Principles of development pricing guidelines for electricity costs

Ideal electricity pricing serves two purposes: on the one hand, to provide the revenue needed to finance the operation of the generation and transmission system, and on the other, to send price signals that enable the system to be optimized.

Electricity is characterized by the great variability of demand over time, and the virtual impossibility of storing it. The entire generation, transmission and distribution chain has to be designed to meet fluctuating demand in real time. For example, demand in France varied between 32 and 89 GW in 2006. It's easy to imagine that the cost of supplying a kilowatt-hour is highly dependent on the period (peak or trough demand) during which it is required.

On the generation side, to meet electricity demand, there is a wide variety of generating facilities with widely differing technical and economic characteristics, from base-load facilities with high investment costs and very low costs in proportion to the energy produced, to peak-load facilities with significantly lower capital costs, but for which fuel is a major cost factor. The shape of electricity demand, which determines the optimal composition of the generating fleet, therefore has a major impact on production costs.

On the consumption side, many customers are sensitive to price modulations. Offering low prices when costs are low, and high prices when costs are high, can encourage them to modify their consumption habits in line with the costs generated by this consumption. However, the aim of pricing is not to act a priori on the load curve by artificially distorting prices, but to reflect the cost of kilowatt-hours consumed.

This article explains the method used to determine the theoretically optimal structure guiding the evolution of regulated electricity sales tariffs in France, i.e. prices regulated by the public authorities and offered only by the incumbent electricity operators in France, and which was applied at the time of EDF's virtual sales monopoly. In addition to these regulated sales tariffs, there are now free-price offers from incumbents and new operators in the downstream electricity market.

It is important to specify that, due to changes in the institutional environment, this article will not deal with the fine-tuning of the transmission tariff (which is the responsibility of the Energy Regulatory Commission), but will refer to this tariff for the determination of integrated tariffs (i.e. including transmission).