WASHINGTON – The transition to a modern electrical grid that is reliable, decarbonized and efficient will require changes in the pricing structures used by electric utilities – including moving beyond a traditional two-part rate – the Alliance to Save Energy says in a new white paper released Wednesday. The paper is the product of a two-year Alliance-led effort (the Rate Design Initiative) bringing together representatives of utilities, technology companies, regulatory experts, environmental groups, consumer advocates and other industry leaders to identify themes and opportunities on rate designs that incentivize energy efficiency and other environmental and social objectives while also addressing adequate cost recovery for utilities.

“Developing utility rates that are fair to all stakeholders is a perennial challenge, but the dramatic shifts happening in our power systems are forcing us to think more creatively. The old-fashioned cost recovery and rate design models we’ve traditionally used simply don’t match tomorrow’s needs,” said Natasha Vidangos, Director for Research at the Alliance. “As an organization that works closely with the wide spectrum of utility sector stakeholders, we took this on to try to identify areas of agreement, opportunity and lessons learned. In rate design, there are rarely simple solutions, but the potential benefits are extraordinary if we get it right.”

The Alliance paper, Forging a Path to the Modern Grid: Energy-Efficient Opportunities in Utility Rate Design, provides broad guidance for parties considering a new rate design, including discussions of rate design elements that can provide customers with clearer price signals and greater control over their demand – focusing not only on how much electricity is used, but where and when. These options, if designed effectively and proven through pilots and educational programs, would help build a more energy-efficient, sustainable and responsive grid while allowing utilities to earn the revenues required to adapt the grid to its modern needs.

Jim Gardner, a former chair of the Kentucky Public Service Commission, and an Initiative participant, said: “Our power systems are facing new opportunities and challenges that are unlike anything in our history. Achieving a cleaner, smarter grid of the future will require creative thinking, new tools and a serious conversation among all stakeholders, which is exactly what the Alliance report has started. There are no easy or one-size-fits-all solutions for rate design but we must not just be trapped in a status quo that is becoming increasingly unsustainable.”

Bruce Edelston, Vice President for Energy Policy at Southern Company, and an Initiative participant, said: “Changes to traditional ratemaking procedures, as suggested by this report, are absolutely vital to ensuring that emerging efficiency technologies can work as effectively as possible, saving both consumers and utilities money and enabling a more modern grid. Of course each state will need to adapt the proposed rate design to its individual circumstances, but the paper concludes that incorporating demand charges into residential rates is an important consideration in our nation’s continuing efforts to use energy more efficiently. We hope the dialogue among all of the disparate groups that contributed to this report continues on these critical issues.”

Dr. Susan Tierney, a senior advisor at the Analysis Group and former state utility regulator and former assistant secretary for policy at the U.S. Department of Energy, who also participated in the Initiative, said: “This is an important and valuable step in a difficult conversation about change in the electric industry, with enormous upside potential for energy efficiency and affordable energy bills. We need to work together to reach a future where electricity is more reliable, more efficient, and has dramatically reduced carbon impacts. Many of our existing utility rate structures were built for a century-old paradigm of cheap, inefficient and fossil-intensive energy use, and they simply won’t get us where we need to go.”

The white paper’s key suggestions include:

• The development and implementation of any rate design policy must be rigorously analyzed and tested against the objective of maximizing system energy efficiency and gaining societal benefits, including minimizing greenhouse gas emissions and maintaining affordable energy access for all.
• As a utility and its stakeholders consider whether and how to pursue a more advanced rate design, analyses and pilot programs should be conducted to gain real-world experience on how customers respond to rate design changes. These pilots should also test the effectiveness of different enabling technologies such as home automation systems.
• Aggressive customer-education programs should precede the deployment and roll-out of new rate designs.
• Jurisdictions that do not have smart meters should explore their deployment, and in the near term, consider a rate structure that incorporates two main elements: a customer charge and a Time of Use (TOU) volumetric rate, providing clearer price signals to users at different times of day.
• Where smart meters are fully deployed, jurisdictions should consider a three-part rate design, including a customer charge, a demand charge, and a time-varying volumetric charge. Such rate design requires careful customization to local context, and as stated above, extensive piloting and consumer education programs to assess impacts before deployment.

About the Alliance to Save Energy

Founded in 1977, the Alliance to Save Energy is a nonprofit, bipartisan alliance of business, government, environmental and consumer leaders working to expand the economy while using less energy. Our mission is to promote energy productivity worldwide – including through energy efficiency – to achieve a stronger economy, a cleaner environment and greater energy security, affordability and reliability.

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