Electricity Rates Are Sorely Outdated. Let’s Give them an Upgrade.

, Senior Energy analyst | February 8, 2017, 3:50 pm EDT
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Last month, to great and enthusiastic email fanfare, my utility presented me with a redesigned electricity bill. One meant to help me better understand the various costs and components that make up the final amount due. In an entirely relatable manner, my household met such news with chortles of joy. What a day!

But the utility’s trick? Colors and a stacked bar chart. They were nice colors, and yet…it proved a letdown. If our electricity bills contained just a bit more of the right information, we could collectively be saving billions of dollars a year, reducing air pollution all around us, and helping to bring ever more renewables online—a true step forward toward our vision of the modern grid. Now tell me that’s not a neat trick.

Shining a light on system costs

So what’s the right information, and how do we get it? Time-varying electricity rates, or rates that go up and down to let us know when it’s costlier and less efficient to be using electricity, and when it’s cheaper and cleaner.

As my colleagues and I explain in a new issue brief Flipping the Switch for a Cleaner Grid, with that extra information, we can make more informed decisions about how and when to use electricity, and save money and clean our air in the process.

Right now, most of us get charged the same flat rate for electricity no matter when we use it. But in reality, the actual cost to the system varies widely over times of day, days of week, and even seasons. These fluctuations in price are driven in large part by the need to meet ever-changing customer demand.

In particular, though we can’t see it with flat rates, our last bits of ill-timed load can mean sky-high prices as the system powers up inefficient plants, which we pay to build and maintain even though we use them for just a small amount of time each year. Talk about a wasteful design. By using price signals to mobilize flexible demand, time-varying rates flip this operations paradigm on its head.

Rates as guides

Time-varying rates use price signals to encourage customers to use electricity at some times and not others. Credit: UCS.

Time-varying rates are designed to encourage customers to alter when and how they use electricity. Different structures go about it in different ways to target different points of inefficiency. The figure on the right shows three of the most common forms: time-of-use (TOU) rates, critical peak pricing (CPP), and real-time pricing.

  • TOU rates (top right) target daily repeating patterns of peak and off-peak periods,
  • CPP rates (middle right) focus on just those few hours a few days a year when electricity use is at its very highest, and
  • Real-time pricing (bottom right) approximates the actual system cost in 5-minute to 1-hour intervals, which allows interested customers to best take advantage of the dynamic up-and-down swings of prices.

Time-based rates are not new; in particular, TOU and CPP rates have been around for a long time, especially for commercial and industrial electricity customers. However, it’s only been with the recent deployment of tens of millions of smart meters over the last few years that wide-scale, administratively low-cost programs have been more readily attainable at the residential level.

Still, except for a few places where state-wide implementation of time-varying rates is on the table (see California and Massachusetts, for example), most utilities continue to see these rates as a boutique approach.

Put me in, Coach!

Despite their simplicity, time-varying rates can create significant outcomes for the grid by shepherding lots of individuals into taking small actions at the same time—in aggregate, all these little contributions can add up to major effects. Take a look at the below example out of New England to get a sense:

New Englanders move as one when the Patriots are in the Super Bowl–namely, to in front of the TV at start time, and into the kitchen at the half. Credit: ISO-NE.

The left panel shows the load curve, or total electricity demand, for a regular winter Sunday in 2012; the right shows Super Bowl Sunday of that year, when New England played New York. Notice the narrowing of the peak and the spikes on the far right of the Super Bowl curve around 6:30, 8, and 10 p.m.? They correspond with the start, half-time, and end of game, respectively.

Now the half-time spike might look small, but it’s actually in the range of a whole natural gas generator needing to come online. Time-varying rates provide a mechanism for coordinating that type of chip-and-dip-refill fervor in our everyday lives.

