biggest issue is to get customers approval for this. Power measured in kW:s is obviously more abstract and more difficult to understand than energy that is measured in kWh:s. (Hänninen 2011,

15 interview). In Sweden the power tariffs have been tested in form of measuring the three highest consumption values in a month and calculating the average from them and there are even companies, such as Sollentuna Energi that have been using power based tariffs for years. The fixed share of the DSO’s bill for small customers is set based on the fuse size and now the possibilities of changing this share to more actual power based fee have been considered. Replacing the fixed fee that depends of the size of the fuse with power tariff would be a way to get rid of the old fashioned fuse size dependence. The fuse is only the protection that prevents the customer from burning down the house.

(Englund 2011, interview)

Before the high price peaks of the winter 2009 - 2010 there was a shift towards more dynamic prices but then after the price peaks more flat-rate tariffs were wanted. Even though price peaks do not influence directly to the customer as they are not completely exposed, they still have been reacting and moving back to more stable contracts. (Koles-sar 2011, interview)

The customer researches indicate that people prefer tariffs where they can influence more to the size of their own electricity bill. In addition, more varied use of the electric-ity grid in the future with small-scale production and demand response requires more flexible tariff structures. (Vattenfall, Framtida prisstruktur 2010). It has also been found out that when testing the tariff structures that consist of totally fixed or totally consump-tion dependant part it always comes to that of having both parts in the tariff is the best option. (Willerström 2011, interview)