Electricity tariff design: Equity and efficiency considerations

This article discusses the equity and efficiency considerations relating to electricity tariff design. Cost-reflective electricity tariffs guide efficient consumption and investment decisions. In doing so, they can lead to a net benefit for consumers in aggregate and can aid the efficient development of electricity systems. However, a cost-reflective reform may create distributional concerns. This paper argues that addressing these distributional concerns through social transfers and adjustments to the tax-benefit system is more efficient, and potentially more equitable, than compromising cost-reflectivity in tariff design. However, there may be additional concerns surrounding political acceptability, which may require these social transfers to be targeted and salient.