In practice, the options for shifting demand run from simple to high-tech. For example, doing something like pressing the “delay start” button on a dishwasher (or just waiting to press start) is an easy, no-upgrades-required fix. On the other hand, some forms of flexibility require a technology intervention before they can be used, like turning water heater tanks—commonly a large residential electricity load—into energy storage devices that heat water during off-peak periods for use whenever needed. Because these resources can be so valuable to the system overall, it can be worth it for utilities to sponsor some of the upgrades themselves.

Excitingly, the recent mass deployment of smart meters means that many new opportunities for shifting electricity use and responding to price signals are beginning to be explored. In particular, innovation around third-party aggregators controlling electricity-dependent devices—from air conditioners to electric vehicles, in ways that are imperceptible to users—could mean even bigger opportunities for savings.

Still, it’s important to look back at that Super Bowl example to remember that it doesn’t actually take much to make a big difference to the grid, and that what we can do today is already a lot.

Fast-tracking our clean energy future

When we talk about the benefits of flexible demand—including those resulting from time-varying rates—we usually focus on the immediate (and persistent) cost savings that occur from not bringing those last costly power plants online. But such benefits are only the beginning of the story. This is especially the case when we consider the needs our grid will have as we race toward a clean energy future supplied by vast amounts of renewable resources.

Time-varying rates can help support a brighter, cleaner, more joyful wind-powered world. Credit: UCS.

Because wind and solar power production is variable, we need ways to fill the gaps when the wind eases or a cloud passes. Additionally, as more and more solar power comes online, the grid can start to run into challenges when the sun sets; solar resources decrease electricity production right around when people are returning home for the night and starting to use lots of electricity.

To manage this variation, we’ve traditionally relied on fossil-fueled power plants. But that reliance comes with a number of strings attached, and often at the expense of renewables, as my colleagues in California have detailed.

Enter flexible demand. If we can guide electricity use to times when our renewable resources are most abundant—and away from when they aren’t—we can take a vitally important step forward on the path to a clean energy future, and make the many and varied goals of our modern, clean grid easier to reach.

Critically, to ensure that access to these benefits is equitable and widespread, it takes a well-designed, well-considered program, as we lay out in our issue brief and as our peers have been diligently monitoring in California.

Think time-varying rates are neat? Take a peek at all the other wonders of an upgraded grid

Here at UCS, we’re working hard to make sure the electricity grid is ready and able to bolster our vision of a clean energy future. Time-varying rates, and their ability to unleash the incredible power of flexible demand, are but one part of this vision. In the time to come, my colleagues and I will be sharing exactly how we see upgrades to the grid enabling this pursuit; for now, though, allow our new video calling for an upgraded grid to brightly shine a light:

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  • Richard Mann

    News from Ontario, Canada. The problem is Wind and Solar are not reducing C02 and our government
    will not admit this costly failure. Ontario’s professional Engineers, those tasked with generation, transmission and billing, have reported the problem. our government continues to build more wind and solar.

    Reference: “Ontario’s Electricity Dilemma – Achieving Low Emissions at Reasonable Electricity Rates”. Ontario Society of Professional Engineers (OSPE). April 2015.
    (Archived at: http://c.ymcdn.com/sites/www.ospe.on.ca/resource/resmgr/DOC_advocy//2015_Presentation_Elec_Dilem.pdf)

    Page 15 of 23. “Why Will Emissions Double as We Add Wind and Solar Plants ?”

    – Wind and Solar require flexible backup generation.

    – Nuclear is too inflexible to backup renewables without expensive engineering changes to the reactors.

    – Flexible electric storage is too expensive at the moment.

    – Consequently natural gas provides the backup for wind and solar in North America.

    – When you add wind and solar you are actually forced to reduce nuclear generation to make room for more natural gas generation to provide flexible backup.

    – Ontario currently produces electricity at less than 40 grams of CO2 emissions/kWh.

