Fixed Bills: No Longer Farfetched
- Aug 3, 2020 4:01 pm GMTAug 3, 2020 3:51 pm GMT
- 1640 views
Netflix, the movie streaming service, has 60 million subscribers in the US, 183 million globally. During the pandemic lockdown, it added 16 million since people did not have much else to do. The vast majority pay a fixed monthly fee. They can watch all they want, binge on serials or whatever without any annoying commercial interruptions. They can watch old and new TV shows when they feel like it, not when they are shown on TV, plus many quality original movies – new content – produced by Netflix and not available elsewhere.
Amazon’s Prime has 112 million customers, up from 95 million in June 2018. Likewise, they pay a fixed annual fee for unlimited “free” deliveries – all they want, as many as they want, multiple deliveries a day if they want. They pay for the goods, but delivery is covered in the fixed price, currently around $119/yr in the US. In most major cities, they can expect same day deliveries. Amazon loves its Prime customers and apparently vice versa – some of whom literally buy everything on-line from Amazon. During the pandemic, Amazon hired an extra 175,000 workers to serve the increased demand.
Now a growing number of rate experts believe that the time has finally arrived for the utility industry to copy Netflix’s fixed subscription price model or perhaps a variation of Amazon’s Prime service – where the poles and wires portion of the service is fixed but you pay extra for the juice. The reason is that like Netflix, the cost of serving the average small electricity customer is mostly fixed. Once you make the necessary investment in the network and the content, in the case of Netflix, who cares how many shows a customer watches? The marginal cost of streaming another episode of a serial is simply not worth the bother. Let them watch as many as they want.
The telecommunication business reached the same conclusion some years ago. It no longer makes any sense to keep track of the minutes, the number of calls, e-mails, downloads or uploads. It is a fixed cost business with zero marginal costs – once you have made the investments in the network. Let them call all they want, and talk as long as they want.
The utilities are not that different. The poles and wires companies are – and have been – fixed cost from the start. It makes little sense to pay for their services based on a volumetric tariff. The maximum capacity of the network determines how much has to be recovered from those who use it. But even for the retailers, the bulk of the costs are fixed. And as more investments are made in renewable generation – which is capital-heavy but virtually zero marginal cost – the energy portion of the bill continues to diminish with the passage of time.
In a working paper, Peter Fox-Penner, Ryan Hledik and Andy Laubershane argue that rather than charging customers on the amount of electricity they consume each month, they should be charged a fixed monthly fee that is guaranteed to remain constant for a specified term, say a year. The authors point out that their FixedBill+ scheme
“… combines the simplicity of a conventional fixed bill with the flexibility benefits, environmental benefits, and cost savings from energy efficiency (EE) and demand response (DR) programs. Enrollment in FixedBill+ would be contingent on customer acceptance of certain EE and DR measures. FixedBill+ could be offered on an opt-in basis and the fixed bill amount would be individually tailored to each customer’s usage history.”
Asked to comment, Fox-Penner noted that the electricity pricing is more nuanced than that of Netflix or Amazon. He points out that (slightly edited),
“Society does not have a compelling interest in the amount of binging people do on Netflix or the number of times they buy on Amazon – well, maybe the latter. But there is a strong public interest in using energy efficiently because of the significant un-priced negative externalities associated with carbon emissions. This is why the plus in FixedBill+ is so important.”
For the scheme to work, it comes with certain strings attached. The authors explain that the
“ … FixedBill+ is an opportunity for electricity service providers in regulated and non-regulated markets to improve profit margins … affords electricity service providers the opportunity to charge a reasonable hedging premium … to accept the risks that are inherent in a year’s worth of energy supply and demand. The provider could also share in some of the cost savings achieved through EE and DR measures. The result is a win-win for consumers and service providers.”
As one might expect, there is always a catch.
“In exchange for the convenience and stability of a fixed bill, the consumer must permit the provider to reach beyond the electricity meter, into their home, and take limited control of a set of agreed-upon energy-related functions. For example, FixedBill+ customers might be required to allow their energy provider infrequent control of their home or business HVAC system, which can be achieved through occasional adjustment of a connected thermostat.”
What to do with the “all you can eat mentality” of customers who sign up with the intention of using all they can or want, perhaps wasting a lot of energy in the process or using it inefficiently? Again, there is a catch and the authors argue that, in fact, the opposite is likely to happen:
“… pricing in a FixedBill+ system will need to rise or fall based on average consumption over some period. For example, the FixedBill+ offer might peg a consumer’s fixed bill for the coming year to the price that it cost to serve that consumer over the preceding year”, adjusted for weather.
“In addition to restraining customers’ all-you-can- eat instincts, these periodic adjustments create an incentive for consumers to invest in long-term efficiency upgrades, such as new, more efficient appliances – for which buying decisions are more difficult for a third-party energy manager to influence. In fact, annual adjustments create an ideal opportunity for the provider and customer to motivate (and finance) major efficiency investments.”
In this context, how would you give appropriate incentives to retailers? According to Fox-Penner, Hledik and Laubershane, from the Boston University and The Brattle Group, respectively, their scheme,
“… means (that) all of the “upstream” links in the energy value chain – such as wholesale energy markets and distribution utilities – need to pass on truly cost- reflective signals to the retail level. It also means giving retail energy providers – whether they are utilities, competitive suppliers, or other third parties – a stake in the cost savings.”
