Designing Pareto optimal electricity retail rates when utility customers are prosumers

Abstract Electric retail rate design is relevant to utilities, customers, and regulators as retail rates impact the utility's revenue as well as the customers' electricity bills. In California, regulators approve rate proposals by privately owned vertical integrated utilities. Approval, however, is subject to compliance with multiple, potentially conflicting objectives such as economic or environmental objectives. Additionally, retail rates are price signals that affect how customers use electricity services. When utility customers change their usage, they also impact the ratemaking objectives to which rates have been designed. This suggests a feedback loop, which is particularly pronounced with prosumers, as they can systematically optimize their interactions with the electricity system. Prevalent ratemaking methods may not deliver retail rates that are optimal for multiple objectives when customers are prosumers. We propose a novel ratemaking method that formalizes the problem of designing retail rates as a multi-criteria optimization problem and accounts for prosumer reactions through a simulation-based optimization approach. Through a fictive case study, we found that the resulting Pareto frontiers are useful in recognizing and balancing tradeoffs among conflicting ratemaking objectives. Additionally, our results indicate that prevailing retail rates in California are not Pareto optimal.