    – Wind and solar with natural gas backup produces electricity at about 200 grams of CO2 emissions/kWh. Therefore adding wind and solar to Ontario’s grid drives CO2 emissions higher. From 2016 to 2032 as Ontario phases out nuclear capacity to make room for wind and solar, CO2 emissions will double (2013 LTEP data).

    – In Ontario, with limited economic hydro and expensive storage, it is mathematically impossible to achieve low CO2 emissions at reasonable electricity prices without nuclear generation.

  • Bruce Danckwerts

    Hi Julie,
    You don’t mention frequency related switching/pricing, which to me is the way to go, especially as you get more renewables on line. Your Super Bowl curve only looks at the demand side – what happens if it happens to be a super sunny day, with plenty of wind in the right places and you actually have a SURPLUS of power, despite the half time peaks?
    If meters and appliances were just fitted with frequency monitoring technology, you could be charged more when the frequency is low (high demand) and less when frequency is high (low demand). Appliances could have two simple dials incorporated into the plug. The first indicates the priority (high to low) so your washing machine you set to low (so it will only switch on when demand is low/frequency is high). The second sets the “latch” so that, if all the washing machines in your grid switch on at a similar time and the frequency of the grid now drops, the washing machine will NOT switch off, until that ‘latched time” has elapsed – allowing it to complete the washing cycle. This has another very important benefit in that it would prevent telegraphing between the grid and all the loads.

    But readers might think that the frequency of the grid is FIXED. Well, it isn’t. Check out http://www.dynamicdemand.co.uk/grid.htm# to see what is happening in real time on the UK’s grid. Something similar will be happening on a grid near you!

    As I said, with an increase in solar and wind generation, frequency pricing is the more appropriate solution.

    Yours in the cause,
    Bruce Danckwerts,

    • Julie McNamara

      Thanks for your thoughtful reply, Bruce. You’re right about our needing to be able to adjust to variations in renewable supply; we see flexible demand as being well-suited to help with that task, too, and it’s one of the primary reasons we are pushing for the mobilization of flexible demand. Sufficient attention to frequency response is also critical, but I don’t think we see it as an either/or, especially given recent research into the ability of renewables and other integrated grid resources like storage and electric vehicles to contribute.

      • Bruce Danckwerts

        Hi Julie,

        Firstly I really regret having to go through Disqus – not your fault, but they keep sending other Disqus junk mail which is SO ANNOYING!

        Secondly, the difference between your time of day rates and my frequency related one, is that your time of day rates have to be set in advance, based on predicted DEMAND. The frequency related system is MUCH more responsive to changing conditions. There would be many situations when your time of day tariff would be charging consumers a high rate (because of peak demand) whereas in fact, there was plenty of power because of an unusually sunny evening , with a steady breeze.
        Also, if we were all on frequency sensitive metering (and switching of loads) and there was a major generator failure, the whole grid would slow down (49Hz in UK and Africa, 59Hz in US and Europe) and all non-essential loads would switch off automatically – regardless of the time of day.

        I doubt that the cost of metering would be any different under the two systems. Frequency sensitive would have the added cost of the frequency sensitive switches, but I imagine that would be no more than a few dollars on appliances that are worth $50 to $500, so quite a small percentage – of purchase cost.

        The BIG unanswered question is how unstable might the grid become if all these frequency switches are switching on and off – telegraphing (hunting) as the grid speeds up, loads switch on, so grid slows down, loads switch off, so grid speeds up……..The latch (which prevents the washing machine from switching off, even if the grid slows down badly) would PARTLY offset this effect. Another refinement might be an ON-delay built into every frequency switch so that, once your low priority water pump, geyser, fridge, deep-freeze, even air-conditioner has switched off (because of low frequency, high demand) they cannot switch on again for at least 10 minutes.

        I worry that changing to Time of Day Tariffs (as your article proposed) will prove to be of short term benefit. If we are going to make changes, I believe we should go as far as our ideas and our technology can take us (as of 2017) so that we do not need to make further changes, hopefully for a very long time.

        Yours in the cause,