Many utility tests of time varying rates have led to bill savings and lower peak loads, but California will soon be taking on the biggest test yet by putting over 20 million consumers on time-of-use (TOU) rates.

Properly designed and deployed TOU rates can help customers save money by shifting their use away from high-priced time periods. The rates can help utilities reduce their expenditures by lowering the highest demand they must meet. And TOU rates often move customer use toward periods when low cost renewables are in greater supply on utility systems, which saves costs for customers and utilities.

The challenge in designing TOU rates is aligning the high prices for customers with high system costs and low prices for customers with low system costs. The challenges with deploying TOU rates are in helping customers understand them and in using the price signals to get customers to pay attention to when they use electricity.

"We are trying to balance price signals that encourage customers to shift usage and bill volatility," SCE Rate Design Senior Advisor Andre Ramirez told Utility Dive. "We do not want dissatisfied customers because they may never want to think about TOU rates again. But rates that don't provide price signals that change customer behaviors would defeat the purpose."

In 2015, in response to a number of successful pilot programs, including a landmark Sacramento Municipal Utility District (SMUD) 2012 to 2014 TOU rate pilot, the California Public Utilities Commission (CPUC) ordered the state's three investor-owned utilities (IOUs) to transition to "default" rates by 2019, requiring customers pay TOU rates unless they opt out.

San Diego Gas & Electric (SDG&E) will begin moving its customers in March, and Southern California Edison (SCE) and Pacific Gas & Electric (PG&E) were given until October 2020 in order to prepare their billing systems. SMUD began another system-wide rollout of default TOU rates as well, Oct. 1.

"TOU empowers customers, and if they shift their usage to lower cost time periods when solar and wind are abundant, they will not only lower their bills, they will also use cleaner energy." Andre Ramirez Rate Design Senior Advisor, Southern California Edison

Today's typical rate is made up of a monthly fixed charge and a per-kWh rate for the electricity a customer uses, regardless of when it is used. But a dozen or more states are working on TOU rates, which charge more for electricity when it costs more to deliver. If customers shift their usage to the lower cost times, they can lower their bills and utilities can see lower peak demand.

"TOU empowers customers, and if they shift their usage to lower cost time periods when solar and wind are abundant, they will not only lower their bills, they will also use cleaner energy," SCE's Ramirez said, adding their proposed rate will save an estimated $55 million per year.

Most utilities have not moved to time-varying rates because regulators assume customers cannot understand them and do not have the technology to manage them, according to Brattle Group Principal Ahmad Faruqui. But Brattle's survey of customer responses to over 300 time-varying rates in 62 pilots shows sufficiently prepared customers "understand and respond" to TOU rates.

A good TOU rate sets electricity prices high when peak demand drives system costs up and sets prices low during low demand hours when low-cost renewables tend to be abundant. If the peak and off-peak prices and time periods accurately align with system costs, the price signals will drive electricity use toward lower system costs and customers will use more renewables.

Pilots and preparations

A "mountain of evidence" shows customers respond to TOU rates, Faruqui reported. "On average, residential customers reduce their on-peak usage by 6.5% for every 10% increase in the peak-to-off-peak price ratio."

With technologies like smart thermostats that increase customer control, "the effect is stronger," Faruqui added. On average, customers with enabling technologies "reduce peak usage by 11.1% for every 10% increase in the price ratio."

SCE moved about 400,000 customers to a set of default TOU rates being tested, Rate Design Senior Advisor Brian Kopec told Utility Dive. Almost 99% of those on a tested rate structure that will be offered in the 2020 system-wide transition chose to stay on that program.

PG&E transitioned 115,000 customers in its pilot: over 90% stayed on the plan and over 7,000 more customers enrolled voluntarily when they found out the plan was available, according to spokesperson Matt Nauman.

Finally, after SDG&E transitioned its pilot TOU customers, approximately 99% remained on a TOU plan, spokesperson Wesley Jones emailed Utility Dive.

Participants were randomly selected for each pilot and their responses to the changes are likely similar to how the IOUs' system-wide customer bases will respond, utility representatives said. Low- and moderate-income customers and those with medical needs were left on existing special plans and will remain on them in the larger rollout.

"Surveys show customers don't think about electricity unless there is an outage, or their bills go up, so our first challenge is to get them to care about this." Brian Kopec Rate Design Senior Advisor, Southern California Edison

The pilots included two customer protections that the CPUC's most recent ruling indicates should be in the system-wide rollouts. One is a "shadow bill" that shows customers whether they are better off with the TOU rate or their old rate. The other is a guarantee that, for the first year of the transition, customers who would have saved more on the old rate will be credited the difference.

It's a safety net that they hope "will get customers to try the rate," SCE's Kopec said.

The pilots also allowed the IOUs to test public outreach and customer education capabilities expected to be critical in 2019 and 2020.

"Surveys show customers don't think about electricity unless there is an outage, or their bills go up, so our first challenge is to get them to care about this," Kopec said. "They also usually don't know much about the rate they are on, so our second challenge is to help them make informed choices."

