Smart Meters, Dumb Prices: Why Electricity Tariffs Are Becoming (More) Inefficient, Regressive, and Outdated

Christopher R. Knittel

June 2026

Electricity tariffs were designed for an earlier power system: one with electromechanical meters, one-way power flows, limited customer-side generation, and relatively weak substitutes for grid electricity. That world is changing. Smart meters make time-varying prices feasible. Rooftop solar, batteries, and behind-the-meter generation allow customers to reduce measured net consumption while remaining connected to the grid. Electrification makes electricity prices central to decarbonizing transportation, buildings, and industry. Data centers are creating large, concentrated new loads and are increasingly considering on-site generation and special grid-service arrangements. These changes expose two long-standing weaknesses in retail electricity pricing. First, many costs of the electricity system are fixed, residual, or driven by peak capacity needs, yet they are commonly recovered through volumetric charges on kilowatt-hours. Second, most residential and small commercial customers face one retail energy price even though the cost of serving electricity varies across hours, locations, and system conditions. In short, we have smart meters, but too often still have dumb prices.

This primer focuses primarily on retail tariff design in the United States, though it draws on international experience where useful. It explains why that tariff structure is becoming increasingly inefficient, regressive, and outdated. It begins by unpacking the electricity bill and distinguishing energy costs, peak-driven capacity and network costs, and residual costs. It then describes the economically efficient tariff: time-varying prices for energy, coincident peak charges for costs driven by system peaks, and transparent fixed or connection charges for residual costs. The primer explains why current tariffs looked reasonable historically, why rooftop solar and data centers now put pressure on volumetric cost recovery, why flat energy prices are increasingly poorly suited to renewable-heavy power systems, and how other jurisdictions are experimenting with dynamic prices, net billing, two-way tariffs, and cost-reflective network charges. It concludes with principles for reform: charge customers for the costs they impose, pay them for the value they provide, and address affordability explicitly rather than hiding redistribution in distorted kilowatt-hour prices.