This is part of a series of monthly posts reflecting different thought leader perspectives on utility rate design. All five opinion pieces appear in full in Leadership in Rate Design: A Compendium of Essays, which was designed to help public power utilities to rethink rate design strategies in the face of evolving technologies and customer preferences. The essays were developed as part of the Association's Moving Public Power Forward initiative.
The number of states, cities and counties committed to 100% clean energy is growing dramatically. The 100% clean electricity supply that seemed impossible 10 years ago has now become a tangible and feasible future.
With higher renewables penetration, planning for greener electricity becomes less about building individual resources and more about building a resource portfolio and system that — as a whole — is tuned to take advantage of clean power when it is available. One key challenge is what to do about the hour-to-hour and minute-to-minute mismatch between renewables output and electricity consumption.
In this context, customer flexibility becomes increasingly valuable. Any consumption that can be reasonably shifted to times when renewables-based supply is high will prevent loss or curtailment of renewables output when it is available. In doing so, customers also shift consumption away from times when renewables-based supply is lower, which can avoid the cost of power supplied by battery storage or even fossil fuel-based generation. This concept is expanding our traditional thinking about customer flexibility: from traditional “demand response” focused on moving consumption away from peak periods, to something more dynamic and including “load shift” toward low-cost periods [1]. Using customer flexibility as a resource in any and all hours is critical to getting the most out of a high-renewables system.
Principles for Meaningful Rate Options and Signals
Effective rates should address and balance the high-level objectives for economic efficiency, equity, revenue adequacy and stability, bill stability, and customer satisfaction, as shown in Figure 1.[2]
Figure 1: Objectives for Effective Retail Rates
The objectives for retail rates are interrelated, and some can represent tangible tradeoffs for customers. One customer, for example, might want to see how power supply costs vary within a day, to moderate their air conditioner on the hottest days when costs are high and save money overall. Another customer might not have the same flexibility to cut air conditioning on the hottest days, might not want to feel penalized for that flexibility, and might prefer more bill stability and costs smoothed over time.
An in-between rate option with moderate cost variability over time — such as the traditional volumetric rates that dominate the industry today — might be meaningless to both customers. The first customer may feel that the cost variability they see is not a strong enough signal (or concentrated enough) to respond to. And the second customer may feel that the cost variability by month or season is not equitable nor helpful given that they can’t respond to it. In either case, customers pay the total cost of service.
For customers of today and tomorrow, rate objectives need to be defined and addressed at a more granular level that is tailored to the diversity of customers and their preferences, possibly even at a customer-specific level. We now have better information technology and tools to understand customers’ behaviors and preferences, and to help them receive and respond to signals so they can shape their consumption in a meaningful way.
The Diversity of Efficient Rate Options
How do customers weigh opportunities to reduce cost versus bill stability? Traditional volumetric rates yield relatively low bill volatility. However, the potential for bill savings is limited — a customer is only empowered to reduce costs through bulk conservation (i.e., a customer reducing total kilowatt-hours consumed over a month).
For even less bill volatility, utilities can offer a fixed monthly bill (e.g., budget billing plan). Under this approach, the utility estimates total seasonal or annual bills, then divides the total by the number of months, similar to a payment plan. Customers may like this type of bill because it is easier to financially plan for. But they must accept the tradeoff of having no signal to consume power when it is economical to do so, which theoretically will yield higher costs to customers overall.
Customers might be willing to risk more bill volatility if they have the flexibility to move consumption away from high-priced periods. An hourly real-time price signal can help show customers exactly what hours contribute most (and least) to the cost to serve them. To date, the U.S. has relatively little experience applying real-time prices to residential customers, but experience in other parts of the world may provide some insights. For example, in early 2017, about 12 million small customers in Spain, or about half of those eligible, were enrolled in a real-time price-based electricity rate, as part of a regulatory redesign to incentivize more efficient customer behavior and lower costs.