The changes coming

In October 2020, SCE will offer a TOU rate with a 5 p.m. to 8 p.m. peak period and another with a 4 p.m. to 9 p.m. peak period, SCE's Ramirez said. There will also be an optional "TOU Prime" with a super off-peak period aimed primarily at EV owners.

SDG&E's March 2019 system-wide offering will have two TOU plans, both built around a 4 p.m. to 9 p.m. peak period priced at $0.47/kWh, Rate Reform Project Manager Katelin Scanlan told Utility Dive. The utility will also offer an off-peak price of $0.22/kWh and a super off-peak period from midnight to 6 a.m. at $0.16/kWh.

PG&E did not make its system-wide transition plans available to Utility Dive, but it is anticipated their model will largely resemble that of the other two IOUs.

"[T]he results showed customers can and will respond to TOU price signals." Larissa Koehler Senior Attorney, Environmental Defense Fund

Though some environmentalists would like to see more granular time periods and higher price differentials to drive more load shifting, the pilots are "an important step in the right direction," Senior Attorney Larissa Koehler of the Environmental Defense Fund (EDF), which has long advocated for TOU rates, told Utility Dive.

The low percentage of people opting out of the pilots is promising, Koehler said. And "results of earlier opt-in pilots show TOU rates can lead to a significant amount of load shifting." Participants are somewhat self-selecting and therefore more likely to be responsive to rate changes than average customers, she acknowledged. "But the results showed customers can and will respond to TOU price signals."

One major unknown in California's TOU rate rollout is whether Community Choice Aggregators (CCAs), which may serve up to 16% of the state's load in 2020, will support the transition.

Most CCAs say they are planning to participate in default TOU rates for residential customers, according to the California Community Choice Association (CalCCA). But the CPUC does not have jurisdiction over CCA rates, and it is up to the CCAs to decide, the association added.

CCAs also may create their own TOU rates, and peak and off-peak periods, and they will take their proposals to their local governing boards for approval, rather than the CPUC, CalCCA emailed Utility Dive.

Marin Clean Energy worked closely with PG&E on its pilot and "CalCCA and its members are committed to continuing to work closely with the IOUs, the Commission and other stakeholders," CalCCA Executive Director Beth Vaughan emailed Utility Dive.

Beyond TOU

"TOU rates will reduce solar curtailment and fossil fuel reliance and lower bills, but they are still static," EDF's Koehler said. "Pricing that is indicative of real-time conditions, like dynamic hourly pricing, is the next step."

A "perfect rate" would use "dynamic pricing, advanced demand price signals, and identifying peak events" but "that is too advanced for most customers," Navigant Director for Energy Regulatory Affairs Lon Huber told Utility Dive. TOU rates "give price signals residential customers can manage."

Huber, who has designed TOU rates for Xcel Energy and Liberty Utilities, has conceived a paradigm shift. Based on communications and entertainment industry models, he has proposed customer subscribe for varying levels of electricity services and varying costs.

"With today's advanced technologies, anything, even a subscription rate, is possible," SCE's Ramirez said. That is the point of the new white paper jointly authored by SCE, PG&E and SDG&E which details four elements necessary for any new rate architecture.

"Twenty-first century customers, who are being offered new technologies, new business models and state policies meant to drive greenhouse gas reductions would be better served with a newly conceived rate architecture that addresses their realities." SCE, PG&E, SDG&E A Modern Rate Architecture for California's Future

First, pricing "transparency" is needed to identify costs for meeting state-mandated policies, Ramirez said. Second, "equity" will prevent costs being imposed on customers for services they do not use. Third, rate elements used to pay for new products, services and business models must be "sustainable." Finally, all customers should have "access" to all energy service options.

Today's rate structure "has been altered iteratively and reactively to meet new challenges," the paper reports. "Twenty-first century customers, who are being offered new technologies, new business models and state policies meant to drive greenhouse gas reductions would be better served with a newly conceived rate architecture that addresses their realities."

A Nov. 15 petition to the CPUC from distributed energy resources proponents may advance the debate. Led by former CPUC staffer Scott Murtishaw, now a consultant to the California Solar & Storage Association, the petition asks the commission to consider optional residential real-time pricing and targeted demand charges.

The scope of California's TOU rate transition is "historic," and regulators will be watching two metrics: how many customers opt out within the first month and how much load is shifted away from peak, Murtishaw told Utility Dive.

The "logical next step" is real-time pricing and targeted demand charges because they both further the objectives of TOU rates, he said.

Real-time pricing allows storage owners to use stored electricity at the lowest prices to offset higher-priced electricity in a more granular and cost-effective way. And demand charges should target a customer's highest period of electricity consumption that coincides with system peak load instead of just the customer's highest period of usage, Murtishaw said. A more targeted demand charge would also drive the storage value proposition.

Customer usage needs to be increasingly responsive as the penetration of variable renewables rises on a system, Murtishaw said. "TOU rates begin that process, but real-time pricing and targeted demand charges are the only way to do it completely. They get the best response from battery storage and other distributed resources to price signals for the benefit of customers and the grid."