Amid sluggish load growth and an evolving grid, the Alliance to Save Energy released a white paper this month that offers a framework to be used by regulators and others for recrafting rate designs in a way that the group says offers financial stability for utilities while supporting ongoing changes to the electric system and the ways it is used.
“As efficiency and distributed generation continue to put downward pressure on sales and in the absence of frequent rate increases, reliance on traditional, flat volumetric pricing makes it increasingly difficult for utilities to recover the fixed costs of existing assets and new investments needed for replacing aging infrastructure,” the group said in the paper, Forging a Path to the Modern Grid: Energy-Efficient Opportunities in Utility Rate Design.
The Alliance to Save Energy is a nonprofit alliance of business, government, environmental and consumer leaders that focuses on energy efficiency.
Gil Quiniones, president and CEO of the New York Power Authority, is co-chair of the group’s board of directors. He has been a board member since October 2014.
The paper grew out of a two-year rate design initiative that included representatives from utilities, technology companies, environmental groups as well as regulatory experts and consumer advocates.
Paul Zummo, Director, Policy Research and Analysis at the American Public Power Association, participated in one of the group discussions leading up to the release of the report.
The paper suggests elements that could be part of a transitional rate design for utilities with advanced metering infrastructure and for utilities that don’t have AMI.
Rate designs will need to be tailored to the individual needs of each utility and state, the paper noted.
“Appropriate combinations of rate designs and other ratemaking policies can support an increasingly clean energy system without detriment to reliability, exorbitant costs to consumers or degradation of utilities’ financial stability,” the paper said.
Instead of relying on volumetric rates where cost recovery is largely tied to how much electricity a consumer uses, a more advanced rate design can spur increased system utilization by encouraging customers to manage their peak demand, which would provide headroom to bring on additional end use electrification, the paper said.
“Price signals can more closely correspond to system costs, providing the correct incentives about what to deploy and where to deploy it,” the paper said. “Customer rates can be managed due to an increase in energy supplies with zero fuel costs.”
In the future, energy efficiency efforts will likely begin to focus not just on lowering overall electricity use but also on when and where power is used, according to the paper.
“To ensure that this transition happens in a way that optimizes the deployment of all types of system resources, prices that recognize the possibility of bi-directional price signals, power flows and geographic and temporal costs are increasingly important,” the paper said.
The paper offered five key recommendations, including the need to analyze and test any rate design policy against the goal of maximizing system-wide energy efficiency and gaining societal benefits.
Pilot programs should be conducted to see how customers respond to rate design changes and to test different technologies such as home automation systems, the paper said.
The alliance recommended that “aggressive” customer-education programs be conducted before implementing new rate designs.
In areas that have smart meters, jurisdictions should consider a three-part rate design, including a customer charge, a demand charge and a time-varying volumetric charge, according to the paper.
The three-part rate design “will increase demand side efficiency, economic efficiency and system energy efficiency, will send appropriate price signals to the market for [demand-side management] investments, will provide consumers with the incentives and ability to control their energy costs and will enable utilities the opportunity to earn a reasonable rate of return on their assets,” the paper said.
Currently, about half of all utility customers have smart meters, according to the paper.
Areas that don’t have smart meters should explore installing them. In the meantime, they should consider rate structures that include a customer charge and a time-of-use volumetric rate, providing clearer price signals to users at different times of the day, the paper said.
The paper offers an example of a three-part rate design for a vertically integrated utility. The example shows how the utility’s revenue requirement would be allocated to its residential customers and then divided into specific charges.
The alliance suggested allocating customer costs into a customer charge, local distribution costs into demand charges and all the rest into a volumetric three-part time-varying rate structure. The time varying rates cover the off-peak, intermediate and peak periods.
