Research Commentary: Economy-Wide Decarbonization Requires Fixing Retail Electricity Rates

Tim Schittekatte, Dharik Mallapragada, Paul L. Joskow, and Richard Schmalensee

January 2023

Absent fundamental reform of retail electricity rates, economy-wide electrification will be substantially more difficult than necessary. In this Research Commentary, we identify two issues with the current predominant retail rate design consisting of almost entirely flat volumetric charges ($/kWh). First, retail customers generally do not see the often-substantial hour-to-hour variation in the marginal cost of electricity supply, which is reflected in spot wholesale prices. Therefore, they cannot profit from the hours with very low prices that are increasing in frequency. Second, costs that are fixed in the short run (e.g., networks) are embedded in the volumetric charge. Consequently, volumetric charges are on average significantly higher than average short-run marginal costs, which hinders the provision of good short-run price signals and inefficiently discourages electrification. We do not propose a single optimal solution for all situations, but rather we identify particularly promising directions of reform.