Navigant Research Blog

Time-Based Rates: What Works, What Doesn’t

— June 30, 2015

A new interim study of time-based or time-of-use (TOU) electricity rate programs shows that certain approaches and technologies get better results than others and that utilities in the planning stages can learn some valuable lessons before they launch their own versions. For instance, the average peak demand reductions for customers on critical peak pricing (CPP) programs were nearly twice the amount (21%) compared with the average reduction among customers in critical peak rebate (CPR) programs (11%).

Opt-In or Opt-Out

The study also explored the process of enrolling customers in programs, employing either opt-in or opt-out approaches. The results showed that enrollment rates were much greater and peak demand reductions were generally lower with an opt-out approach, but retention rates were nearly the same (91% opt-out vs. 92% opt-in) for both. Given these results, there appears to be an overall cost-benefit advantage to opt-out approaches versus opt-in, though additional analysis is needed to validate and replicate this conclusion, the report authors noted.

In-Home Displays Make Little Difference

The use of in-home displays (IHDs) was also scrutinized, and results showed these devices made little difference to enrollment or retention rates. Moreover, Sacramento Municipal Utility District (SMUD) found that its program offerings without IHDs were more cost-effective for the utility in all cases than those with IHDs. This has led SMUD officials to say they do not intend to offer IHDs in the future.

PCTs Show Better Results

The use of programmable communicating thermostats (PCTs) yielded generally better results than among customers that did not have this type of device. Peak demand reductions for CPP and CPR customers with PCTs (27% to 45%) were higher than among customers without a PCT (-1% to 37%). Results from Oklahoma Gas & Electric (OG&E) showed that rate offers for customers with PCTs were more cost-effective for the utility than for those without the device.

Besides SMUD and OG&E, the study involved eight other U.S. utilities that were part of the Department of Energy’s (DOE’s) Smart Grid Investment Grant (SGIG) program: Cleveland Electric Illuminating Company (CEIC), DTE Energy (DTE), Green Mountain Power (GMP), Lakeland Electric (LE), Marblehead Municipal Light Department (MMLD), Minnesota Power (MP), NV Energy (NVE), and Vermont Electric Cooperative (VEC). The DOE plans to publish five more reports using data from these utilities in the coming months, with a final report expected in the first quarter of 2016.

Given the wide variety of options, designing effective time-based rate structures and processes can be a significant challenge for utility managers. What works for one utility’s customer base might not work for well for another. Yet, these interim results do provide some solid guidance, and with careful planning (noting what has and has not worked), a reasonably positive outcome is a likely result for both the utility and its participating customers.


Pilot Sheds Light on TOU Rate Sign-Ups

— June 16, 2015

Shifting customers to time-of-use (TOU) pricing creates new challenges for utilities that are considering such moves due to regulatory pressure for greater efficiency and energy conservation. According to a recent Utility Dive report, lessons learned from a pilot program at PECO reveal some useful ideas that could be applicable to other utilities.

PECO, the Exelon subsidiary operating in Philadelphia, identified more than 120,000 residential customers who would be eligible for its Smart Time Pricing program and used direct mail, bill inserts, and email to promote sign-ups. Eventually, 4,882 customers agreed, approximately a 4% acceptance rate, with direct mail the most successful method and email a near total failure.

The TOU pricing was simple. The peak generation rate was nearly $0.16 per kWh on weekdays from 2 p.m. to 6 p.m., excluding holidays; the off-peak rate was just under $0.7 per kWh during the remaining hours. Results were somewhat predictable: the program yielded an average of nearly 6% reduction in peak electricity demand between 2 p.m. and 6 p.m. during the summer months; there was little load reduction in the winter months. For customers enrolled in the program, load reductions produced an average cost savings of 5%. Most of the savings came from people changing their use of large appliances and heating, ventilation, and air conditioning (HVAC) systems.

Program Surprises

One of the surprises from the pilot came from people’s perceptions, or in some ways, their misperceptions. While the average savings was 5%, many people thought they had saved more. In a follow-up survey, 46% of respondents said they saved more than $20 on their bills, when in fact just 5% had. Another eye opener from the PECO pilot involved demographics. Critics of TOU programs argue that the pricing is unsuitable for some groups such as the elderly, low-income, or disabled. But in this pilot, households that reduced usage the most were those with at least one senior citizen or someone covered by the Americans with Disabilities Act (ADA).

The PECO pilot contrasts with other attempts in recent years. For instance, the Sacramento Municipal Utility District (SMUD) in California chose to compare two groups of customers: those who were defaulted into TOU plans versus those who were given a choice to opt in. More than 90% of customers who were notified they were being placed on TOU rates at the start of a summer season stayed on the plan, compared with a participation rate of 15%–20% for those given an opt-in choice. SMUD also fund that many customers liked TOU rates, and the utility intends to make TOU pricing its default structure beginning in 2018. The rest of California is likely to follow suit, as regulators in the state are in the process of redesigning rate structures and considering proposals for implementing more widespread TOU rates by 2019.

There is no one-size-fits all when it comes to TOU pricing. Utilities and regulators can consider several methods for implementing these sometimes controversial programs. Two things are clear: if executed properly, both customers and utilities can benefit, and preconceived notions may not always be valid.


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