Perfect Utility Rate Design

The Ins and Outs of Electricity Rate Design

Electricity rate design has the power to completely alter the energy sector, for better or worse. The world of electricity rate design can be a confusing one, so before we get into which rate design would be most beneficial for you and the energy sector (that’s for a later blog post!), let us first define and explore three of the main types of rate designs.

Fixed Charges and Consumption Charges – The current system for billing electricity for most utilities across the country, this rate design charges fixed fees in tandem with a usage bill and is most common with residential consumers. Fixed charges never change from month to month (as the name implies), as they are there as a result of your connection to the grid. Recently, utility companies across the country have been advocating for significant fixed charge increases. In theory, a fixed charge is there to compensate the utility for the fixed portion of their costs as a result of having you as a customer (for instance, the cost to bill you and read your meter).

Related: Are fixed utility charges bad for consumers?

Time of Use – This system is decidedly more complicated than the previous one, and would require some work on the part of you, the consumer. The idea is simple: the cost of using electricity would change according to the time of day (for instance, customers would be charged higher rates for using electricity during specified peak demand times).

Figure 1: An example of a suggested TOU rate for summer months. Source: www.pge.com

The execution of Time of Use (TOU) rates (such as advocacy and ensuring customer understanding) is where the system becomes more complicated. States such as California and Massachusetts have already adopted a TOU rate design, and our own Tennessee Valley Authority has also proposed making the transition to TOU rates. Additionally, TOU rates are already available in most states on a voluntary basis. At its most basic, TOU rates provide price signals to customers to encourage them to use when rates are low and conserve when rates are high.

Related: 6 Reasons Why Time of Use Rates Are the Best Option

Peak Demand Charges – In many states and especially for commercial customers, electricity use is billed in two ways by the utility: based on consumption, that is, how much electricity you actually used in a given period, and peak demand, or the highest capacity required during that billing period. A simple way to think about this is with an analogy: the odometer in your car would represent the “consumption,” and the fastest speed you traveled during that period would be the “peak demand.” Your car needs to be able to last for a long time (high mileage) but also may need to go fast from time to time (of course, if you drive a Tesla Model S, that’s all the time! But we digress…). In the case of this electricity rate design, you would be charged for both consumption and peak demand, and oftentimes these two charges appear as one combined charge.

The main idea behind peak demand charges is that they provide customers with price signals to encourage them not to make large, instantaneous demands on the systems but instead to spread their usage out over the day more smoothly. Depending on the rate structure in a given area, and your habits, demand charges can constitute up to 30% of an electricity bill.

Related: Probing Residential Demand Charges

 

What is the Utility Death Spiral?

The “utility death spiral” sounds pretty scary, doesn’t it? It could be if you’re a utility company. In 2013, the Edison Electric Institute (EEI) released a report positing that an eroding revenue stream, declining profits, rising costs, and ever-weakening credit metrics would diminish the ability of electric utilities to survive in an increasingly off-the-grid world.

“Recent technological and economic changes are expected to challenge and transform the electric utility industry,” the report said. “These changes (or ‘disruptive challenges’) arise due to a convergence of factors, including: falling costs of distributed generation and other distributed energy resources. Taken together, these factors are potential ‘game changers’ to the U.S. electric utility industry.”

The report gave no indication as to when this “utility death spiral” would begin happening, and, to date, no major U.S. utility has gone defunct. Is the utility death spiral, then, simply a myth? Not necessarily.

In an article from 2015, William Pentland of Forbes argues that “the predicted casualties of the death spiral have turned out to be the victors and the predicted victors have turned out to be the casualties.” In this case, the “victors” are the utility companies and the “casualties” are the distributed renewable energy companies. SunEdison, for instance, a supposed “victor” in the report, had lost more than two-thirds of its market value in 2015.

While that may have been the case in America in 2015, utility companies in Europe have hit a bit of a bump in the road since the report was released. The German mega-utility RWE lost more than $3.8 billion in 2013 as it closed down numerous unprofitable fossil fuel plants. Similarly, in the same year, the Swedish utility company Vattenfall experienced $2.3 billion in losses due to a “fundamental structural change” in the electricity market. Clearly, as grid maintenance costs increase and the cost of renewable energy decreases, more customers have substantially reduced their energy consumption from the utility or moved entirely off the grid. According to the Wall Street Journal, 16 percent of German companies are now completely and entirely energy self-sufficient. This massive shift in the energy sector could spell the end of many utility companies.

But what about across the pond, here in America the beautiful? What has happened since 2015, when renewable energy was cited as a “casualty?” As it turns out, a lot – especially in California and Hawaii.

California has seen the most progress in this area. Because of its successful energy-efficiency policies and its policies supporting utility-scale solar and rooftop solar, the state has helped more than half a million customers go solar since 2007. As a result, utility companies there have seen the beginnings of a utility death spiral. California regulators predict that, by 2020, 85 percent of customers in the state will be using electricity from entities other than investor-owned utilities.

