Network tariffs are price components paid by electricity consumers to finance the past and future costs of building, and the cost of operating the electricity grid.
This general description is used in numerous regulatory documents, for example see the Commission Staff Working Document "Best practices on Renewable Energy Self-generation", 15 July 2015, COM(2015) 339 final, p. 8.
In turn, the ACER Report on Distribution Tariff Methodologies in Europe (February 2021, p. 14) observes: "electricity tariff design, in general, aims at recovering the costs incurred by a monopolistic system operator while stimulating efficiency".
However, a fragmented understanding of the term “distribution tariffs” can be observed across the EU Member States, since the operators' costs are recovered not only (although mainly) by tariffs for use of the networks, but also through other mechanisms, such as connection charges, regulated services or contractual arrangements with industrial customers and generators flexibility services (Electricity Distribution Network Tariffs CEER Guidelines of Good Practice, 23 January 2017, Ref: C16-DS-27-03, p. 6).
In some EU Member States distribution tariffs cover even taxes, levies or other payments for non-DSO costs (such as support schemes for renewable energy sources, or co-generation of heat and power, etc.), however, in line with Article 18 of Regulation (EU) 2019/943, ACER is of the view that distribution tariffs should not include costs of renewable support schemes or other unrelated policy costs, in order to facilitate their cost reflectivity.
Transmission tariffs can also be levied on a capacity (MW) or production/consumption basis (MWh).
Services such as metering and other administrative costs are typically covered by tariff's fixed component.
With the aim of facilitating a common understanding (and comparability, when relevant), ACER suggests differentiating distribution tariffs from other regulated tariffs paid by users connected to the distribution network by using the following terms when setting or approving the next tariff methodology in each EU Member State:
- distribution tariffs / tariff elements;
- tariffs / tariff elements for metering services (where applicable);
- transmission tariffs / tariff elements (which includes amounts paid by distribution connected users for the use of transmission network) related to transmission infrastructure costs, such as return on capital, depreciation and operational expenditures, to transmission losses and to the Inter-TSO compensation mechanism;
- tariffs / tariff elements for purchasing system services (e.g. reserves, congestion management, voltage control and reactive power support, black-start capability and system balancing), paid to both TSOs and DSOs.
ACER Programming Document 2017 - 2019, September 2016 (p. 56) mentioned ACER plans to initiate work on a common set of transmission tariff principles (starting in 2016).
The objective of this work is to establish and adopt a harmonised set of transmission tariff principles, allowing an efficient balance between the Internal Energy Market goals.
The resultant of this project was the ACER Report of February 2021 on Distribution Tariff Methodologies.
Network tariffs are levied by:
Network tariffs objectives
According to the ACER Report of February 2021 on Distribution Tariff Methodologies in Europe network tariffs have three key objectives:
(a) they should recover costs,
(b) they should incentivise DSOs to increase their efficiency and
(c) they should support efficient usage of the network.
Objective (c) involves the incentivisation of network tariff structures, which means that they should provide economic signals to network users.
ACER also reveals that network tariff methodologies should be “free from any political or commercial interest”.
ACER’s view is that this is the prerogative of National Regulatory Authorities (NRAs).
It equally means that the design of network tariff structures should be based on network related issues (like costs and efficient use) only and not be biased by market objectives or market prices.
It is important to note that, in principle, it is possible to charge both load/end-consumers as well as electricity generators (so-called "G-charges") for the provision of transmission services.
Also the said ACER's Report of February 2021 confirms (p. 14) that distribution tariffs may be levied on network users in relation to the costs due to withdrawal from the grid (i.e. distribution tariff for withdrawal) and/or in relation to the costs due to injection (i.e. distribution tariffs for injection).
Commission Regulation (EU) No 838/2010 of 23 September 2010 on laying down guidelines relating to the inter-transmission system operator compensation mechanism and a common regulatory approach to transmission charging specifies guidelines on a common regulatory approach to electricity transmission charging, including allowed ranges for the annual average transmission charges levied on generators in each EU Member State.
These allowed ranges for European Member States G-charges include a number of exemptions for:
- charges paid by generators for physical assets required for connection to the system or the upgrade of the connection;
- charges paid by generators related to ancillary services; and
- specific system loss charges paid by generators.
