Capacity Tariffs

Capacity tariffs, also referred to as capacity charges or capacity fees, are a pricing mechanism. Capacity tariffs charge consumers based on their peak loads. Thus, capacity tariffs incentivize consumers to keep peaks to a minimum or, in the case of time-varying capacity tariffs, shift peaks to low price periods.

Importance of capacity tariffs

To ensure uninterrupted supply, grids must be able to support peak demand. Usage-based charges, however, are determined only by the amount of electricity consumed. Capacity tariffs, on the other hand, are calculated based on the capacity requirements of a consumer, which reflect the need for infrastructure investment to meet peak demand.

Types of capacity tariffs

Static capacity tariffs

Static capacity tariffs apply a charge per kilowatt (kW) for the highest load in a given time period. In Germany, for example, the consumption of large consumers (more than 100,000 kWh/year) is measured in 15-minute intervals. The 15-minute interval with the highest consumption is then used to calculate capacity charges for the entire year.

Time-varying capacity tariffs

Similar to usage-based time of use tariffs, time-varying capacity tariffs apply different charges to peaks that vary over time. This incentivizes consumers to reduce loads during peak periods and thereby aims to reduce grid congestion.

• Static time-varying capacity tariffs: These tariffs vary by predefined intervals e.g. a day-time and a night-time tariff. These prices may change depending on the hour of the day, day of the week and season. The prices are set ahead of time for an entire time period, usually one year. While the prices aim to reflect the load level in the grid, they are not formed in response to actual, current load levels.
• Dynamic capacity tariffs: Prices are set in direct response to the load level in the grid.
• Critical peak pricing: A combination of static and dynamic tariffs. For most periods, capacity charges are either flat or are provided in intervals for the entire period. During extreme periods, however, an extra charge is applied to lower strain on the grid. The charge is published on short notice.

In practice

In transmission and distribution grids

In many European countries, time-varying capacity tariffs are applied. According to ACER, 21 of the 27 EU member states have static time-varying tariffs in the distribution grid. Nine also apply time-varying tariffs in the transmission grid.

Germany and Italy, along with Romania, Hungary, Bulgaria and Cyprus, do not apply any time-varying capacity charges.

Increased capacity charges in transmission and distribution grids are applied for one or two periods per day depending on the country.

For consumers

• Flanders (Belgium): In January 2023, the Belgian region of Flanders introduced capacity tariffs for all consumers. With these, the regulator aims to reduce strain on the grid during peak hours and consequently reduce the need for grid extensions.
  To calculate the peak load, the grid operator considers 15-minute intervals and charges fees based on the highest peak each month. For consumers without a smart meter, a peak load of 2.5 kW is considered.
• Germany: In Germany, large consumers (>100,000 kWh/year) are monitored in 15-minute intervals. The interval with the highest load in a year then sets the capacity charge for the year.
  The annual consumption is divided by the peak load to derive the yearly utilization hours.
  The lower the number of yearly utilization hours, the higher the charge per kW of peak load. Consumers in low-voltage grids pay 5 ct/kW if their utilization hours are above 2,500 and 9 ct/kW if their utilization hours are below 2,500. In mid-voltage grids, consumers pay 3 ct/kW (>2,500 utilization hours) and 6 ct/kW (<2,500 utilization hours). 

Criticism

Static capacity tariffs incentivize even consumption. As shown in the figure above, large consumers can realize substantial savings in Germany by reaching annual utilization hours of 7,000 or more.

Annual utilization hours (AUH) are calculated as follows:

AUH = Annual consumption (MWh) / Maximum load (MW)

Given that a year has a total of 8,760 hours, the maximum load may only be 25% greater than the average load to reach 7,000 utilization hours. So, essentially, consumers are incentivized to operate at base load throughout. Therefore, consumers have no incentive to provide flexibility to help balance the grid.

Thus, the flexibility potential of large consumers remains largely untapped in Germany.