Can utilities cut peak demand with price signals that give customers more control?

Editorial note: This article has been updated with information from Tucson Electric Power, Southern California Edison and San Diego Gas & Electric.

Electricity consumption in the United States hits its highest levels in a mere sliver of time — one percent of all the hours of the year. But those kilowatt-hours (kWh) account for about 8-12 percent of system peak demand.

These figures come from an article on dynamic pricing from the Brattle Group, which goes on to say that “even a 5-percent reduction in peak demand in the United States could lower consumer energy costs by at least $3 billion a year.”

Which is why new rate designs and new forms of demand management have become a central part of the U.S. energy transition — both with the potential to benefit customers and the grid.

Rate designs based on dynamic pricing — also called variable pricing — aim to capture the real-time costs of producing and delivering electricity based on time of day and time of year.

As noted in the Smart Electric Power Alliance (SEPA) 2017 Utility Demand Response Market Snapshot, a number of utilities are rolling out demand response programs with dynamic rates as a way for customers  to have more control over their energy use, and more incentives to participate in such programs.

Coinciding with the rise of other distributed energy resources, dynamic pricing options are part of the current evolution of demand response beyond traditional forms of utility-controlled load management via air conditioners and water heaters. These rates represent new tools for utilities and customers to make the grid more efficient while potentially cutting monthly electric bills.

For example, in Illinois, where Ameren Illinois and Commonwealth Edison (ComEd) offer voluntary, opt-in real-time pricing to residential customers, a new study by the Citizens Utility Board and the Environmental Defense Fund found that 97 percent of ComEd customers would have saved money by participating in the program, even without changing their electricity use. Even greater savings might be possible if customers actively chose to shift their electricity use in response to rate-based incentives, the study says.

Based on the data gathered for the Utility Demand Response Market Snapshot, we wanted to find out how many utilities have created new rates that provide customers with options for some degree of control over how and when they participate in demand response programs. We also wanted to explore what forms of dynamic pricing utilities are using.

For this study, we worked with RateAcuity, a data service that monitors U.S. electric utility rates. We began with a relatively small sample of 95 utilities — mostly investor-owned, but also including some municipals and electric cooperatives — that had been on SEPA’s 2017 Top 10 lists for solar, storage and demand response. Our goal was to see how changes in generation mix and demand management correlate with how utilities design new rates.

In addition to high rates of distributed clean energy generation, the 95 utilities in our sample also had rate classes for utility-controlled demand response programs aimed at peak load management. As shown in the figure below, out of this sample, 82 have rolled out programs and rates allowing customers to choose either renewable or distributed energy generation — such as net metering, green tariffs and community solar — or customer-controlled demand management, or both.

Our most significant finding, however, is that 74 utilities have rates for both distributed energy generation and demand management. In other words, 78 percent of utilities in this group offer rate and program combinations that allow customers a wide degree of control in choosing the source of their energy as well as when and how they will use it.

Benefits of some rate features that allow high level of customer-control while curbing energy usage during peak times:

• Quick launch when needed: Some temporal rates discourage electricity use during times of maximum demand, such as the hottest days of summer, by imposing significant surcharges for electricity used during specific hours on peak demand days, in exchange for lower rates at non-peak times. Southern California Edison, for example, has instituted a program called, Critical Peak Pricing, a rate option that is more than twelves times higher than the regular summer rate on those peak demand days. Customers are notified a day ahead of time that the peak period rates will be in effect.
• Enticing bill credit/savings: Utilities may offer peak time programs to reward customers for frequent and regular lower energy use during peak times by giving them a credit on their bill or lowered, off-peak energy charges. San Diego Gas & Electric offers customers a credit of $0.75 per kWh or more for reducing consumption below a specific level during a peak event. When compared to the Residential Time of Use schedule, with summer on-peak rates of more than $0.40 per kWh, this credit can provide a substantial incentive for customers enrolled in the program to reduce use during a peak time rebate event. This program is especially helpful for residential customers who can reduce energy usage without sacrificing comfort, for example, by turning up the thermostat when they leave for work. Again, customers are notified in advance so they can plan to reduce energy consumption enough to qualify for a credit.
• New grounds for customer engagement: Utilities can leverage opportunities to engage and educate customers when offering multiple or new rate plans that allow for different energy usage preferences. Tucson Electric Power (TEP) not only offers its residential and small commercial customers a base rate, it also offers a Peak Demand, a Time of Use, as well as a combination rate plan called the Demand Time of Use Plan, which combines the lowest off-peak usage rates with higher on-peak rates and a demand charge. Of all, the Demand Time of Use Plan would require the highest level of energy cost and usage education from customers in order to take advantage of this plan. Customers who choose this rate can take advantage of an extremely low cost for off-peak energy — up to a whopping 40 percent reduction from the utility’s basic energy charge per kWh. However, TEP advises customers that their monthly bills could increase if they do not adjust demand accordingly.

Whether customers will opt in to these programs in significant numbers remains to be seen. Outreach and education will be a key ingredient for success to ensure customers understand the potential benefits as well as the disadvantages dynamically priced demand response programs may offer.

Caveats here include ensuring that customer education materials are accessible and easy to understand, as well as understanding that overall enrollment numbers may not be the most accurate measure of success, since many of these programs allow customers to opt out of specific peak time events.

What is clear is that demand response will continue to evolve as a powerful and effective resource for load management and the integration of distributed energy resources. And dynamic pricing, while still in the formative, experimental phase, is here to stay.

Stephanie Fetchen is the Co-President of KFR Services, the parent company of RateAcuity. She developed and champions the data quality program that has enabled accuracy exceeding 99.98% for product delivered to customers. She can be reached at [email protected].

Daisy Chung is Research Manager at SEPA. She focuses on utility deployment at the distribution level, with specialty in asset management and operations & maintenance. She can be reached at [email protected].