In Hawaii, electricity prices are far higher than anywhere else in the U.S. Naturally, this means that many customers have been making the switch to solar. However, because so many customers were installing solar, utilities have had to place restrictions that prevent some from even turning on their systems. So many Hawaiians saw the positives of solar that they were literally breaking the system. Nice.

Does Hawaii’s need to restrict solar mean that your state will have to do the same? Not at all. The main reason behind the restrictions stems from Hawaii’s isolated grid. Because there are no power lines linking Hawaii with the rest of the U.S., the utility has nowhere to discard excess solar power. Obviously, this is not an issue with continental states. Because of its isolation, Hawaii has had to rethink the way it does electricity, and we think the rest of the U.S. should be in on that too.

While the utility death spiral is, in fact, a real thing, there are some things that can be done to make the transition to solar as smooth as possible. For instance, good rate design and policies can protect consumers and utilities and help manage the transition without large disruptions in the market. Stay tuned for a future blog post where we will talk about these solutions in more detail.

Peak Car Ownership: Is a Transportation Revolution Just Around the Corner?

Researchers at the Rocky Mountain Institute say in a detailed study that private car ownership will hit its peak by 2020. If these researchers are correct, it could spell the beginning of a new energy and technological revolution – if, and only if, companies prepare for such an event by researching automated personal mobility powered by electric powertrains. Thankfully, as the study points out, companies such as Lyft and Uber are already exploring self-driving robot taxis, as well as Apple, Google, and Tesla. In a few years, then, as the study claims, these companies will absolutely produce a new mobility system that is superior to our existing system. But what effects will this emerging mobility system have on the energy sector?

The study’s authors, Charlie Johnson and Jonathan Walker, say that “this future system has the potential to reduce costs by over $1 trillion, reduce CO2 emissions by a gigaton, and save tens of thousands of lives per year in the U.S. alone.” When people stop buying their own vehicles and begin using a city’s autonomous, electrically-powered taxi system, there will be a major decrease in gasoline demand, as the study suggests.

 

For many, though, it’s not about if the transition will happen (because there are few who doubt it), it’s all about when the transition will happen. Many are less optimistic about the Rocky Mountain Institute’s projections. Margo Oge, a former EPA transportation and air quality official, says that “In the end the overall success of autonomous mobility will be based on public trust. It’s not just an issue of technology. Trust takes time to develop.” By 2020, when the Rocky Mountain Institute projects we will hit peak car ownership, will cities be ready to convert to an entirely shared, automated, and electrified fleet of personal mobility vehicles? Probably not. But there’s still hope!

Walker, of the Rocky Mountain Institute, asserts that “there’s people who say the technology’s not going to be ready, but they’re quoting things like 5 or 10 years, when a year ago, they were quoting 30 years.” Who knows? A transportation revolution could happen sooner than we think. We’re crossing our fingers.

Energy vs Power

Understanding What Demand Response Can Do for You

So what is demand response? It is a change in USAGE of energy of an electric utility customer to better match the demand for power with the supply. It can also be thought of as a method of how electric companies compensate for the extra energy used during a “peak time”. When you hear “peak time”, think of a hot Alabama summer day when everyone is running their air conditioners at 2 PM.

What is demand?

Electric energy cannot be easily stored, so utilities have traditionally matched demand and supply by throttling the production rate of their power plants, taking generating units on or off line, or importing power from other utilities. But there are limits to what can be achieved on the supply side, as some generating units can take a long time to come up to full power, some may be very expensive to operate, and demand can be greater than the capacity of all the available power plants put together. Demand response is one of the solutions to these limits and seeks to adjust the demand for power instead of adjusting the supply.

At the consumer level, demand response is a way for certain areas to maintain adequate power during busier peak times and can save them money in the process. One example of this was in 2016, when the New York City grid “shed load” by reducing power at a number of public services, including the Metropolitan Transportation Authority; and utility ConEdison activated a voluntary program to adjust consumers’ air-conditioner thermostats at peak hours. In exchange for participating in these voluntary programs, electricity customers received a rebate varying in amount based on participation.

To help visualize what this looks like, think about the traffic on an interstate. Everyone suffers if the traffic is at a standstill; but once portions of traffic begins taking proper detour routes or delaying their trip, it allows everyone to get to their destination faster. Similarly, if some consumers participate in demand response by lessening their own energy use, or when they use it, then everyone on the grid can maintain their energy usage during peak hours at cheaper prices.

While the main goal of demand response is to maintain energy availability through all times of the year, consumers can earn financial rewards by participating. In many states, regulators create incentives for utilities to use less energy, especially during peak hours of the day. Demand response programs were originally put in place to avoid having to turn on “peaker plants,” or auxiliary power plants that may be used only 10 days a year to meet the traffic of high demand days. You can imagine how expensive these “peaker plants” are to operate by thinking about if we added lanes to our highways just to accommodate Black Friday traffic.

Instead of building new power plants to meet demand, utilities instead can rely on demand response. For example, in New York, 543 megawatts of demand reduction are available just from commercial and industrial customers participating in demand response, which is about the same capacity as a medium size power plant. Keeping these plants idle also helps keep the price of power down, which saves money for the entire customer base. Instead of having to call on very expensive power generators to meet high demand in the late afternoon, grid operators can reduce the load in the system and avoid paying peak-time pricing.

