Should time-varying rates-such as time-of-use (TOU) rates and critical peak pricing (CPP) and other dynamic pricing rates-be deployed as the default tariff for residential and small business customers?
Economists have long argued that since such rates best reflect the cost of providing electricity-that they should be the default tariff, as that would maximize economic efficiency. One of the basic foundations of economic efficiency is that a good should only be consumed, when the benefit it gives exceeds its cost. Flat rates do not send out a signal that allows consumers to make such prudent choices. Even if customers do not modify their load shapes, time-varying rates would promote equity in rate design since they would eliminate the subsidies that exist when customers who are more expensive to serve (i.e., those with poor load factors) pay the same price for electricity as those who are less expensive to serve (i.e., those with higher load factors).
However, as of this writing, less than two percent of the residential and small business customers in the US are on time-varying rates. Such rates have been commonplace among large commercial and industrial customers for many years, and were often the default rate and sometimes the mandatory rate. At the same time, it was argued that time-varying rates could not be offered to residential and small business customers because of a lack of advanced metering infrastructure (AMI). However, more than a third of these customers are on AMI today. In the next 10 years, almost all customers might be on AMI.
So it is not surprising that commissions in California and Massachusetts are considering whether these rates should be made the default tariff. These two states are among the most committed to promoting economic efficiency and equity in energy use and are also two of the most expensive states. Unsurprisingly, the opponents of such rates have decided to cite the customer backlash that ensued in the early 1980s when a few states mandated these rates for large residential customers.
However, new data from north of the border could change the dynamics of the debate. American regulators and utilities should study Ontarios successful deployment of time-of-use rates. They began to be rolled out in 2009 across the province, once smart meters fell in place, and deployment was completed by 2012. The current time-of-use rates consist of the three pricing periods and feature a modest ratio of 1.5 to 1 between the peak and off-peak periods.
The rollout was the first of its kind across the globe. Some difficulties were encountered along the way. Toronto Hydro was the first to deploy the rates. Initial press coverage was negative and stated that seventy percent of the first ten thousand customers had encountered higher bills. On close examination, it was revealed that the bills did not go up because of the time-of-use rate but because the previous rate had an inclining block character which provided a discount to small users and that the initial sample of ten thousand was dominated by small users. Another misstep took place when the premier, while campaigning for his reelection, urged Ontarians to do their laundry on weekends. It almost cost him his reelection. This episode highlighted the fact that Ontarians, like people everywhere else, do not want to be told how to live their lives.
The Ontario Power Authority (OPA) is charged with analyzing the impact of these rates on load shapes and energy conservation. It is carrying out a three-year analysis and has recently published the first year results. The main conclusion is that even with a relatively muted price signal, residential customers responded by lowering peak usage by about 2.5 percent. This result is consistent with those from other pilots and full-scale deployments, as summarized in the Brattle Arc of Price Responsiveness.
It was also found that the time-of-use rates did not induce energy conservation.
The response of small business customers was not statistically significant, a result that is consistent with studies elsewhere which have found that such customers only respond when they are provided enabling technologies such as smart thermostats.
So what are the takeaways for Americans? First, that there was no customer backlash when four million customers were moved to time-varying rates. Second, that residential customers responded by lowering peak usage either by curtailing peak loads or shifting them to off-peak periods. As a result, economic efficiency was improved and inter-customer equity was enhanced. And, third, that the demand response engendered by the rates has allowed the province to recover some of the cost of deploying AMI. In the US, the AMI business case for many utilities was predicated on the deployment of time-varying rates. At a minimum, time-varying rates should be deployed in such jurisdictions.|
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