Forging a Path to the Modern Grid

It's not news that power systems across the United States are experiencing an upheaval. With the greater deployment of energy efficiency, renewable energy and distributed resources, as well as different usage patterns and customer demands, today's grid is struggling to perform to our expectations.

Transitioning to a more modern electrical grid will require changes to the pricing structures used by electric utilities, moving beyond the traditional two-part rate with its roots in the nineteenth century.

However, adapting today's rates to tomorrow's needs is no simple matter. Every community will need to assess, customize and fine-tune specific rate elements to their needs, local policy priorities, and historical context. But as more communities across the United States are starting down this path, it is a powerful moment for an open and creative discussion about the options.

To seek insights from the broad community of stakeholders and search for areas of consensus, the Alliance to Save Energy convened the Rate Design Initiative (RDI). This included more than fifty participants across the spectrum of technology companies, industry associations, advocacy organizations, regional partnerships, think tanks, and utilities.

Discussions among the RDI participants were insightful. In February 2018, the Alliance presented a white paper on the initiative, sharing areas of consensus as well as the Alliance's own specific insights and considerations for stakeholders starting down the path of rate reform.

Notably, there was full consensus among the RDI participants around the need to prepare ourselves for the modern grid: one that is reliable, resilient, decarbonized, automated, transactive, efficient and equity-driven.

The participants recognized that rate designs based on a two-part tariff with flat volumetric charges and customer charges do not reflect the actual costs of the grid. The rates also do not give customers a chance to respond to price signals, and in many cases do not encourage the investments that will create the modern grid.

The RDI participants also reached consensus on a series of principles to govern rate reform, each demonstrating a balance of interests. For example, the importance of collecting revenue for the use of the electricity grid while compensating customers for investments that bring system-wide cost savings.

Other principles include the importance of reflecting real-time localized costs of service while assuring equity and minimizing rate shock. And the importance of ensuring that rate design is complementary with state energy goals and priorities.

Based on insights from the RDI discussions, the Alliance went further, to independently develop three key insights for consideration by power sector stakeholders.

First, the Alliance recommends all rate design options be considered against the north star of enhanced energy efficiency. When integrated with partner priorities such as sustainability, economic efficiency and equity, energy efficiency can drive the vision for the future while focusing on outcomes.

Second, the success of any new rate design depends largely on how customers understand and respond to the new rates. For this reason, extensive educational campaigns and piloting studies are necessary to understand the real outcomes.

Finally, the Alliance suggests exploring several rate design elements as a starting point for discussion. In jurisdictions that lack advanced metering infrastructure or AMI, a two-part tariff with a seasonal time of use or TOU charge. Where AMI is deployed, a three-part tariff, including a customer charge, TOU volumetric charge, and a demand charge.

Deploying AMI and a well-designed time-varying volumetric rate and demand charge can provide an effective mapping of system use to costs. It also provides consumers with new ways to adjust their energy use to respond to price signals — not only how much, but when andwhere.

This is the future of energy efficiency.

As we begin this conversation, we must acknowledge that the rate design riddle is, and will always be, a high-stakes affair without a single solution. But as we come together around a shared vision for the future, we need to talk seriously about near-term solutions and be prepared to think creatively. Tomorrow's grid awaits.