A new study by the Smart Energy Consumer Collaborative (SECC) finds that consumers are interested in alternative rate plans, but outreach and education are needed to spur enrollments.
The main takeaway for utilities is “consumers are interested in alternative rates if they are designed in ways they find understandable and they have a reason to do it,” Patty Durand, president and CEO of SECC, said.
The SECC study, Rate Design: What Do Customer Want and Need?, analyzed responses from about 1,100 residential customers and 500 small and medium business (SMB) customers. The study was sponsored by the Department of Energy’s Office of Electricity and Commonwealth Edison and conducted for SECC by Opinion Dynamics.
It is the first time the SECC has done a report on rate plans, and it comes at a time when many utilities are exploring new rate designs as a way of better aligning their energy costs to customer usage. California is preparing to move to TOU rates for all customers in 2020, and states such as Illinois, New York, Pennsylvania and Texas are investigating alternative rate plans.
Among other things, the study found a sharp difference between residential and small and medium business customers in their attitudes toward alternative rates.
For instance, residential consumers are open to trying alternative rates, the study found, even though many had never heard of them. Small and medium business customers, on the other hand, overwhelmingly prefer alternative rates over traditional flat rates.
“I was surprised about the SMBs,” said Durand. “They were already familiar with alternative rates and 88% knew that they were billed by the kilowatt hour. They are ready to be engaged and ready to enroll in plans.”
Small and medium business customers are eager to exert greater control over their energy costs as they seek to find new and inventive ways to reduce operating costs, according to the study. Many small and medium business customers were “surprisingly aware of alternative rate offerings,” meaning that electricity providers may have more latitude to experiment with more advanced rate plan offerings, the report found.
With residential customers, however, utilities “may be wise to utilize a more cautious approach,” the report recommended, suggesting that they be offered simpler alternative rate structures such as two-tier time-of-use (TOU) rates as a first step.
“Residential customers are probably not ready for demand pricing or real-time pricing and may never be ready as these rate structures carry significant risk and little perceived benefit to residential consumers,” the study found.
Residential customers’ rate plan decisions are largely driven by a desire to avoid extra fees and charges with 62% of residential respondents to the survey saying they would choose an alternative plan if it were optimally designed. An optimal residential rate plan would include two-tier TOU rates with no demand charges, a $50 one-time enrollment benefit and sourced from solar power.
Both residential and small and medium business customers begin to lose interest in alternative rates as extra charges, such as demand charges and green power premiums, are added to the rate offering, the study found.
In contrast to residential customers, small and medium business customers are less concerned about the details of a specific rate plan. They also have slightly different ideas about what would constitute an optimal rate plan.
Up to 79% of small and medium business customers would prefer an alternative rate plan over a standard rate plan, if it were optimally designed, the survey found.
For those customers, an optimal rate plan would include a two-tiered TOU rate with peak and off-peak price blocks and no demand charges or green power premiums. In contrast to residential customers, however, the survey found that small and medium business customers would prefer a one-year price guarantee to a sign-on bonus and would prefer wind, not solar, as their green power source. The difference in renewable power source preferences is probably linked to residential customers’ interest in rooftop solar, Durand said.
One of the strongest messages to come out of the report for utilities is “there has to be an upside or there won’t be movement,” Durand said.
Durand will be speaking at the Association’s Customer Connections Conference in New Orleans on Monday, Oct. 28, participating on the Getting Smart About Customers panel with John Romero, general manager of Colorado Springs Utilities.