"Distribution tariffs for injection, where applied, typically vary based on the voltage level. Additionally, injection charges vary based on location (1 Member State) or the DSO which the network user connects to (3 Member States). In 2 Member States, time-differentiation is incorporated in the distribution tariff for injection" (ACER Report on Distribution Tariff Methodologies in Europe, February 2021, p. 11).
Methodologies and responsibilities for tariffs-setting
The EU Electricity Directive 2009/72/EC left room for the European Union Member States to develop their own grid tariff methodology, reflecting the particularities of national electricity systems.
In turn, Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market in electricity (recast) in Recitals 81 and 82 clarifies (respectively):
- "Regulatory authorities should be able to fix or approve tariffs, or the methodologies underlying the calculation of the tariffs, on the basis of a proposal by the transmission system operator or distribution system operators, or on the basis of a proposal agreed between those operators and the users of the network. In carrying out those tasks, regulatory authorities should ensure that transmission and distribution tariffs are non-discriminatory and cost- reflective, and should take account of the long-term, marginal, avoided network costs from distributed generation and demand-side management measures";
- "Regulatory authorities should fix or approve individual grid tariffs for transmission and distribution networks or a methodology, or both. In either case, the independence of the regulatory authorities in setting network tariffs pursuant to point (b)(ii) of Article 57(4) should be preserved".
As a consequence, European countries differ both in the share of costs that are recovered from generation and load, and the basis on which tariffs are determined.
The said ACER Report of February 2021 (p. 16) indicates that in 16 out of 22 the EU Member States with multiple DSOs, all DSOs within the Member State (or region) apply the same tariff methodology (as required by the national law, with 4 exceptions (FR, GR, IT, RO) where the NRAs decided to apply the same tariff methodology).
In the remaining 6 EU Member States where there is more than one DSO, different tariff methodologies apply:
- in 2 Member States (AT, PL), the NRA itself sets different tariff methodologies for different (groups) of DSOs,
- in 3 Member States (DK, FI, SE), the DSOs are free to design their own tariff structure within certain legal boundaries (e.g. tariffs must be cost-reflective, clear, not detrimental to market efficiency, etc.) and the tariff structures are indeed not identical for all DSOs.
When it comes to responsibilities for tariff-setting the said ACER Report of February 2021 (p. 17) refers to the following data:
- in 90% of the Member States (24 out of 27) the NRA (in Belgium the regional regulator) sets or approves the tariff methodology;
- the vast majority of the Member States (i.e. 21), the NRA directly defines the distribution tariff methodology, while in 3 Member States (DK, IE, MT) the NRA approves the tariff methodology defined by the DSO;
- in Germany, the Ministry defines the tariff methodology, while the NRA supervises the compliance of the tariff calculation by the DSOs with the law and the tariff methodology;
- in Finland and Sweden , the DSO defines the tariff methodology based on the legal boundaries (including that the tariff must be cost reflective and facilitate efficient network use), the tariff methodology is not subject to NRA’s approval, however, the NRA approves the revenue cap for the DSO and supervises the compliance between the applied methodology and the national law.
Based on the above review the ACER’ opinion is that “there are compelling reasons to have NRAs directly set the distribution tariff methodology or as a strict minimum approve the methodology proposed by DSOs, in order to ensure that methodologies are free from any political or commercial interest which is ensured by NRAs’ independence legally guaranteed by the EU law”.
The said ACER’s Report of February 2021 invokes (p. 19) the following data as regard the frequency of tariff methodologies and the tariff value updates:
- in about half of the Member States (13 out of 27), the tariff methodology is set for a fixed period of time, the period for the tariff methodology is:
- between 4 and 5 years in 8 Member States, i.e. 4 years in France, Hungary, Luxembourg and in Belgium’s Flanders region and 5 years in the Czech Republic, Brussels and Wallonia regions of Belgium, Romania, the Slovak Republic and for the current tariff methodology period also in the Netherlands, where it varies between 3-5 years;
- a 6 to 8 year period is split up into two sub-periods in 2 Member States (in Italy 8 years with mid-term amendments, and in Spain, 6 years with mid-term amendments);
- 3 years in 3 Member States, i.e. in Portugal and Slovenia, and for the current tariff methodology period also in Bulgaria, where it varies between 2-5 years;
- in the remaining 14 Member States the length of the tariff methodology period is not defined (in these Member States (except in AT), the party responsible for setting the tariff decides on when to revise the tariff methodology);
- of the 13 Member States where the tariff methodology is set for fixed multiple years, in all, but one (SK) the tariff values are set on a yearly basis (either ex-ante for all the years of the regulatory period or updated every year, taking into account for example, under- and over- recovery of the DSO);
- the Slovak Republic, the tariff values are in principle set for the entire 5- year tariff methodology period, but if the default economic parameters applied in determination of the tariffs change significantly, the NRA may approve new tariff values. In practice, it happens almost every year.
ACER is of the view that setting the distribution tariff methodology for multiple years can allow appropriate analysis of the possible actions to be taken and more effective stakeholder involvement and can support tariff predictability and save resources.
For the reasons above, ACER recommends that:
- the length of the distribution tariff methodology period is at least 4 years, considering users’ calls for stable tariff methodologies, the need for discussions and consultations before setting the methodology and the time needed to implement new tariff structures (the set methodology may be subject to revision before, due to rapid changes in the sector, if duly justified); and
- distribution tariff values are updated yearly based on variations of the drivers defined by the tariff methodology and on inflation.
ACER is of the view that availability of fundamental tariff-related information is of utmost importance in order to ensure transparency and comparability in distribution tariff setting and to facilitate an efficient internal energy market.
Taking stock of the provisions in Article 59(9) of Directive (EU) 2019/944, ACER recommends publishing at least:
- the detailed methodology, which is applied to set distribution tariffs, including in particular the cost categories covered by them;
- at least when the tariff methodology is set, the amounts recovered by each distribution tariff element; and
- each year, the distribution tariff values for each network user group.
Cost reflectivity: For efficient use and development of the grid, as far as practicable, tariffs paid by network users should reflect the cost they impose on the system and give appropriate incentives to avoid future costs
Non-distortionary: costs should be recovered in ways that avoid distorting decisions around access to and use of the network, and market offers
Cost recovery: DSOs should be able to recover efficiently incurred costs. As well as tariffs for use of the distribution system, DSOs may also recover costs through connection charges and regulated services
Non-discriminatory: there should be no undue discrimination among network users
Transparency: the methodology for calculating tariffs should be transparent and accessible to all stakeholders
Predictability: it is important that network users can effectively estimate the costs of their use of the distribution system, facilitating efficient long term investment by network users. However, the changing nature of the energy system means network tariffs will need to evolve over time
Simplicity: As far as possible tariffs should be easy to understand and implement. The simpler they are, the easier they are for network users to respond to
Source: Electricity Distribution Network Tariffs CEER Guidelines of Good Practice, 23 January 2017, Ref: C16-DS-27-03, p. 7
Network tariff's classifications
The most prominent tariff's classification is the distinction between capacity tariffs and volumetric tariffs.
This differentiation is based on whether tariffs are levied on a MW/kW (capacity) or MWh/kWh production/consumption (commodity).
Capacity tariffs depend on the peak load as grid costs are mainly capacity driven.
Therefore consumers with high peak loads pay the highest network costs.
Different models of capacity tariff exist:
a) flat: a fixed charge based on connection capacity (kVA) or measured capacity (kW);
b) variable: different capacity with different tariff per level; and,
c) time-of-use: different tariffs in line with the available grid capacity (peak/off-peak), requiring a smart meter.
Volumetric tariffs are charged for each kWh of electricity consumed from the grid and are easier to implement with conventional meters.
Volumetric tariffs can be:
a) proportionate: consumers pay per kWh, independent of volume level;
b) progressive: the tariff per kWh increases with an increasing consumption level;
c) regressive: the tariff per kWh decreases with an increasing consumption level; and,
d) time-of-use: different tariffs in line with the available grid capacity (peak /off-peak).
A day/night tariff is possible without smart meter whereas more complex peak and off-peak tariffs are only possible with smart meters.
Hybrid models combining both capacity and volumetric tariff also exist.
The document of Cambridge Economic Policy Associates Ltd of August 2015 “Scoping towards potential harmonisation of electricity transmission tariff structures, Conclusions and next steps, Final Report“ refers in this regard to following examples:
- in Spain and in Italy the electricity distribution grid tariff for household customers consists of three components: a flat component (€/point of delivery), a component billing the connection capacity (€/kW), and a progressive volumetric component (€/kWh);
- for an average Italian household consumer, about 80% of the whole electricity bill is volume related and 20% capacity based;.
