For at least a couple decades, electrical contractors have been helping customers find new ways to reduce electricity use. That’s because, in most areas of the country, rates have been based on total electricity consumption, and those rates have been going up. Now, with more states moving toward time-based electricity pricing, ECs will soon be asked to help customers with an entirely different problem. In many regions, when electricity is used could be more important to a consumer’s monthly budget than their actual kilowatt-hour totals.
Understanding new rate plans
Called time-of-use (TOU) rates, these new billing plans are a response to our changing electricity-generation mix. Renewable-energy resources, such as solar and wind, are more plentiful at different times—solar peaks in mid-afternoon, and wind is often strongest during overnight hours. Shifting customer loads toward the time when renewable resources are most plentiful can minimize utilities’ dependence on fossil-fuel-based generation. It also reduces the need to add generating stations to meet demand peaks that might only occur once or twice a year.
Some customers might be familiar with peak-reduction strategies such as demand response rates. Under such programs, customers can earn rebates for cutting their electricity use during high-demand periods based on a signal from the utility. In many newer plans, this happens automatically through direct utility control of a home’s smart thermostat. However, there are big differences between the two approaches in design and in frequency.
“This incentive is being provided through the rate design rather than through some direct utility control, and the decision to participate is left up to the customer,” said Ryan Hledik, a principal with the Brattle Group, an international consulting firm with expertise in energy economics that is headquartered in Boston and has 11 offices around the world. “Also, the price signal appears on a daily basis, as opposed to something that’s only going to happen, say, 10 days a year.”
So, the big push with TOU rates is to change consumers’ habits. That’s the reason millions of California electricity customers are becoming much more aware of when they’ve been using power. With the state’s nation-leading solar-energy use growing by the year, utilities find themselves struggling with too much electricity during midday hours and peaks that hit just as the sun begins to set. As a result, utility regulators are requiring the state’s three largest utilities to transition most residential customers to TOU plans by the end of this year.
While TOU rates aren’t a new idea, Hledik said they have more often been used during times when electricity loads have grown faster than generation capacity. Today’s motivations are different, he noted. The situation now is more complicated because the capacity constraints can vary by the hour. In fact, because of high solar-adoption in states such as California and Arizona, systems can have significant overcapacity in the middle of the day.
“It calls for a different rate design because you actually want to encourage load during those hours, but then have a higher price later in the day,” he said.
Varying price signals are seen as a way to encourage customer use of technologies such as solar panels paired with battery storage as renewable energy becomes more important.
“It allows you to give customers price signals that will encourage adoption of these technologies in a useful way,” Hledik said.
Nationally, by the end of 2017, almost 8.5 million utility customers were enrolled in a TOU plan, according to the Federal Energy Regulatory Commission.
That’s a 42% increase since 2013, illustrating how quickly interest in TOU rates is growing. A number of pilot programs are now helping utilities and regulators better understand what motivates consumers to choose and stick with these rate structures. Timing is important, as the industry seeks to get ahead of the emerging demand for electric vehicle (EV) charging.
Margo Everett, a director with Chicago research firm Navigant, notes that the demand and growing numbers of EVs could add to the grid load if their owners all decided to plug them in at the same time.
“The holy grail for utilities is flat load, so if utilities can incentivize customers to charge during a certain time, you actually improve the capacity of the grid.”
Designing plans that work
While the concept behind TOU rates seems simple, it turns out that designing plans consumers will stick with can be complicated. All the programs announced so far are voluntary. Even in California, customers have the option to call their utility and opt out of TOU rates and return to a conventional plan based strictly on kilowatt-hour totals.
The Smart Energy Consumer Collaborative (SECC), a research group focused on understanding U.S. energy consumers, has studied utility customer preferences in TOU rate design. Among the findings of their September 2019 report, “Rate Design: What Do Consumers Want and Need?” was that the precise peak-pricing time boundaries aren’t as important as the availability of options.
“Consumers want choices,” said Patty Durand, SECC’s president and CEO. “So, when consumers were offered just one time of use plan, they weren’t as interested as when they were offered a choice between three different plans.”
She added that ease of adoption is more important than the amount of potential monthly savings from a TOU plan. For example, many preferred a plan with two 12-hour periods, one peak and one off-peak, versus plans with multiple pricing periods that might lead to lower bills.
“The drivers aren’t as much price difference as convenience and clarity. Consumers want to have limited risk, and they want it to be simple,” she said.
The peak versus off-peak difference also can’t be an arbitrary figure, according to Hledik. It has to relate to the actual added expense the utility would face to supply electricity during high-demand hours of the day. And consumers have limits as to how much they can drive down their usage, regardless of how much they might save.
Of course, how well consumers understand their TOU options from the outset will have a significant effect on adoption. This includes education on concrete steps consumers can make to support a move to a TOU plan.
“What really makes the difference is knowing what to do about it—what if you ran you’re dishwasher at 10 at night, or your washing machine first thing in the morning?” Everett said, describing real-world examples such messaging might highlight. “Then the customers change their behavior because they know what behavior to change.”
Smart electric meters are a base technology for any electric utility seeking to introduce a TOU rate plan. The devices enable the two-way, real-time communication between utilities and their customers needed to ensure billing accuracy. So, electrical contractors now working as meter installers are sure to benefit as these plans proliferate.
“Smart meters are the No. 1 reason we’ve seen more utilities moving in this direction recently,” Hledik said. “They’re what is enabling the widespread offering of these rates.”
For ECs specializing in residential work, becoming familiar with EV charging equipment installation practices offers another opportunity, Durand said. While it’s possible to charge an EV using Level 1 equipment connected to a 120-volt (V) outlet, most drivers will find this process takes too long and will be looking for 240V Level 2 chargers, which require professional installation.
“By 2022, there will be more than 220 electric vehicle models available, so being able to install a Level 2 charger will be really important,” Durand said, adding that some gas stations currently are beginning to add—or transition to—EV charging services. “That could be a whole new area of business where electrical contractors could be involved.”
Energy storage is another technology that’s especially attractive in TOU rate scenarios. Especially when paired with rooftop solar panels, home battery systems can shift customer demand off the grid during peak-demand periods. And, as Everett noted, energy drawn from the battery will be virtually free.
“The value in storage is having a price differential between when you store it and when you use it,” she said. “That makes the economics of storage much more preferential.”
Then there all the add-on devices that might not become a significant income stream on their own for the contractor, but could help build a reputation for value-added expertise. Sensors, timers and other controls, especially those with remote access capability, can aid a customer’s efforts to maximize potential TOU savings. Everett highlights a number of examples.
“Air conditioning is one of the biggest loads that influence the time of use period, and smart thermostats are a great tool—you can precool your home and then turn it up to a higher temperature during the time of use period,” Everett said. “And timers on your appliances and then any kind of smart phone app that can help you manage your electricity use is helpful.”
Highlighting such opportunities during service visits can provide a relationship-building boost, Everett said.
“As electrical contractors are helping to install electrical equipment, they can ask [customers] what rate they’re on and present options,” she said. “They’re the ones who are touching customers, and they have first-hand opportunities to help customers adopt time of use rates.”