Perfect Utility Rate Design

6 Reasons Time of Use Rates Are the Best Option

Previously we discussed the pros and cons of the available utility use rates. In that post we mentioned that while none of the options are perfect we do have a favorite, so here’s

6 Reasons Time of Use Rates Are The Best Option

 

  1. Time of Use (TOU) Rates will lower your bill.

With some simple adjustments to your electricity use habits, you would save a significant amount of money with TOU rates versus standard consumption rates.

  1. A true Time of Use Rate system wouldn’t charge any unwarranted fees.

Utilities are notorious for trying to increase fixed charges and fees. With a true TOU rate, you are only charged for the amount of electricity you consumed (based on when you used it) with no extraneous charges.

  1. Time of Use Rates rates encourage the use of solar.

The current system for most utilities across the country charges a “fixed rate,” meaning you are charged that rate regardless of the amount of electricity you use. Without these fixed charges, TOU rates can encourage the use of solar, especially if the peak rates are during daylight hours.

  1. Time of Use Rates can be available to everybody, whether you’re a business owner or a resident.

Additionally, in most states, TOU rates are already available on a voluntary basis.

  1. Time of Use Rates are good for the consumer and the utility.

If implemented properly, TOU rates are directly related to when the system (e.g., the grid) experiences the most cost. By changing your behaviors, you’re not only saving money but also helping the entire system.

  1. There’s only one downside.

Many don’t know of – or have not seen the benefits of – TOU rates. As such, consumer education would be the greatest barrier for getting TOU rates off the ground. Consumers would need to be educated on how they can actually save money with TOU rates – because, unfortunately, you would not be able to switch to TOU rates and have your bill magically decrease. Saving money with TOU rates would require some work on the part of the consumer. Here are a few things that you would have to do to save more money with TOU rates:

  • Plug devices such as computers, televisions, game
  • consoles, and printers into power strips and turn off the switch when these devices are not in use during peak demand hours.
  • Program your AC/heater to not run as much during peak hours.
  • Use your washer and dryer during non-peak times.
  • Install automatic timers to only run your water heater during non-peak times (trust us, you’ll still have plenty of hot water).
  • Use solar during peak demand hours!

With some careful alteration of your electricity habits, most consumers would save hundreds of dollars a year on electricity with TOU rates compared to standard consumption charges. TOU rates are good for utilities and your electricity bill – and all that’s needed is to get the word out.

Perfect Utility Rate Design

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.

Understanding Public Utility Regulatory Policies Act of 1978 (PURPA)

Defining PURPA

Passed in 1978 as one part of the National Energy Act, the Public Utility Regulatory Policies act (PURPA), provided a major benefit to the production and integration of renewable energy.

The National Energy Act was conceived in reaction to the energy crisis of 1973. It contained a plethora of legislation that would aim to drastically cut the demand for imported oil. One such act, now today as PURPA, would give manufacturers of renewable energy a toe-hold in the door to large scale energy manufacturing and deployment, which is always appreciated. PURPA was meant to promote better energy conservation, domestic power production, and renewable energy construction and integration.

Prior to PURPA, electric utilities were structured in what is known as vertical monopolies, which basically means that they control all aspects of energy supply: the generation, distribution and control were all controlled by one company, which was originally thought to be more effective method of energy maintenance. Well, that is until PURPA was introduced and broke that model and would make it much easier for other energy companies to integrate into the grid.

PURPA also eliminated “rate structure” promotions offered by utilities. Rate structure decreased the cost of electricity by kWh with increasing usage, with smaller increments included, as well.

PURPA’s Role in Renewable Energy

PURPA enabled non-utility generators (NUG’s) to generate and attach energy to the energy grid by breaking the monopolies that held control of it. Not only that, but PURPA also forced utility companies to purchase energy from other energy producers, like producers of renewable energy, if that cost was less than their avoided cost, or the cost of producing the extra energy on their own and delivering it to the consumer. As a result, more and more cogeneration plants were built and implemented into the system. These plants were required by law to harness thermal energy in the form of steam, which would otherwise be wasted if energy alone was produced.

Controversy with PURPA

PURPA was not as big of an issue back in the 1970’s. However, more and more utility providers are having issues with PURPA. Specifically, having to accept renewable energy providers, specifically providers of solar energy, due to the fact that solar energy has become gradually more affordable and viable in energy production over the last few years.

One such controversy has erupted in Montana where the state’s largest investor-owned utility company, known as NorthWestern Energy, filed a claim with the state’s public service commission stating that the current rates of qualified providers (QF’s), which were stalled at $66 per mega-watt hour, was out of date as of 2013. The commission granted the proposal and altered the terms of which QF’s that provided between 100 kilowatts and 3 megawatts received the current avoided cost rate. None of the projects met the criteria.

The Federal Energy Regulatory Commission (FERC) declared that the Montana State Commission had ruled in a way that was inconsistent with PURPA. However, as of this writing, they have not made any movements to rectify the commissions movement, which begs the question as to how seriously PURPA is being enforced.

In another instance, a North Carolina based utility company, Duke Energy, is currently backing a bill that would bring all renewable energy construction to a slow crawl. Introduced by Rep. Dean Arp (R-Union), House bill 909 is encouraging the once halted negotiations between Duke Energy, renewable energy advocates, and other PURPA stakeholders.

The bill would remove all North Carolina renewable energy projects from the umbrella of PURPA, and would throw those projects into a bidding process lead by Duke Energy. The bidding would have a ceiling of a predicted 400 megawatts.

“This bill would crush renewables in every sense, except perhaps in agriculture,” said Chris Carmody, the executive director of the North Carolina Clean Energy Business Alliance. You can read more on the North Carolina controversy here!

But Montana and North Carolina are not the only states seeing conflict with PURPA. Utah and Oregon utilities are starting to call for new contract lengths, rates, and other changes. Solar companies have since stated that the proposed changes would make it impossible to finance solar projects. It is not farsighted to say that further controversy could emerge in the near future.

New Legislation Affecting PURPA

PURPA is seeing a steady decline in significance as most of the contracts signed in the 1980’s are coming to an end. Furthermore, PURPA was amended in 2005 under the Energy Policy Act of 2005. The amendments to PURPA begin on Section E, subsection 1251 through 1254 of the Energy Policy act. Here is a short list of what amendments were made:

  • Each electric utility service shall make available upon request net metering services to any electric consumer the utility serves
  • Each electric utility shall develop a plan to minimize dependence on 1 fuel source and to ensure that the electric energy it sells to consumers is generated using a diverse range of fuels and technologies, including renewable technologies.
  • Each electric utility shall develop and implement a 10-year plan to increase the efficiency of its fossil fuel generation.
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.