Are the authors aware of any pilots where such a scheme was successfully implemented? They say,
“A variation of the FixedBill+ concept that combines hourly subscription pricing with load flexibility incentives has been piloted in California by Southern California Edison, TeMix, and Universal Devices, Inc. through a California Energy Commission-funded demonstration project.”
The authors claim that this trial (URL at the end) demonstrated that the concept is sound, practical and can be applied elsewhere.
But why now? What makes fixed billing attractive today that was not the case in the past? Fox-Penner, Hledik and Laubershane point out that 3 key conditions must be in place for their scheme to work, and they say all 3 currently apply,
- We have smart meters – certainly in states such as California;
- We have smart devices – such as smart thermostats; and
- We have smart, automated systems and software.
The authors provide an illustrative example in the white paper that suggests their FixedBill+ is win-win and saves money compared to a simple fixed bill scheme. The estimated savings are not huge, less than $100 per annum (Table above), but given millions of customers, the numbers add up. The details are spelled out in the appendix to the white paper.
Skeptical as always, your editor, asked Ryan Hledik, a principal at the Brattle Group in San Francisco, how can the proposed scheme deliver benefits for customers while enhancing the retailers’ margins at the same time? Where does the purported savings come from? Hledik explained that the FixedBill+ comes with strings attached to make it win-win:
“… the customer would need to accept certain DR or EE measures to qualify for the fixed bill offer. So, the savings would be system cost savings resulting from those DR or EE measures. The utility and the customer would share the cost savings, hence the win-win. For the example presented in the paper, the cost savings are such that the customer can be offered a bill that is lower than his/her standard bill.”
Moreover, the scheme
“… packages load flexibility with something customers want – a totally predictable, stable bill. It has the potential to improve the value proposition to the customer, relative to just asking them to participate in a regular DR program.”
Regardless of the specifics, the basic idea has merits and the time is certainly ripe for the industry – and its regulators – to step out of the proverbial box. And as both existing and new retailers, aggregators and other intermediaries enter the field with new service and business models the days of the volumetric flat tariffs may be numbered.
Photo Credit: Fereidoon P. Sioshansi,
According to Ahmad Faruqui, also a principal at the Brattle Group, solar leasing programs can be defined as a type of fixed bill product that has been around for a while. In this case, solar customers pay a fixed bill to the solar leasing company that lowers their overall electricity bill. The “free” electricity from the sun replaces some of the kWhs previously bought from the grid – depending on the size of the investment.
Faruqui says that “… shared EE savings programs – the type offered by energy service companies or ESCOs – are another example. They are typically directed at C&I customers. Recall ENRON energy services signing $2 billion contracts with companies such as Corning Glass to meet all their energy service needs for a decade and the $2 billion number was lower than their otherwise projected energy bill. ENRON would take over the process and upgrade the client’s energy intensive equipment to generate the savings.” Enron, of course, imploded amidst scandals, but the same model is used today by the likes of Enel X and others who take a portion of the savings from their efforts.
Faruqui, however, notes that the regulators, at least in the US, are not quite ready to move away from the status quo. He points to a proposal by the Puget Sound Energy for an EE leasing program for residential customers that did not get commission approval, but says the basic idea was sound. Perhaps the time has arrived to try again.
UK’s Ovo Energy has 2 such offerings, a 12-month fixed rate option called Better Energy and a 2-year fixed energy plan – which according to its website is its most popular plan. The plans do not have a true-up at the end of the contract period but have a reset provision, similar to a variable rate home loan mortgage.
According to Lynne Gallagher, the interim CEO of Energy Consumers Australia (ECA), retailers can offer fixed bills in the UK where they appear to have more certainty over the volatility in the underlying wholesale and network costs. “This could be attractive for some customers in Australia (because they value predictability) and there has been a successful trial in Western Australia, run by the integrated utility Horizon Power. But customer acceptability in Australia depends very much on whether consumers are inconvenienced or have to go without air-conditioning on a hot day on a regular basis, to stay within a plan they can afford. When these plans come with the simple option of upgrading easily when the consumer runs over their plan limit (as data plans on cell phones used to do), it may attract more interest.”
Mike Swanston, head of the Customer Advocate, a customer advocacy business in Brisbane, QLD, reports that a few retailers in Australia tried fixed bill schemes a couple of years ago but says the experiments “Did not go down well. The big gentailer Origin Energy, for example, offered a Predictable Plan for a while and there was some take up, with many customers expecting it to look a lot like a mobile phone plan. But given the volatility of the prices in the market, Origin experienced the rude shock of a ‘true up’ and the necessity to reset the offer amount after 1 year. Other retailers, who were carrying the overs and unders of the network component of the bill also found that the scheme ‘ate into their margin’ which were razor thin to begin with.”
The real test, according to Swanson is whether the retailer can absorb the risk of price volatility in their fixed price offerings, “perhaps one day.” He says that AGL’s smoothing bill option still runs, while Origin’s Predictable Plan is defunct (see URLs below).