Design Trade-Offs for Residential Retail Tariffs and Virtual Power Plants: Article No. 127339

Retail rate design and virtual power plants (VPPs) have the potential to shift customer electricity demand and provide economic benefits to utility customers. As the adoption of distributed energy resources (DERs) and flexible loads increases, retail tariff and program design can impact Bonbright's rate design principles including affordability, fairness, and economic efficiency. We model the effects of residential retail rates and VPP programs on power system costs in Massachusetts under a potential future system with high renewable energy and DER adoption. We model interactions among retail rate design, demand flexibility, and utility costs and identify trade-offs across different rate designs and VPP programs. We estimate that time-of-use (TOU) rates and VPP programs designed to avoid critical peak rates can lower overall system costs by 3.5 %-4.8 %. These lower costs translate to lower electricity bills for 62 %-91 % of customers, depending on the scenario. Although TOU rates with a critical peak VPP program can benefit all customer segments and are economically efficient, a VPP program with flat rates leads to the lowest overall bills for customers. We find that customers with loads that align with peak demand and who participate in critical peak VPP programs can underpay for their contribution to utility costs and shift costs to other customers. While our assumptions about mandatory TOU and/or critical peak pricing likely impact the magnitude of the results, the results highlight the trade-offs of these tariffs and programs and the importance of tariff and program design as demand becomes more flexible and responsive.