Conquering Consumer Resistance


Published In: EnergyBiz Magazine March/April 2012


DYNAMIC PRICING FOR RESIDENTIAL ELECTRICITY use will bring significant advantages to utilities and their customers. The customer response elicited by time-of-use rates will lower overall system cost, to the benefit of all consumers. Properly implemented, time-of-use rates are fairer and will induce customers to use electricity more efficiently. There is no serious debate about these statements.

But utilities and their regulators have famously not moved toward dynamic pricing for residential customers in the United States. The reasons for this reluctance include concerns about the cost of metering and fears of consumer resistance. But the pressures to move to dynamic pricing are mounting and the foregone benefits are adding up. There are several ways in which regulators might introduce time-sensitive rates in a way that will be acceptable to consumers.

Time-of-use rates have always enjoyed theoretical support. But now there are several new, practical reasons why utilities and their regulators should move toward them.

Demand for electric vehicles will grow steadily over the next two decades. Some mechanism is needed to induce or require customers to charge vehicles during off-peak times. Today's time-insensitive residential prices will lead to higher system costs if customers plug in their vehicles after work, adding to the late-afternoon summertime peak load on generation and distribution systems. In the other direction, nighttime energy loads from EVs will be desirable by utilities with significant wind generation.

Residential adoption of distributed generation, especially small-scale solar systems, appears to be accelerating as the cost of systems fall and residential financing options grow. Unless electricity is priced on a time-sensitive basis, the correct value of such distributed generation to the utility system is obscured. Net metering at time-sensitive rates will increase payments to solar systems, permitting utilities to charge compensatory rates to solar customers for distribution service.

Time-of-use rates are essential to the new energy markets that will develop because of grid modernization. The deployment of smart meters and the arrival of intermediaries who operate between utilities and their customers will require rational retail pricing of electricity. Usage-sensitive pricing will stimulate the use of home energy management tools.

Energy efficiency and residential demand response will be enabled by the use of dynamic pricing, which will also be required by vehicle-to-grid transactions.

There may be non-price approaches to each of these challenges, involving separate metering of vehicles, solar panels and smart appliances. But only dynamic pricing addresses all four considerations simultaneously and consistently.

The Institute for Electric Efficiency reports that 27 million smart meters were installed in September 2011 and projects that 65 million will be in place by 2015, reaching 54 percent of all residential customers.

It is sometimes suggested that the best transition to dynamic pricing is to make it optional so that customers who benefit from the rate structure will subscribe. There are problems with this approach. First, it creates an immediate revenue shortfall for the utility, requiring that rates increase for the non-time-of-use rate customers. Further, the transition to the rates is likely to be very slow. Most customers do not have an acute sense of their energy use; in jurisdictions where the rates have been optional, few customers have subscribed.

These considerations lead to the following recommendation: Instead of making time-of-use rates optional for all customers, regulators should make them mandatory for the largest 15 to 20 percent of residential customers and optional for others.

Requiring the rates for the largest customers will not likely trigger widespread consumer resistance to the rates; it will be seen as fair for the largest customers on the system. This strategy will address a relatively large fraction of electric sales while affecting a relatively small percentage of customers. The largest 20 percent of residential consumers will account for about 40 percent of electricity sales.

This approach will be an effective way to break the ice on dynamic pricing. Some research suggests that most customers prefer time-of-use rates after they have experience with them. Following the introduction of the rates for the largest customers, with some socialization occurring as a result, voluntary subscription by smaller customers will likely increase.

The largest electricity users tend to be wealthier and have larger houses; as such, they are most likely to be early purchasers of electric vehicles and solar generation, and have large air-conditioning loads. Wealthier customers are more likely to adopt home energy management systems. If smart meters are not already installed in an area, time-of-use rates applied to only the largest customers will easily justify selective installation of smart meters for the affected customers.

Concerns about inter-customer equity can be allayed. The largest residential customers are qualitatively different from the smallest customers. For example, time-of-use meters can more easily be justified for large customers. Further, utilities and their regulators have long made distinctions in the rate structures of small and large commercial customers, based on customer demand levels. This proposal is the equivalent of creating an additional residential customer class based on usage. Finally, this proposal can be defended as a large-scale pilot: A commission can hold open the possibility of extending the rates to all residential customers, depending on the experience with the largest customers.

When introducing dynamic pricing to the largest members of the residential class, regulators and utilities have several choices for cost allocation and rate design. To keep matters simple, regulators should set initial dynamic prices at a level that recovers the same aggregate revenues from the set of customers being moved to the rates. Rate design should be simple: fixed prices for fixed time periods, possibly varying by season. More sophisticated rate designs such as real-time pricing can be explored later if desired. A possible variation would be the addition of a critical-peak pricing element, under which prices would rise sharply during a few hours of the year when system peak is especially high.

Consumer-side benefits of the smart grid have been elusive, held back by the traditional residential rate designs used throughout the country. Energy managers and smart devices make little sense when prices do not signal utility system costs. The proposal outlined here will help utilities and their regulators break the cycle with smart prices, enabling the development of a smarter consumer energy market.




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