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The Five “Immortal Objections” to Time-of-Use Rates

image credit: https://www.oeb.ca/rates-and-your-bill/electricity-rates/managing-costs-time-use-rates

While there is a mountain of empirical evidence that customers accept and respond to TOU rates, skeptics continue to assert the contrary. That’s the primary reason why only 4% of the customers in the US are on TOU rates while nearly 80% of them are on smart meters.

Recently, a very respected and seasoned regulator wrote to me that TOU rates are “an exercise in modifying human behavior with little chance of success. Even if successful, they will not yield any tangible reduction in electricity costs.”

I have been keeping track of frequently voiced objections to TOU rates since I joined the EPRI Rate Design Study in 1979. The first one used to be the lack of metering technology. That one is no longer in my diary. Here are the five that are in my diary. They have endured for so long that I call them Immortal Objections.

 

Objection 1: While TOU rates might reduce peak load, they will not lower customer bills.

Response 1: Well-designed TOU rates will yield savings to customers even in the short term as customer reduce peak loads and shift their peak usage to off-peak periods. In the long run, the savings will be even greater as customers install new digital devices such as smart thermostats. Additionally, as peak demands are lowered, there will be less need to invest in peaking capacity and that will further reduce costs to customers over the long run.

 

Objection 2: Lower peak demand will not lower transmission and distribution costs since they do not depend on load.  

Response 2: Congestion is rising on distribution circuits and that can be relieved by targeted TOU pricing. In addition, TOU pricing can lower the need for T&D investments in the long run. Most ISOs/RTO’s would welcome the demand response created by TOU rates. 

 

Objection 3: On-going pilots with TOU rates and other time-varying rates show minimal customer reaction to price signals in changing their load profiles.   

Objection 3: There is a world of contrary evidence on this topic. Customers do respond to TOU rates and lower peak demands while shifting some of that load to off-peak periods.

 

Objection 4: Residential customers are busy with seeing off kids to school in the morning, commuting to work, returning home to have dinner with the family and then making time to watch TV and perhaps do the laundry. Customers have little time or interest in becoming a home energy manager. They just want the lights to come on when they flip the bill and get an affordable bill at the end of the month.

Response 4: While that is true of the vast majority of customers, sound scientific research has shown that, on average, TOU pricing motivates customers to modify their lifestyle and save money. In OGE’s case, they have signed up a fifth of their customers onto dynamic pricing, often enabled with a smart thermostat. On average, these customers are reducing their peak demand by 40% and lowering their bills by 20%. SMUD deployed default TOU rates without any hitch last year. Fort Collins in Colorado instituted mandatory TOU pricing last year. Consumers Energy will begin deploying default TOU rates in June. Xcel Energy in Colorado has filed for deploying default TOU rates this year. SDGE has already done that and PG&E and SCE will begin deploying TOU rates from October onwards.

 

Objection 5: In the developing world, people eke out a meager existence, living from hand to mouth. They are so focused on making ends meet that they don’t have time to focus on responding to TOU rates.

Response 5: Even in the developing world, people are seeking to lower their energy bills and modify their lifestyle to improve the climate of the planet. While we don’t have a lot of evidence from developing countries on the efficacy of TOU rates, there is no reason to think they won’t work there.

Ahmad Faruqui's picture

Thank Ahmad for the Post!

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Discussions

Matt Chester's picture
Matt Chester on Apr 27, 2020 4:31 pm GMT

Objection 3: On-going pilots with TOU rates and other time-varying rates show minimal customer reaction to price signals in changing their load profiles.   

Objection 3: There is a world of contrary evidence on this topic. Customers do respond to TOU rates and lower peak demands while shifting some of that load to off-peak periods.

With this one, I have to wonder-- what's the problem with having people who do react to price signals being the one to reap the rewards? People aren't forced into TOU rates against their will, so is the opposition just that the utility resources are better spent on other programs? Because the investment is (relatively speaking) not immense given how many customers have smart meters anyway

Eric Van Orden's picture
Eric Van Orden on Apr 29, 2020 3:36 pm GMT

Re: Objection and Response #3 and #4

While it might be challenging to compare apples to oranges rate designs and market conditions from different utilities over time. I'd be curious to know if the customer reaction is increasing over time. Not just from individual consumer understanding of the bill impact from paying attention to the price signals from one year to the next (which was explored in customer surveys when I was involved with managing the Xcel Energy Colorado pilot) . But, a longer-term view, over many years, based on availability of technology to help change usage when at home and away. In other words, while I generally disagree with the sentiment of Objection #4. I would "buy" the argument a little more in the days before smart thermostats. But, now there is the ability to schedule and control many major appliances. To me, its a chicken and an egg: If utilities bring the rates, home energy management (HEM) technology will help the consumers. The good news is that Objection #3 has been disproven over and over again. And, utilities are proposing/implementing time-of-use rates, not just as pilots. 

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