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TOU Rates in California: What will we learn?

Chris Chen's picture
Principal C2 Consulting

Retired as SDG&E's strategy development manager where I identified and evaluated strategic business initiatives and new business models to drive revenue growth. Now working as an independent...

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  • Jan 4, 2019

This item is part of the Special Issue - 2019-01 - Predictions & Trends, click here for more

California often acts as the guinea pig or test case for the rest of the nation. Will TOU rates continue the tradition? TOU will become the default residential rate for the state’s 3 IOUs in March of 2019 (customers will be able to opt out of the TOU rate if they wish for the first year). Will TOU rates be the “killer app” that drives residential distributed energy resource (DER) adoption?

The implementation of residential TOU rates in California in 2019 will enhance the appreciation of the term, “Customer Grid” because customers will be more engaged with their energy use. While winter rates will not vary enough to warrant increased customer attention, summer rates will vary by over $.30/kWh.  TOU pilots and studies have shown customers will change their usage patterns given economic incentive if the changes on their part are relatively easy.  So, how will TOU impact DERs such as solar, storage and energy management systems (EMS)?

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In CA, solar customers are already on TOU rates. There is a key change in 2019 as the peak period moves to later in the day (4-9 pm), meaning all peak solar generation will be during off peak hours, with only 2-3 hours of low level generation during peak hours for most solar customers. While this does reduce the positive business case for solar, the decreasing cost curve for solar should offset some of this impact, with little impact to adoption rates.

EMS will make it easier for customers to shift loads from peak to off peak periods.  However, given the predictable nature of TOU rates, smart thermostats and smart plugs or even low tech timers may offer enough functionality to allow customers to respond adequately. 

Home energy storage (HES) will be more attractive and If home energy storage vendors such as Hygge Power, Orison, Sonnen, Tesla and others can bring storage to market at a positive business case for consumers, HES would be the easiest and most customer friendly way to enable customers to maintain or even reduce their energy bills.  However, Sonnen, Tesla, and others have been selling to high end early adopters and the 2019 TOU rates won’t impact their addressable markets much, if at all.  New entrants such as Hygge and Orison are targeting price points which are more appealing to mass market consumers. 

Both Orison and Hygge are targeting around $1k/kWh for their systems, with no installation costs. Even at that price point, the payback on an HES would be 21.5 years (assuming the system can arbitrage its capacity once per day) based solely on price arbitrage benefits (2019 summer rates are not published, this analysis assumes the differential in 2019 will be similar to 2018).  While both companies believe prices will come down with market adoption, near-term the greater value for HES may be in DR programs.  In my personal experience with the OhmConnect program last summer, I was paid an average of $9.70/kwh which added up to over $200 (I use less than 350 kWh/month).  Their payment formula is obviously not sustainable, but there are opportunities to monetize storage through DR programs which would substantially shorten the payback period for HES. While there are also reliability benefits from HES, there is a trade-off between price arbitrage and reliability.  So, while the business case for HES will be better with TOU rates, it will not be good enough to drive mass adoption without additional utility and DR programs.  Utilities will need to create benefit streams using customer DER and compensate customers through rebates or discounts to help make the case for storage.

TOU rates are not an immediate game changer for DER.  They are a stepping stone which makes people aware of how the cost of energy changes during the day and what can be done to mitigate those impacts, paving the way for more dynamic rates. Utilities can benefit most from TOU rates by maximizing the customer education/acceptance opportunities from introducing them to energy management tools such as EMS and HES.  Offering rebates or discounts on residential storage units and EMS will provide a means for customers to respond to TOU rates and will also boost customer satisfaction. 

While the TOU aspect of SDG&E rates may not be the killer app for DER, the overall level of rates will open eyes.  More customers will have a positive business case for solar (not from TOU, but from overall rate levels) which should drive higher adoption.  California utilities have been leaders in utility innovation and change and they may be the first to test the impacts of unsustainably high electric rates.

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