New Rate Designs Can Help or Hurt Energy Efficiency ...So Choosing the Right One is Important
Electric utilities face a challenging future. Energy efficiency and rooftop solar have reduced U.S. homeowners’ demand for electricity from utilities to the point that there has been no increase in demand for the past five years. Predictions of a “utility death spiral” appear exaggerated, but utilities almost universally recognize that they need new business models.
One way that utilities and regulators have responded has been to explore new rate designs. The topic sounds dull and technical, but they way rates are structured can have a large impact on home performance contractors and energy efficiency programs.
A new study from the American Council for an Energy-Efficient Economy (ACEEE) shows many utilities jumping into uncharted rate-making waters. To simplify a complicated situation, utilities are experimenting with three “non-traditional” approaches to ratemaking. (None of these approaches are entirely new, but they are all a departure from the traditional way rates have been set.)
The traditional rate structure divides the customer’s bill into two parts. The customer pays a fixed “customer charge” for services utility services, including metering, billing, and customer service. She or he also pays a “volumetric” charge based on how much electricity s/he consumes – ten cents per kWh, for example.
The first of the non-traditional rate structures increases the fixed customer charge. Utilities justify this approach on the grounds that customer charges cover distribution and other costs. Higher customer charges typically reduces the value of both energy efficiency and solar, because when the fixed part of the bill increases, the part of the bill that depends on how much energy the homeowner uses is smaller. Because this approach gives the consumer less control over their monthly bill, it has often been quite unpopular.
The second non-traditional rate structure, “demand charges,” is designed to capture a utility’s cost of providing service during peak demand periods. Demand charges are based on a customer’s peak usage during a defined period. Because this approach is relatively new for residential customers, more research is needed to determine its impact, but it appears so far to have limited impact in encouraging consumers to reduce peak demand and total consumption.
The third option, time-of-use (TOU) pricing charges customers different per-kWh charges depending on when they use electricity. Rates during peak demand times are most expensive, and off-peak rates are cheapest. Consumers generally respond to TOU pricing not only by using less electricity during peak periods, but by lowering their total electric usage as well.
The ACEEE study shows how rate structures can have a major impact on energy efficiency improvements. Time-of-use pricing can increase the value of energy efficiency improvements and reduce efficiency measures’ payback periods because they help consumers save energy at peak periods. Increased consumer charges, by contrast, may actually reduce the payback period for efficiency improvements, making them less valuable than they would be if the consumer paid traditional rates. The impact of demand charges is less clear, but it seems that they create a smaller incentive for energy efficiency measures (i.e. result in a longer payback) than TOU rates, but a larger incentive than increased consumer charges.
So when the next rate case comes up in your state, you might want to weigh in, especially if new rate designs are announced. Which one gets selected could make a big difference to your customers – and to your bottom line.