Does a Perfect Rate Design Exist?

Does a Perfect Utility Rate Design Exist?

The simple answer: no. There is no perfect rate design, as there are up and downsides to each. However, we believe there is a best option, and we’ll talk about that in a later blog post. For now, let us analyze the positives and negatives of each of the three main types of rate designs. If you need a refresher on the often-confusing world of rate design, check out our blog post on the topic.

Fixed Charges and Consumption Charges – In many ways, this rate design seems like it would be the most ideal, especially for residential consumers. Your monthly charge would consist of a fixed charge, the charge of being connected to the utility, and a consumption charge based on how much electricity you used during the billing period. Seems great, right? You pay for electricity you use, along with a fixed charge, and don’t pay for electricity you didn’t use. Simple! Well, as it turns out, the word “fixed” is not so fixed… It’s really a relative term.

Recently, Alabama Power has started a “pilot program” that exponentially hikes the fixed charge rate (up to 400 percent!). For now, the rate increase is voluntary and experimental, but it forebodes of future substantial rate inflation. Even now, many utilities across the country are actively trying to increase fixed rates. Fixed charges are generally thought to be bad for consumers because they discourage energy efficiency and renewable energy and are liable to increase without warning (check out our blog post on fixed charges!).

Time of Use (TOU) – Most simply, TOU rates charge customers prices based on the time of day in which the energy is consumed. When the grid is congested, the prices goes up, and when there is plenty of excess electricity available, the prices goes down. This system could encourage energy conservation and efficiency by motivating customers to use electricity outside of peak demand times and to conserve it inside peak demand times. Additionally, no fixed charge means more freedom and incentive to conserve energy. The only downside to this system resides in the amount of customer education it would require, such as learning how to use other means of energy consumption (like solar!) or simply remembering not to consume as much energy during the specified times. Most customers are not used to being charged this way and would need time to adjust.

Peak Demand Charges – Because of the hiked charge on peak usages, this rate design encourages customers to not make large, instantaneous demands on the system, no matter the time of day. This rate design is typically reserved for commercial consumers where it is oftentimes necessary or unavoidable to use large amounts of electricity at one time. Of course, there are ways to somewhat decrease high peak demand charges (such as installing solar if you have a daytime peak or spacing out electricity use more smoothly), but the rate design is still imperfect. Peak demand charges, then, can be a good, sensible idea but tend to be impractical in the sense that each customer’s individual peak isn’t always as necessary as the system’s overall needs.

Choosing the right rate design is difficult; each one presents its own challenge to overcome. The question to ask when pondering the plethora of rate design options is “Which one is best, not easiest, for the energy sector?” We’ll leave you with that hint until the final blog post in this series, where we will explain in detail why we believe a certain rate design is the best.

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