Title: On the Efficiency of Connection Charges---Part II: Integration of Distributed Energy Resources,
Abstract: 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 an ex-ante two-part tariff for a regulated monopolistic
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 endogenous effect on the optimal two-part tariff and the
induced welfare gains. Two DER integration models are considered: (i) a
decentralized model involving behind-the-meter DERs in a net metering setting,
and (ii) a centralized model involving DERs integrated by the retailer. It is
shown that DERs integrated under either model can achieve the same social
welfare and the net-metering tariff structure is optimal. The retail prices
under both integration models are equal and reflect the expected wholesale
prices. The connection charges differ and are affected by the retailer's fixed
costs as well as the statistical dependencies between wholesale prices and
behind-the-meter DERs. In particular, the connection charge of the
decentralized model is generally higher than that of the centralized model. An
empirical analysis is presented to estimate the impact of DER on welfare
distribution and inter-class cross-subsidies using real price and demand data
and simulations. The analysis shows that, with the prevailing retail pricing
and net-metering, consumer welfare decreases with the level of DER integration.
Issues of cross-subsidy and practical drawbacks of decentralized integration
are also discussed.