In a high renewables system in the U.S., a real-time price signal can also be simplified to indicate when fossil fuel is being burned (relatively high cents per kilowatt-hour), versus when renewables output is plentiful (low or even negative ¢/kWh). Translating a real-time price signal into an emissions signal may be more meaningful for some customers.
The tradeoff of higher bill volatility, however, can’t completely be eliminated by the customer avoiding high-priced hours and consuming more in low-priced hours. There will always be the risk that prices are sometimes high when the customer can’t or doesn’t want to respond. More moderate time-varying price signals, like time-of-use rates and critical peak pricing, can also be quite effective if they are designed properly.
Enabling Customer Flexibility through Tailored Retail Rates and Services
At its heart, traditional demand response is about giving better information to customers and letting them decide how to adjust (or not adjust) their consumption patterns. Customers have shown that they will only respond to cost signals that are meaningful to them, and so customer options must be tailored carefully.
Today’s customers have two important attributes that can affect their consumption patterns and must be considered along with retail rate design. First, customers have a heightened awareness of the electricity supply mix, and they may have stronger preferences for green attributes and where the power comes from (such as local or onsite power) than customers of yesterday. So, beyond cost signal options, customers might want options to choose a supply mix that better suits their preferences and values.
Second, customers are more comfortable with using technology and tools to make informed spending decisions. They use apps, search engines, web services and other tools on a daily basis to process and simplify an enormous amount of information to make even the simplest spending decisions. Advanced equipment like smart meters can improve the quality of cost, consumption, and supply mix data available to the customer. Tools and services including apps, price and consumption reports, and smart appliances can help the customer absorb that information quickly and adjust consumption patterns with more automation. Experiments with enabling technologies such as in-home displays and smart thermostats have already shown that customers can be more flexible if they are given better resources to do so.
The Path Forward
The path to developing meaningful new rate structures and options for customers in a renewable energy future begins with better understanding how customer needs are changing. This can be done through focus groups and surveys that not only seek to understand preferences on cost versus bill stability, but also seek to understand preferences on power supply mix, environmental goals, and willingness to provide flexibility at different times of the day.
With customer preferences better understood, utilities can draw from the wealth of experience they already have in order to identify and test the effectiveness of different rate options. This includes field testing new rate designs, determining their acceptance and comprehension by customers, and evaluating the impact of the new rates on energy consumption and load shapes. Tests should include considerations of technologies that enable customers to easily understand their rates and any price or environmental signals they are receiving, set preferences for responding to those signals, and respond automatically in a way that does not disturb customers’ quality of life.
Utilities and regulators will then need to develop an implementation plan for new rates. They must determine if the new rates should be offered on an opt-in, opt-out, or mandatory basis and how that may change over time. There are many different approaches to this and each has its pros and cons. There may be useful lessons learned from other utilities that have already rolled out similar rates.
To quell fears of unexpected impacts, it will be useful to compute the bill changes that the new rates will bring about and find ways to mitigate any adverse impacts.
Finally, continuous customer education and outreach is crucial for customers to understand the array of rate options they have, and for them to make the best use of the rate they choose. In a sense, this effort both begins and ends with a conversation with customers. Through those conversations, electric utilities and regulators can help customers make great strides in realizing the benefits of their renewable energy future.
[1] Note that although the idea of flexible load shapes is gaining attention in the industry today, it is a concept that has been around for some time. See, for example, Gellings, Clark W., Pradep C. Gupta, and Ahmad Faruqui, “Strategic Implications of Demand-Side Planning,” Chapter 8 in Plummer, James L., Eugene N. Oatman, and Pradeep C. Gupta (eds), Strategic Management and Planning for Electric Utilities, Prentice-Hall, Englewood Cliffs, 1985, pp. 137–150. See also, Schweppe, Fred C., Richard D. Tabors, and James L. Kirtley, “Homeostatic Control: The Utility/Customer Marketplace for Electric Power,” MIT Energy Laboratory Report MIT-EL 81-033, September 1981.
[2] Bonbright, James C., Albert L. Danielsen, and David R. Kamerschen, “Principles of Public Utility Rates,” Arlington, Va: Public Utility Reports, 1988.