Electricity Rates Are Sorely Outdated.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

February 8, 2017
Julie McNamara
Senior Energy Analyst

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: