Navigant Research Blog

DSM Solutions Help Mitigate Rising Customer Utility Rates

Paige Leuschner — December 7, 2015

Energy efficiency programs emerged during the 1970s energy crisis to help consumers cope with rising energy prices by delivering more products and services for the same energy input and restraining the growth in energy consumption. Today, energy efficiency has evolved to become an integral part of utility operations, not only as a method for reducing demand, but also as a way to expand service offerings and engage customers.

However, traditional utility business models—which date back over 100 years—tend to be based on increasing profit by increasing electricity sales. Thus, increasing energy efficiency measures and consequently decreasing electricity sales can result in decreased revenue for utilities. Many utilities have responded to this issue by proposing steep rate increases, though utilities cannot simply increase rates when it suits them. State laws require utilities to make a formal proposal to their public utility commission in the form of a rate case. Wisconsin’s Madison Gas and Electric filed a rate case in 2014 to increase its fixed charges (a part of the energy bill that customers must pay regardless of the amount of energy they use) from $10 in 2014 to $67 by 2017. Kansas City Power & Light also filed a rate case to increase its fixed charges from $9 to $25, though the Kansas Public Service Commission only allowed the fixed charges to rise to $11.88, an 11.7% increase. The new rate became effective on September 15, 2015.

Spurring Innovation

Yet, many utilities are embracing the changing landscape and finding more innovative solutions to their decreasing revenue beyond increasing rates. Some utilities are transitioning from commodity providers into service providers; a handful of big utilities in Arizona, Georgia, Michigan, and Texas have begun competing with solar vendors to provide their customers with rooftop solar. CPS Energy’s vice president of corporate development and planning, Raiford Smith, stated, “The whole theory is you need to serve your customer or someone will serve them for you.”

Demand-side management (DSM) programs are also becoming an increasingly popular option, as these programs can often be an inexpensive way for utilities to expand service offerings, engage customers, and save on expensive infrastructure. For example, Consolidated Edison is working with analytical DSM vendor Retroficiency on a Brooklyn/Queens DSM program in order to shed 52 MW of load and to avoid building a new $1 billion substation. Commonwealth Edison, Glendale Water & Power, Baltimore Gas & Electric, and Consumers Energy are all working with behavioral DSM vendor Opower to implement behavioral demand response, a type of demand response (DR) that uses behavioral sciences to encourage customers to reduce their consumption during DR events. Arizona Public Service Company (APS), an Arizona-based utility, is implementing time-of-use (TOU) rates, which makes energy more expensive during times of peak demand and cheaper when there is less demand to encourage customers to shift their consumption. Approximately 52% of the utility’s 1.2 million customers are using TOU rates, the most of any utility in the United States.

The market for these types of products and services is growing, as discussed in Navigant Research’s recently published report, Behavioral and Analytical Demand-Side Management. Innovative utilities are setting an example for those dedicated to older, more traditional business models, revealing that energy efficiency and helping customers reduce their bills and consumption is an opportunity for increasing business, not a threat.

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