Creativity in Rate Design as an Enabler for Expanded Distributed Resources

September 2014

Policy makers and utility company executives have put out a call for more sophisticated rate designs to address the growing disconnect between the evolving grid and traditional residential and commercial rate structures. With the growing adoption of Distributed Energy Resources (DERs), regulators and utility companies are faced with taking a more creative approach to electricity pricing.

Customers who install, for example, roof-top solar panels to serve a portion or all of their electric usage become “partial requirements customers.” What is not fully appreciated is that those same customers, by remaining connected to the grid to meet their additional energy needs, continue to be served by the same generation, transmission, distribution, and customer service resources as other customers. Traditional pricing structures, with their “net metering” provisions, do not fully account for the cost of serving partial requirements customers who choose to deploy DERs. Proponents of rate design changes contend that serving customers who have deployed DERs under current rates shifts the cost of service to other customers and is unreasonably discriminatory.

In a report published by the Rocky Mountain Institute, aligning the financial interests of both customers and utility customers will require a transition from volumetric block rates to more granular pricing. Pricing adjustments that more accurately account for the costs and benefits of DERs must be considered. Several utility executives have also noted that because of absent rate design changes, non-DER customers will bear a larger percentage of the overall cost to serve in the future.

Key Details

  • Electric utilities continue to experience an erosion of electricity purchases even though total electricity consumption remains relatively stable.
  • The use of DERs replaces electricity once purchased from the utility, resulting in DER customers paying less for their share of the utilities’ fixed costs.
  • Utility rate structures are incompatible with the widespread adoption of DERs, most notably in current net metering tariffs.
  • The industry has seen little change over the years in terms of rate design and how utilities recover their costs of service, resulting in a disconnect between the evolving world of DERs and old world electricity pricing.
  • Changing electricity pricing to better reflect the benefits and costs of electricity services will unleash a new wave of innovative distributed technologies.
  • Pricing mechanisms must be capable of reflecting marginal costs and benefits more accurately, regardless of whom is undertaking the investment (i.e., customer, utility, or third-party provider).
  • Ultimately, success will hinge on the ability to create a two-way exchange of value and service between the utility and its customers.

Implications

  • Shifting to more sophisticated pricing structures will be disruptive and may upset a traditional rate design principle—simplicity.
  • Today’s most common electricity pricing structures for residential and commercial customers (e.g., bundled, volumetric rates) provide little incentive for the deployment and operation of DERs.
  • Maintaining the status quo on electricity pricing will stifle DER adoption rates and result in lost opportunities for cost reduction and inefficient utilization of assets.
  • Innovation in rate design to accommodate expanded use of DERs could include:
    • Establishing a fixed monthly customer charge with a flat cost per kWh
    • Selling back all the energy produced at the utility’s avoided cost
    • Unbundling rates and setting time and location-specific pricing
  • Each of which is sure to disrupt traditional rate-making protocols.
  • Even without pricing reforms, distributed resources are likely to account for a growing share of electric system investments in the future.

More Information

Rocky Mountain Institute, “Rate Design for the Distribution Edge: Electricity Pricing for a Distributed Resource Future”: http://www.rmi.org/elab_rate_design

SNL News Article: http://www.snl.com/InteractiveX/article.aspx?ID=28990344&KPLT=4

SNL News Article: http://www.snl.com/InteractiveX/article.aspx?ID=28978605

This report is part of the Regulatory Minute series. To view all featured Minutes, please click here.

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Contributing Authors

Dave Adams Director

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