The New Wave of Rate Design

January 29, 2019 Dan Tarrence

Traditional utility-decreed regulation-controlled rates may soon be an anachronism. Rate-making services are shifting toward a more customer-centric approach, placing a higher value on customer demand. Even more radical yet, but further down the pipeline, are subscription-based electricity services packages, modeled on companies like Amazon and Netflix.

Here’s a brief outline of the new crop of alternatives to the traditional fixed rate model.

Distributed energy resources (DERs)

The whole concept of DERs, which encompass customer-sited solar, battery storage, electric vehicle chargers and smart energy efficiency improvements, shift power into the hands of customers. DERs have a growing impact on how energy is generated, consumed and managed, despite the fact that some utilities see them as a threat to their safety and reliability standards. Across the country, utilities are introducing new policies featuring rates that value specific DER time and location attributes. This newer model has the potential to benefit both utilities and customers. Locational values, which would reflect prices by a customer’s location on the grid, is still a work in progress that shows much promise as the technology quickly improves.  There are also Blockchain models for peer-to-peer energy sales.  In these cases, it will be important for the utility to ensure their grid continues to serve as the backbone for the transactions.

Time-of-use (TOU) rate

This aspect of DERs is rapidly proliferating. A recent article in Utility Dive cited a Brattle Grouptime-of-use study that found “about half of U.S. investor-owned utilities and 14% of all utilities have a time-of-use (TOU) rate through which customers pay more per-kWh when demand is high.” These rates are voluntary, appealing to customers seeking opportunities to lower their bills by transitioning usage to off-peak times. TOU provides foreshadowing on how rates will need to evolve to be more tailored to customers’ specific needs. Different price tiers make sense to a generation accustomed to memberships such as Amazon Prime. They allow a subset of customers to prioritize cost over convenience. According to Utility Dive, “A new pilot plan by Xcel slated to roll out in 2020 predicts a 15% reduction in its system peak demand from the rate.”

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Performance-based ratemaking (PBR)

The performance model is on the upswing, favoring incentives over the typical cost-of-service regulation that rewards capital investment. PBR is on the rise because it guides behavior in the desired direction, which is often the ultimate goal of utilities. By identifying what customers want and creating opportunities for utilities to earn money by meeting those demands, PBRs embody a new, forward-thinking criterion for a more customer-centric model.

Energy subscriptions

Electricity subscriptions challenge the status quo by bypassing a regulator’s ability to rely on competitive markets to ensure pricing. In the subscription model, electricity becomes a service that needs a compelling value proposition. According to Utility Dive, “that subscription market, covering cable TV and online entertainment offerings, grew over 100% per year from $57 million in 2011 to more than $2.6 billion in 2016.” The economics of subscription resonate for customers, who get to choose between fixed monthly prices for varying levels of utility-provided products and services. Tiered offerings that range from economy to premium offer a wide variety of choices and perks, with better services accompanying a steeper rate.

Rate design that integrates the principles of a subscription model meets our modern expectations, making energy rates more straightforward and transparent. In the long run, the utility can harness the freedom of the subscription model to allocate usage to where it’s most valuable and least expensive for the entire system. It’s a whole-system approach that puts utilities better in sync with the goals of energy efficiency. To learn more, schedule a meeting with a Franklin Energy expert today.




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