The combination of volume and capacity elements is also currently applied for industrial consumers in other countries like Belgium, France and the Netherlands.
Most EU Member States currently charge grid costs through volumetric grid tariffs, although there is increasing interest in charging part, or all, of such costs through the capacity component of the tariff.
E.DSO document of June 2021 "Guidance on Distribution Network Tariff Structures" argues for partly shifting from kWh-based towards kW-based network tariffs.
Such approach is supported by the fact that the kWh-component of network tariffs rises artificially the value of self-produced (e.g. solar) kWhs, which makes it more attractive to produce your own electricity.
With more self-production, the amount of energy taken from the grid decreases, and besides the decrease of network losses (which is a relatively small effect), the costs of the network do not decrease, since they are mostly fixed, and the network is still needed for periods of low self-production.
These network costs need to be covered with less kWhs, so the kWh-tariff has to increase.
Then it will be even more attractive to invest in solar panels to produce your own kWhs.
In that way the kWh-tariff will spiral upwards as more and more customers adopt self-consumption, or the network cost-recovery will spiral downwards.
Actually, the kWh-based network tariff component has a kind of perverse incentive.
Other tariffs' classifications are based on the following determinants:
1. Depending on whether transmission tariffs are levied on generation or load (or both), and whether they apply to embedded generation;
2. Differentiating between transmission tariffs driven by locational signals and uniform ones;
3. With respect to locational transmission tariffs they may differ either by node or by zone;
4. Depending on whether transmission tariffs provide economic incentives for time of use of the transmission network;
5. Depending on the types of cost the transmission tariff recover.
Network tariffs in the Winter Energy Package
Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity on conditions for access to the network for cross-border exchanges in electricity, was adopted as part of the Third Energy Package to facilitate a competitive and integrated energy market across the EU.
The said Regulation set out a series of common objectives for transmission network access charges in Europe including, among other things, promotion of transparency, the need to take into account network security, and tariff structures which reflect actual/efficient costs, are non-discriminatory, non-distance related and, where appropriate, provide locational signals.
The European Commission's Proposal of 30 November 2016 for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast, COM(2016) 861 final 2016/0379 (COD)) included a specific part on charges for access to networks (Article 16) - see box below.
Article 16 of the Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast), 30.11.2016, COM(2016) 861 final 2016/0379 (COD)
Charges for access to networks
1. Charges applied by network operators for access to networks, including charges for connection to the networks, charges for use of networks, and, where applicable, charges for related network reinforcements, shall be transparent, take into account the need for network security and flexibility and reflect actual costs incurred insofar as they correspond to those of an efficient and structurally comparable network operator and are applied in a non-discriminatory manner.
In particular, they shall be applied in a way which does not discriminate between production connected at the distribution level and production connected at the transmission level, either positively or negatively. They shall not discriminate against energy storage and shall not create disincentives for participation in demand response.
Without prejudice to paragraph 3, those charges shall not be distance-related.
2. Tariffs shall grant appropriate incentives to transmission and distribution system operators, over both the short and long term, to increase efficiencies, including energy efficiency, foster market integration and security of supply, and support investments and the related research activities.
3. Where appropriate, the level of the tariffs applied to producers and/or consumers shall provide locational signals at Union level, and take into account the amount of network losses and congestion caused, and investment costs for infrastructure.
4. When setting the charges for network access, the following shall be taken into account:
(a) payments and receipts resulting from the inter-transmission system operator compensation mechanism;
(b) actual payments made and received as well as payments expected for future periods of time, estimated on the basis of past periods.
5. Setting the charges for network access under this Article shall be without prejudice to charges resulting from congestion management referred to in Article 14.
6. There shall be no specific network charge on individual transactions for cross-border trade of electricity.
7. Distribution tariffs shall reflect the cost of use of the distribution network by system users including active customers, and may be differentiated based on system users' consumption or generation profiles. Where Member States have implemented the deployment of smart metering systems, regulatory authorities may introduce time differentiated network tariffs, reflecting the use of the network, in a transparent and foreseeable way for the consumer.
8. Regulatory authorities shall provide incentives to distribution system operators to procure services for the operation and development of their networks and integrate innovative solutions in the distribution systems. For that purpose regulatory authorities shall recognise as eligible and include all relevant costs in distribution tariffs and introduce performance targets in order to incentivise distribution system operators to raise efficiencies, including energy efficiency, in their networks.
