Electricity grid tariffs for consumption: obstacles to flexibility

Currently, offtakers at higher voltage levels (≥25 kV) pay a double capacity tariff: the kWcontracted for the right of use and the kWmax(weighted) for the highest peak per month. The idea of this is that the power grid should be sized according to the highest peak load, so that the highest peak (per month) of an individual offtaker is also reflective of how much this user contributes to grid costs. Thus, to save on transmission costs, an offtaker should register lower peaks. While that is technically possible by, for example, deploying batteries, flexible generators, or shifting business processes in time, it is often too expensive in light of the overall cost savings. One cause is that more flexible and/or less intensive grid usage often does not result in transport costs savings.

In theory, an offtaker could save up to roughly 80%¹ on their transport costs simply by no longer taking electricity from the public grid. As a result, no kWmax(weighted) is registered and thus only the kWcontracted is charged at a 50% discount, due to the 600-hour tariff discount. The offtaker would then hold the contracted transport capacity (the kWcontracted) as security and backup in case of a disruption in or maintenance of their own generation and/or storage facilities behind the meter. However, facilities behind the meter also need to be taken into scheduled or unscheduled maintenance from time to time. As a result, electricity is still drawn from the public grid with a high capacity, resulting in high kWmax(weighted) peaks. The intended transport costs savings can thus be completely negated with just one kWmax(weighted) peak per month.

¹The rate for one kilowatt of contracted transport capacity (kWcontracted) is lower than one kilowatt of registered kWmax(weighted), resulting in savings of more than 50%. After a 60% cost reduction by not registering kWmax(weighted), another 50% discount would be obtained on the remaining kWcontracted costs due to the 600-hour rate.

The 600-hour discounted rate is an interesting option for savings, as it gives offtakers a 50% discount on their kWcontracted rate and their kWmax(weighted) is measured and billed on a weekly basis (instead of monthly). However, the 600-hour tariff is not applicable to many business cases and is also risky. Claiming this discounted tariff requires that the total annual consumption (volume) divided by the highest annual kWmax(weighted) peak remains below 600. The 600-hour tariff can therefore only be claimed if an offtaker draws little electricity relative to its maximum (peak) electricity demand. Thus, an offtaker will have to cover almost all of its electricity consumption with production behind the meter. An investment in generation that only partially covers the electricity demand will usually not be enough to claim the 600-hour rate. Moreover, the 600-hour rate is risky, as an unintended, minute overshoot of it negates the entire intended transport costs savings for that year.

Finally, it is theoretically a possibility to combine flexible generation with alternative transport rights in order to save on transport costs. On the transmission grid (≥110 kV) the time-based transmission right exists, on the distribution grid level (<110 kV) the time-block-based transmission right, and on all voltage levels the fully variable transport right is available.

The fully variable transport right provides attractive transport cost savings - namely, exemption from kWcontracted - but falls off quickly in practice. Virtually no offtaker will give up its fixed transport right in exchange for a fully uncertain transport right. A guaranteed supply of electricity is usually too important for business operations.

The time block-based transport right do give an offtaker certainty about the moments during and the capacity at which an offtaker may draw electricity from the grid, but unfortunately provides much more limited savings in transport costs. Instead of a full exemption from the kWcontracted, the kWcontracted is charged pro rata to the average time during which transportation service may still be taken.

The time-based transport right is the most interesting. With this, an offtaker has the certainty of being able to make use of its contracted transport capacity for at least 85% of the hours in the year, and can still save up to a maximum of about 40% on transport costs due to an exemption from the kWcontracted (not considering savings based on rush-hour pricing). The amount of savings depends in particular on whether the entire firm transport capacity is converted to a time-based transport right, or only a portion.

