Dodging the deadweight death-spiral: Efficiency and equity implications of UK electricity tariff reform

Are current tariff structures inefficient and, if so, should we be concerned? Combining nationally representative household-level data with information on utility cost and tariff structure, I show that electricity prices in... [ view full abstract ]

Are current tariff structures inefficient and, if so, should we be concerned? Combining nationally representative household-level data with information on utility cost and tariff structure, I show that electricity prices in the UK create considerable welfare losses and may undermine the benefits of distributed generation. Prices are three times greater than marginal cost. Welfare losses are estimated to be a considerable portion of total supply costs. Existing tariffs cannot be justified on environmental or social grounds. Welfare losses exceed environmental costs. The implicit cost of redistribution is greater than the marginal cost of public funds if price elasticity is low. Welfare effects are positive across all income groups if price elasticity is high. Distortions increase with the adoption of Distributed Energy Resources (DERs; e.g. solar). Unless a Coasian tariff reform is implemented, growing DER deployment may lead to a ‘deadweight death spiral’ in welfare losses