This is the first in 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.
Public power retail rate design seeks to:
- Keep electricity affordable
- Encourage conservation and sustainable customer resources
- Assist in power supply transformation
- Meet legal requirements
- Ensure financial stability
- Use marginal cost of service in the rate design process
Two major rate structures for residential customers are being implemented in California — the increasing block tier rate structure and the time-of-use rate structure. Both structures are widely used and have strong attributes to meet the rate design goals listed above.
The increasing block tier rate is much easier to understand and implement and helps keep electricity bills affordable for low-use customers. The tier allocation is based on baseline consumption from essential household appliances and lighting. As long as customers maintain their energy usage for these essential energy needs, their bills remain stable, and they only pay a lower-tier rate. As the largest loads for these low-use customers tend to be from refrigeration and lighting, load-shifting opportunities are nearly nonexistent, so a TOU rate would not help to lower their bills.
Low energy users are mostly renters and retirees who constitute more than 50 percent of the Los Angeles Department of Water and Power’s residential customers. If these customers are switched from an increasing block tier to a TOU rate, they will most likely see an increase in their bills, given that they are now enjoying the lowest-tier rate and not subject to peak pricing.
It will be challenging for low-use customers to adopt solutions suited to a TOU structure, such as solar and battery storage, to avoid the peak price, as most of them are renters and therefore unable to modify their building structures or make longer-term investments. The tiered rate structure is a perfect fit as it enables these customers to reduce greenhouse gas emissions by using less energy to take advantage of the tiered pricing structure.
A TOU rate structure carries a better pricing signal to encourage conservation and customer-sited renewable energy resources, especially for high-use customers, such as those living in single-family homes. TOU encourages customers to invest in energy conservation measures, load shifting, battery storage, and renewable generation.
LADWP has had a TOU rate since the 1990s, because we realized long ago that we serve a diverse population with varying needs and must provide a variety of options to meet those needs. The tier rate and TOU rate complement each other well. If the tier rate is not optimal for a particular customer, that customer can be covered by the TOU rate, especially in the high energy users segment.
Under the tier rate, once you reach the highest tier, there are no other choices to reduce the bill if you do not reduce usage. On the other hand, the TOU rate can help the customers shift load to the low price period or store energy during the low-price period to use later in the peak high price period.
A recent LADWP integrated resource planning study showed that commercial battery storage singular charge/discharge cost is around 20 cents per kilowatt-hour at an annual decrease rate of minus 5.5%. In 15 years, battery storage costs will be equivalent to a single combustion turbine capacity cost. This is similar to how solar generation costs dramatically dropped in the last 15 years. If we gradually invest in utility-scale battery storage systems, we will solve the peaking issue in a few years. It is also more cost-effective to install utility-scale battery storage systems that will increase energy use by sharing the energy storage assets among our customers. It is easier to implement demand response if utilities operate storage systems.
Based on customer usage patterns, we’ve seen that both tiered rates and TOU rates are important in serving Los Angeles’ diverse residential customers. With the advancement of utility-scale battery storage systems, we can gradually reduce the complexity of our rate design.
The current combination of increasing block tier rate and TOU rate structures will slowly evolve to a simpler structure that will encourage conservation, energy efficiency, and sustainable energy resources.
George Chen has been with the Los Angeles Department of Water and Power for more than 28 years. He has managed metering system design, advanced metering infrastructure projects, forecasting of load profiles, and the implementation of complex billing systems. He has been the rates manager since 2006 and manages water and power rates, contributing to an annual revenue of $5 billion.