Much like consumers, demand response saves the system money, sometimes on the upper end of millions a week, but the program also creates a better and safer grid in doing so. The grid benefits from not needing to build any extra power plants to supply power during those “peaker times”, which are only about 10 days out of the year, which in turn would require extra power to operate and build. Furthermore, if consumers are using the demand response program, the grid will be less taxed for power output on a daily basis. By conserving energy, grid alterations can be delayed or significantly reduced. In an electricity grid, electricity consumption and production must balance at all times; any significant imbalance could cause grid instability or severe voltage fluctuations, and cause failures within the grid. Don’t forget that demand response can ALSO be used to INCREASE demand during periods of high supply and/or low demand, which, unchecked, could cause an imbalance.

Overall, demand response is beneficial to everyone involved. It saves consumers, businesses, and utilities, money and helps the grid run more efficiently. If given the opportunity, everyone should opt-in to this program for themselves, the grid, and the environmental benefits from using less energy. And if you don’t currently have the opportunity, ask your utility and your Public Service Commission about starting demand response programs to save you money.

Related: Probing Residential Demand Charges

Battery Storage and Ancillary Services

Ancillary services by definition are services that support the transmission of electricity from its generation site to the customer or helps maintain its usability throughout the system. Many people may not know that the standard 120 volts we are used to receiving from the wall actually varies a tiny amount from second to second. If you were to monitor the power from the wall, the voltage may swing from 118-122 volts. We do not typically think about the mechanisms that take place to keep our power useful and ready for when we flip the switch.

On a larger scale, ancillary services are generators or other service providers that are synchronized to the grid and are able to rapidly increase output in three major categories: contingency, regulation, and flexibility reserves. The contingency reserve requirement is assumed to be constant for all hours of the year and corresponds to a spinning reserve equal to about 3% of peak load and about 4.5% of the average load. Another way to think of “spinning reserves” are the backup or redundancy built into the grid. Basically, we slightly overbuild the total generation needed so the grid can be provided with ancillary services making good quality power possible.

Additionally, regulation and flexibility reserve requirements vary by hour based on the net load and impact of variability and uncertainty of wind and solar. The availability and constraints of individual generators to provide reserves are a major source of the cost of providing reserves. Not all generators are capable of providing certain regulation reserves based on operational practice or lack of necessary equipment to follow a regulation signal.

So, what does the future of ancillary services hold and how can they be more beneficial?

At a residential level, a combination of solar and storage is only worthwhile when specific conditions are met that make the value of storage greater than the cost of installing It. For example, when the renewable energy creates an excess, the extra energy can be stored for later consumption. This would allow the customer to buy less power from the grid and enable them to cut their costs.

However, some customers are now being charged for using power during peak times, which is known as a demand charge. Energy storage can be used to lower peak time energy consumption, or the highest amount of power a customer draws from the grid; therefore, reducing the amount customers spend on demand charges. In North America, the break-even point for most demand charges is $9 per kilowatt. Energy storage can lower that cost to $4 or $5 per kilowatt by as early as 2020. As storage costs decrease, more customers will begin to see economic benefits and existing storage users will see the optimum size of energy storage increase.

Lastly, energy storage will impact electricity grids as a whole because it provides more function than just power on demand. Batteries can provide the grid with ancillary services like frequency regulation and should be compensated to do so. All this is to say, if utilities provide appropriate price signals to the market, customers will respond by installing battery storage where and how they can be compensated.

Currently, grids experience a continuous imbalance between the power they produce and its consumption because of the millions of devices that are turned on and off in an unrelated way. The imbalance can cause frequencies to deviate, which can affect equipment and potentially hurt the stability of the grid. Energy storage is well suited for frequency regulation because of its rapid response time and its ability to charge and discharge efficiently. This storage could significantly reduce the amount and cost of the reserves currently needed to provide such services to the grid.

One reason for the optimistic outlook on battery storage’s role with providing ancillary services is the progress lithium ion batteries have made in recent years. In 2015, lithium-ion batteries were responsible for 95 percent of energy storage at both the residential and grid levels. The reason for the increase in popularity is due to the price dropping, safety improving, and better performance characteristics. All of these qualities are leading to lithium-ion batteries being suitable for stationary energy storage across the grid; ranging from large-scale installations and transmission infrastructure to individual and residential use, even without being appropriately compensated for ancillary services.

The most important aspect is the large-scale deployment of energy storage that could overturn the status quo for many electricity markets. In developed countries, central or bulk generation traditionally has been used to satisfy instantaneous demand, with ancillary services helping to smooth out discrepancies between generation and load; and energy storage is well suited to provide such ancillary services. Eventually, as costs fall, it could move beyond that role, providing more and more power to the grid, displacing plants; however, that time has not yet come although approaching quickly. It is important to recognize that energy storage has the potential to upend the industry structures, both physical and economic, that have defined power markets for the last century or more.