California Flattens Rate Blocks, Rolls Out Default Time-of-use Pricing


California’s three largest investor-owned utilities will soon go through a major electricity rate reform. Currently the state uses a four-tier inclining block rate in which heavy electricity users push into the upper tiers where they pay quite a bit more for those excessive kilowatt-hours. On the other hand, smaller electricity users remain in the less-expensive tiers.

Following passage of AB 327 in 2013, the California Public Utilities Commission (CPUC) is working to replace the four-tier structure with a two-tier or a three-tier structure. The price difference between the tiers would be no more than 20 and 33 percent respectively. While this would seem to discourage conservation and efficiency, and reduce the economic incentive for installing solar for the higher energy users, the proposal also includes a shift to time-of-use (TOU) rates by 2019. TOU rates could change the entire equation, giving customers an incentive to shift their loads to off-peak time periods, lowering their bills while also helping the utility company shave peak demand.

Flattening CA’s rate tiers—economic impacts for customers and solar

In California’s current four-tier pricing structure, rates range from about $0.13 per kilowatt-hour for the lowest tiers, to as high as $0.33 per kilowatt-hour for the highest tiers. This scenario encourages conservation and efficiency among the highest users, and also means investing in solar for those high users makes economic sense. But many argue that users aren’t paying the true costs of their energy consumption. “Customers in top tiers, even after they install solar, are still paying more than the cost of their energy service, and thus are subsidizing the lower users,” according to RMI Senior Associate Matt Lehrman.

Thus the change to the new structure. While the proposed two-tier and three-tier structures will lower bills for the highest energy users, they could very well raise bills for the lowest energy users, raising the ire of many environmental and consumer advocates. Environmentalists argue that higher energy using customers will have no incentive to conserve, and consumer advocates argue that low-energy users will be unfairly burdened. And many wonder how this change will affect solar economics. “It changes the equation for customers,” says Lehrman. “Depending on what tier you’re on, the efficiency incentive could get better or worse, and the economics of going solar could get better or worse.” But what could really benefit all classes of consumers is the change to default TOU rates.

Rolling out wide-scale time-of-use pricing as the default

“Cross-subsidies are prevalent throughout the electricity system, and appropriate compensation for the benefits and costs of distributed solar is the subject now of vigorous debate,” says Lehrman. “But there’s no doubt that moving to default time-of-use rates gets customers closer to their true cost of service. Then customers have better price signals that can increase deployment of DERs, reduce bills, and improve grid operation.”

TOU rates take into consideration differences in the cost of producing and delivering electricity throughout the day, charging a higher price during peak hours (usually a handful occurring at the same time each weekday) and less at all other times. The proposal orders California’s three investor-owned utilities—Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric—to start TOU pilots by next year, and to make TOU rates the default structure in 2019.

Some of these utilities already offer an opt-in time-of-use rate for residences. But making TOU the default residential rate might have the largest impact, as seen in a pilot project run by the Sacramento Municipal Utility District. “This is the first example of TOU pricing being the default at scale,” according to RMI Senior Associate Mark Dyson. “It’s a great step in the right direction, to help people align their consumption with low-cost generation on the grid.”

Analysts have expressed concern that traditional TOU rates are highest in the afternoon, and if that ends up pushing load to evening hours, it could hypothetically make the infamous duck curve worse. However, it’s not that simple. The duck curve shows what will happen when more solar PV is integrated into the grid on a sunny spring day with low temperatures and thus low air conditioning demand. Growing rooftop solar output during the middle of the day suppresses net grid demand, deepening the belly of the duck. But when solar output drops off at the end of the day and electricity demand peaks as people get home from work, it creates an even steeper, taller neck, leading to a huge ramp up need. Time-of-use rates that discourage daytime consumption could potentially aggravate this issue.

There are, however, ways to address this. “If you have the same TOU rates every day, you might make the duck curve worse on a few days, but most other days you could make it better, because TOU rates do line up with air conditioning peaks,” according to Dyson. This shows the importance of TOU rates moving in time in order to address its interaction with the duck curve. “As solar becomes a larger part of the California electricity system, TOU pricing blocks need to change to reflect that,” says Dyson. In fact, with growing rooftop solar, a day is probably coming when we’ll likely need more-differentiated TOU rates, ones that “pull” some customers’ demand to coincide with rooftop solar generation and ones that “push” other customers’ demand away from grid peak to off-peak hours.

An important role for load shifting

With a shift to time-of-use pricing, customers are encouraged to change the timing of their electricity use, lowering their bills while also providing benefits to the utility company by reducing peak load. Most importantly, the technologies to enable this load shifting are low-cost and widely available today. Shifting loads from peak to off-peak, low-cost times could be accomplished by precooling a home to avoid running an air conditioner during grid peak periods, or using the large storage tank in your water heater to heat water only at night, all with no disruption to comfort or service quality.

Combined with load shifting, TOU pricing can benefit customers by empowering them to reduce their bills with technology-enabled, seamless control technologies that can avoid energy use during expensive peak hours. As TOU rates evolve to reflect the reality of the duck curve and the increasing role of solar in California’s electricity system, customers can be encouraged to shift more load to hours of rooftop solar output, eliminating the steep ramping periods and high evening peaks that system operators fear. More sophisticated rate structures, as advocated for in eLab’s Rate Design for the Distribution Edge, are important to incent more optimal distributed energy resource adoption and grid integration, which can help lead us toward a lower-carbon, reliable, resilient, affordable future of electric service, and a win-win situation for both utilities and customers.

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