How Effective are Time-of-Use Rates? Hint: Not Very
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- May 27, 2020 9:41 pm GMTMay 27, 2020 9:26 pm GMT
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Time-of-use rates are fast becoming a popular tool for utilities to deal with an uncertain future in electric markets. Faced with declining demand and an irrevocable shift towards renewable energy, more utilities across the country are hopping onto the TOU bandwagon or exploring their use to better their revenue prospects and grid functioning.
California utilities began offering opt-out and opt-in rates to customers last year. This October onwards, all new customers in the state will default to TOU rates. Virginia also recently gave the go-ahead to Dominion Energy to introduce TOU rates in its territories.
It is easy to see the attraction of flexible rates. Dynamic pricing will boost the bottom line at investor-owned utilities even as it reduces their generation costs by shifting peak loads away from expensive non-renewable energy sources. For utility customers, TOU rates promise reduced electric bills by shifting energy consumption to off-peak hours.
But their neat storyline, in its current form, has several loose ends. Available research points to a mixed record of success for TOU rates in pilots at utilities. Studies conducted over the years have found that the grid’s compositional reality makes it difficult to deliver on the promises of renewable energy integration and reduced rates. TOU critics also claim that such rates allow utilities to charge for the same infrastructure twice. Finally, TOU rates might also end up having an adverse effect on climate change and society.
An Undesirable Load Shift?
One of the perceived benefits of TOU rates is load shifting. By moving grid loads away from peak demand, utilities can better manage and distribute their power requirements. Load shifting also has the potential to reduce overall power consumption and provide a pathway to boost renewable energy use in the grid.
But load shifts can also create more time periods that resemble peak demand. A recent study conducted at the University of Texas in Austin found that dynamic pricing creates additional residential peaks. “They (dynamic pricing programs) can actually increase the magnitude of the residential peak load by incentivizing customers to concentrate appliance usage within the low-price hours,” the study states. Arkasama Bandopadhyay, one the study’s authors, told me via email that the second residential peak could actually be higher than the original peak, even though it occurs at a different time.
In states like Texas, where airconditioning use skyrockets during the summer, residential peaks can account for as much as fifty percent of overall demand, Bandopadhyay pointed out. The same study also found that ramp rates for time-use rates are also higher as compared to constant rate cases, meaning utilities will need to deploy energy sources that can be dispatched quickly.
One could argue that this state of affairs sets up the perfect use case for renewable energy. Indeed, residential off-peak times at Southern California Edison (SCE) are designed to promote energy consumption in the morning and afternoon, when the sun is shining. Texas has an arsenal of wind power that can be deployed into action at night, during off-peak hours.
What to make of Dominion Energy’s off-peak hours, though? They will occur after 10 pm during summer months. This means there will be a surge in demand after that time. The utility’s energy mix in Virginia is heavily skewed towards natural gas and is expected to increase in the future after a spate of investments in recent years. It is reportedly setting up an offshore wind “empire” but that future is some ways off, considering that it has set itself a target of achieving only 15% renewables in its grid by 2025. Virginia has also not provided a specific timeline for removing fossil fuel generation from its energy mix. Meanwhile, the TOU hours ensure that fossil fuel use is not only perpetuated but also encouraged.
The Promise of Load and Bill Reductions
Time-of-Use rates are marketed as tools to reduce overall energy consumption in households. Concentrating energy use in off-peak hours can reduce bills and grid loads.
But academic research relating to this topic paints an uneven picture. In this picture, electric consumption may increase or decrease due to TOU rates and bill reductions are neither widespread nor uniform.
Some studies have indicated peak load reductions of as much as 50% and a corresponding 10% decrease in overall energy consumptions for grid systems that utilize TOU rates. But the UT Austin study found that overall household energy consumption remained the same even as load shifted away from peak hours. “Our analysis challenges the frequently expressed notion that dynamic prices would be “cure-all” solutions to high peak demand issues in the electricity sector,” the study concludes.
Lower electric bills are also doubtful. If the UT Austin study is correct, then utility customers should be able to reduce their electric bills by altering their energy habits to off-peak hours. A 2017 CPUC testimony by attorney Marcel Hawiger from The Utility Reform Network (TURN) contradicts this theory. It contains the results of a pilot TOU rate case study conducted in 2012 for customers of SCE and PG&E. There was no bill change for 40% to 50% of SCE customers and 50% of PG&E customers. In fact, as many as 40% of customers witnessed bill increases. From the overall sample, only 10% to 15% had reduced bills.
A decrease in bill amounts is also contingent on the utility’s rate design and willingness to pass on benefits to customers. When Arizona Public Service, a pioneer in TOU rates, presented its General Rate Case (GRC) in 2016, it included a mandatory demand charge and higher basic service charge for certain residential customers. This is just one example of how the contents of an electric bill might change.
It must be noted that Virginia’s Dominion does not have a particularly flattering past record in this instance. The utility has made free use of rate adjustment clauses (RACs) to tack additional line items onto consumer bills in the past. The current introduction of TOU rates is also accompanied with the costly exercise of deployment and installation of smart meters in Dominion’s service area and marketing and education budgets regarding TOU. The buildup of costs, especially the latter, makes it uncertain whether Dominion’s customers will witness a reduction in their overall bills.
The TOU Effect on Low-Income Customers
All of the points mentioned above stress the need for an optimal rate design that provides customers with an incentive to shift peak loads and results in cost and load reductions. But electric customers are a heterogeneous mix with multiple income levels. For customers with high or varying loads, a time-of-use rate might provide sufficient reductions. But the time-of-use rate roulette penalizes low-income customers. A 2017 study by the American Council for an Energy-Efficient Economy found that low-income customers were disproportionately affected by rate designs based on demand charges. This was primarily because they tend to use lower amounts of electricity and a flatter load profile with less discretionary energy usage, limiting their ability to respond to changes in electric charges. Unless a proper price signal is sent to customers through rate design, TOU can also be counterproductive to energy efficiency because low rates could reduce customer motivation to participate in utility energy efficiency programs, the study noted.