Retail rate design for decarbonized and resilient electricity systems

Abstract This perspective examines trade-offs in designing residential electricity rates that improve economic efficiency while ensuring feasible and distributionally favorable outcomes. We analyze rate structures across three key dimensions: improving economic efficiency by reflecting social marginal costs; ensuring affordability, technology access, and residual cost recovery; and simplicity in customer understanding and implementation. While real-time pricing based on social marginal costs is the most economically efficient choice, intermediate approaches like time-of-use rates or critical peak rates may better balance competing objectives. We recommend that decision-makers (1) move towards pricing environmental externalities in time-varying electricity rates, (2) introduce time-varying rates with predictable price periods gradually, (3) expand access to flexibility enabling technologies for low-income customers, and (4) carefully design fixed charges for residual cost recovery to avoid distributionally regressive impacts. These findings are particularly relevant as utilities nationwide consider rate reforms to support electrification while maintaining ratepayer affordability.