An offtaker could therefore save on the kWcontracted with a time-based transport right, while additionally saving on the kWmax(weighted) resulting from flexibility (production and/or storage) behind the meter. However, an offtaker does run the risk that for up to 15% of the hours in the year no or less electricity may be taken from the grid while its own production and/or storage behind the meter may be in unscheduled maintenance. That risk would have to be quantified and factored into the business case for flexible production and/or storage, although it seems manageable. Overall, significant amounts could be saved on transportation costs this way. It is questionable, however, whether time-based transportation rights will be available in sufficient quantities. Indeed, this product has limited availability and is currently already being rapidly awarded to the many battery projects currently being realized at the transmission level.

In short, for large offtakers at higher voltage levels, the possibilities of saving on transport costs is often very limited (if possible at all), because occasionally drawing from the grid as back-up may still be necessary and, as a result, both the contracted kW and the maximum kW are charged (in full). In many cases, no claim can be made on the 600-hour tariff, and assuming that it can be used is a risky assumption. The time-based transport right and associated discounted rate is a useful addition to facilitate the creation of a business case for savings on transport costs. However, these are only limitedly available at the transmission grid level, and not at all at the distribution level (<110 kV). This issue is less relevant at lower voltage levels (<25 kV), because 50% of the grid costs are assigned to an additional kWh volumetric tariff. Lower consumption at such voltage levels therefore always leads to lower transport costs.

Overall, the tariff structures do not contribute to unlocking production and flexibility for offtakers at higher voltage levels. This is unfortunate, as the financial incentive for consumption can be much higher than the proposed feed-in tariffs, and the efforts of offtakers to use the grid more flexibly and less intensively could still contribute significantly. For example, multiple large offtakers registering only 2 or 3 kWmax(weighted) peaks per month, instead of 20, should generally also lead to lower grid load peaks (assuming the remaining offtakers’ peaks would not still occur simultaneously).

To provide large offtakers with (an additional) financial incentive to invest in flexibility and use the grid less intensively, the tariff structure for consumption at higher voltage levels could be adjusted. For example, the kWmax weighted) could be calculated and invoiced per week instead of per month. This way, an occasional kWmax(weighted) peak would not result in the entire kWmax(weighted) rate being charged for that month, and the financial consequences of, for example, production and/or storage installation outages behind the meter would be more limited. Additionally, the introduction of a supplementary kWh volumetric rate (to which part of the total grid costs would be assigned) could be considered, thus rewarding large offtakers more proportionally for their efforts to use the grid more efficiently and less intensively.

Of course, it could (and likely will) happen that the peaks of large offtakers incidentally happen simultaneously, which would result in a high peak grid load. Nevertheless, this should theoretically happen less frequently, and the grid operator would need to spend less on congestion services to create additional transport capacity or avoid congestion. Even if that is not or hardly any cheaper, the grid operator would at least have more residual capacity to offer as alternative transport rights.

Fortunately, the ACM seems to be aware of the issue: in its publication “Principles for the electricity tariff structure” of 17 July 2024, the ACM stated that "Flexible grid users at higher voltage levels [...] sometimes experience it as an obstacle that occasional grid usage directly leads to high costs, because all costs are charged through the tariff components contracted kW and kW max, rather than through a kWh tariff.” In the same publication, the ACM noted that there is no good explanation for the different tariff structures between high voltage and the levels below, other than that it has ‘developed this way historically’. Therefore, the ACM will consider a more uniform tariff structure for all voltage levels in its broader revision of the grid tariff structures. Regarding that uniform tariff, it also mentions that it will at least be partly based on capacity and partly on volume.

Nevertheless, until tariff structures are reviewed by the ACM, a possible business case already exists around investments in flexible grid use by offtakers. Indeed, in congestion areas, offtakers can participate in congestion management. This requires offtakers to limit their grid use at times to be agreed with the grid operator. To this end, parties then conclude a capacity reduction contract or redispatch offer contract. The main advantage of congestion management compared to the use of variable transmission rights is that the fee for offering flexibility to network operators is negotiated freely with the network operator. This means that offtakers can charge a price for that flexibility that they need to recover their investments or costs with a return. As the results of a total of 271 congestion management studies have so far proved very disappointing, the lucrative possibilities of participating in congestion management are currently underused. This presents opportunities for companies interested in active energy management.