Bills and Rates

Rate design: Thinking inside the clock

When it comes to rate design, utilities can no longer take a business-as-usual approach.

Customers increasingly want to be able to directly manage their energy use, and they expect options when it comes to paying for electricity. Creative rate design strategies are needed to account for the growth of renewables like solar and wind, more electric vehicles on the road, and the growth in distributed energy resources. Public power utilities are also looking for ways to better match costs and revenues.

The good news is that if done right, innovative approaches to rate design can be a win-win proposition for customers and utilities.

An example of a public power utility thinking outside the rate design box comes from California’s SMUD, which recently received the green light from its board of directors to implement new time-based rates.

Called time-of-day, the rates are designed to encourage customers to reduce energy use during peak times, when electrical power costs the most to produce or buy on the open market.

“To the best of our knowledge, we’re the first public power utility that has approved the transition to a TOD rate” as a standard rate for residential customers, said Jonathon Tudor, a spokesman for SMUD.

All residential customers will be transitioned to the new rate by the end of 2019. The SMUD board also approved a fixed rate for customers who would prefer not to have a time-based rate.

“A rate based on when electricity is used better reflects the true cost of providing service, which increases during periods of highest demand,” SMUD explained on its website. “With the new TOD rate, customers have a financial incentive to shift energy use to lower cost, off-peak hours.”

SMUD believes that time-based rates will provide its customers with more control over their energy costs. Customers can potentially lower their bills by changing when they use energy and how much they use. The utility noted that reducing energy usage will reduce the need to build new power plants and to buy power at peak market prices.

Under the residential TOD rate, the year will be divided into two parts: the summer season, from June 1 until Sept. 30; and the non-summer season, from Oct. 1 until May 31. Most customers will see lower bills during the eight-month non-summer season and higher bills during the four-month summer season.

The cost to use electricity will be lowest during off-peak times and highest during peak times. In the summer season, in addition to “peak” and “off-peak,” there also will be a “mid-peak.”

SMUD estimates that under the TOD rate, roughly 57 percent of residential customers will pay slightly more for electricity annually, on average, than under today’s rates. The utility expects 49 percent of customers to pay an average of $2 more per month, and another 8 percent of customers to pay an average of $6.80 more per month.

On the other hand, 38 percent of customers are predicted to save $1.65 per month, on average, while 6 percent will save $8 per month, on average. SMUD expects about 43 percent of residential customers will pay less each year.

Customers who do not have a smart meter, or who live in a master-metered community, will not be eligible for the new TOD rate.