9. By [OP: please add specific date – three months after entry into force] the Agency shall provide a recommendation addressed to regulatory authorities on the progressive convergence of transmission and distribution tariff methodologies. That recommendation shall address at least:
(a) the ratio of tariffs applied to producers and to consumers;
(b) the costs to be recovered by tariffs;
(c) time differentiated network tariffs;
(d) locational signals;
(e) the relationship between transmission and distribution tariffs, including principles relating to non-discrimination;
(f) methods to ensure transparency in the setting and structure of tariffs;
(g) groups of network users subject to tariffs, including tariff exemptions.
10. Without prejudice to further harmonisation by way of delegated acts pursuant to Article 55 (1)(k), regulatory authorities shall take the Agency's recommendation duly into consideration when approving or fixing transmission tariffs or their methodologies in accordance with Article 59(6)(a) of [recast of Directive 2009/72/EC as proposed by COM(2016) 864/2].
11. The Agency shall monitor the implementation of its recommendation and provide a report to the Commission by 31st January each year. It shall update the recommendation at least once every two years.
The said Proposal of 30 November 2016 in Article 55(1)(k) also included the empowerment for the European Commission to adopt delegated acts concerning the establishment of network codes in the area of rules regarding, among others, "harmonised transmission and distribution tariff structures and connection charges including locational signals and inter-transmission system operator compensation rules".
In response to the said legislative proposition the Council of European Energy Regulators (CEER) recommended, however, that both the network code on transmission and distribution tariffs in Article 55 of the Electricity Regulation, and the ACER recommendation for a progressive convergence of distribution and transmission tariffs methodologies in the aforementioned Article 16, should be removed.
It is the CEER's stance, that there is no need for an EU-wide tariffs network code.
CEER disagreed with the proposed “one-size-fits-all” prescriptive approach to network tariffs in all EU Member States through a network code.
CEER argued that this would prove to be highly complex and would remove the ability of energy regulators to design/facilitate network and connection tariffs based on the differing network circumstances and the needs of local consumers.
A comparison between Regulation (EU) 2019/943 and Regulation (EC) No 714/20092 made by the CEER Paper of 20 April 2020 on Electricity Distribution Tariffs Supporting the Energy Transition (Distribution Systems Working Group, Ref: C19-DS-55-04, p. 7) highlights some differences in what each of them expects from network tariffs, in particular regarding distribution tariffs.
According to the said CEER Paper of 20 April 2020, while Regulation (EU) 2019/943 has kept a lot of the requirements from Regulation (EC) No 714/2009, it includes as additional requirements the consideration of network flexibility and a reference to not including unrelated policy objectives.
In addition, it stipulates the non-discrimination of generation connected to distribution, when compared to transmission-connected producers, as well as the need to ensure non-discrimination towards energy storage, self-generation, self-consumption and demand response.
Moreover, Regulation (EU) 2019/943 includes separate sections on distribution tariffs (Article 18 (7) and (8)).
This requires NRAs to consider the use of time-differentiated tariffs in Member States where smart metering systems have been deployed.
It also suggests providing incentives to DSOs for the procurement of services that enable more cost-efficient operation and development of distribution systems.
These services include in particular, energy efficiency, flexibility and the development of smart grids and intelligent metering systems.
Pursuant to Article 59(1)(a) of the Electricity Directive (EU) 2019/944, each NRA has the duty of fixing or approving, in accordance with transparent criteria, distribution tariffs or their methodologies, or both.
Article 18 of the Electricity Regulation (EU) 2019/943 requires that tariffs for access to (distribution) networks shall be cost-reflective, transparent, take into account the need for network security and flexibility and reflect efficient actual costs incurred and that tariffs are applied in a non-discriminatory manner.
Article 18(7) specifies that distribution tariffs shall be cost-reflective taking into account the use of the distribution network by system users including active customers.
Distribution tariffs may contain network connection capacity elements and may be differentiated based on system users' consumption or generation profiles.
Approach to the P2P
In its Guidance of June 2021 on Distribution Network Tariff Structures the E.DSO explains that concerning tariffs, the peer-to-peer (P2P) trading “only have significance when behind one single connection to the grid” - in all other situations, without such a single connection, the regular network tariffs have to be applied to each individually connected customer (p. 2).