The U.S. electricity system is undergoing major changes today, including the expansion of distributed energy resources, the deployment of Advanced Metering Infrastructure and the impact of evolving customer expectations. In response to these and other factors, including the need to reduce peak loads and a desire to align energy consumption with renewable energy production, electricity providers and regulators are increasingly exploring new rate designs and pricing options for residential customers.

For example, in California, the state’s three major investor-owned utilities (IOUs) – Pacific Gas & Electric, San Diego Gas & Electric and Southern California Edison – are all currently transitioning to time-of-use rates as part of a statewide effort to address climate change, and many other electric utilities across the country have rolled out time-varying or dynamic rate pilots and fully-developed programs in recent years.

For these new pricing options to drive reduced energy usage and costs, electricity providers and regulators will need to ensure that they are designed with the needs and wants of the typical residential energy customer in mind. But what do consumers actually want when it comes to rate design?

Let’s take a look at some of major theories behind customer-centric, smart rate design and lessons learned with time-varying rates in two U.S. states, Illinois and California.

According to Jim Lazar, a senior advisor with The Regulatory Assistance Project (RAP)® and a noted expert on effective rate design, “rate design should make the choices the customer makes to minimize their own bill consistent with the choices they would make to minimize system costs.” This is what he considers to be the essence of rate design.

In the “Smart Rate Design for a Smart Future” report, Lazar developed an illustrative residential rate that he believes will be effective at achieving this goal. This smart rate includes a relatively low fixed customer charge for connecting to the grid and a three-part time-varying rate (off-peak, mid-peak and on-peak) that recovers most costs of the grid and all of the costs of power supply.

The rate design also includes a critical peak price for times when the grid is severely stressed, as consumers have shown a willingness to react quickly and effectively to this. Notably, however, the rate does not include a high fixed monthly charge or residential demand charge, both of which are not directly tied to consumer electricity consumption and, therefore, are often ineffectual in producing the desired consumer behavior change.

According to Lazar, many rates similar to RAP’s smart rate example have been deployed in places from California to France, and in a review of 109 pilot programs, they have been proven to be effective at reducing energy usage. The study found that a basic time-of-use (TOU) rate typically resulted in about 5-10 percent peak reduction and that critical peak pricing typically demonstrated 10-30 percent reduction. In contrast, typical demand charges were shown to result in peak reductions of only two percent.

In addition, the effectiveness of these time-varying rate designs can be amplified through technology. According to Lazar, smart technologies – including smart charging of electric vehicles, smart thermostats, residential battery storage and smart water heaters – can boost the peak reduction of TOU rates to 10-20 percent and the peak reduction of critical peak pricing to 20-40 percent.

Lazar’s research and analysis demonstrates that time-varying rates – if designed properly – can be very effective at reducing energy usage and saving customers money. Next, let’s look at two examples of where Lazar’s TOU rate example are being deployed now and what is being done to ensure that consumers understand these new rate plans and engage with them.

While designing smart rates is a major step in ensuring that consumer see benefits for smart energy usage, customer outreach and engagement is a major hurdle in itself.

In the State of Illinois, ComEd and Ameren Illinois have had a lengthy history of developing time-varying rate pilots and programs, with their primary two programs dating back to 2007. And Elevate Energy, a Chicago-based nonprofit that works to ensure that the benefits of clean energy and energy efficiency reach all consumers, has served as a third-party administrator for these programs – essentially doing everything but the billing. As such, Elevate Energy has garnered significant experience on what effectively engages consumers in these programs.

While a 2017 study from the Citizens Utility Board of Illinois and the Environmental Defense Fund showed that 97 percent of Illinois customers would save at least some money on a real-time pricing plan without changes to their usage behaviors, Elevate Energy works diligently to ensure that consumers get the most out of the available opt-in dynamic rate plans. Their extensive experience designing bill inserts, savings reports, emails, online portals, apps and other communications media for Ameren Illinois and ComEd has taught Elevate Energy three major lessons that can be applied to any dynamic pricing program to drive interest and participation.

The first of these is to keep the messaging as simple as possible; outreach should be personalized via segmentation, and value propositions need to be tailored to these segments. Consumers today are inundated with information in their daily lives, and the benefits for participating in a dynamic pricing program need to be clearly stated to get consumers’ attention. Second, program enrollment should be made as easy as possible whether it’s online or through the mail. In their years of administering ComEd and Ameren Illinois’ programs, Elevate Energy has had success using relatively simple tactics like prepaid return envelopes or prepopulating online forms, so that there’s one less step that consumers must take.

Finally, Elevate Energy has found that it’s crucial to provide a variety of ways that participants can engage with the TOU rate plan. This can range from providing simple advice on how consumers can manually make changes – like pre-cooling their homes – to providing tools that work with smart energy technologies that they already have in their homes, e.g. smart power strips and smart thermostats.

By keeping these tips in mind, electricity providers can help consumers understand new rate design programs and how they will benefit them personally.

Although many utilities have offered dynamic and time-varying rate plans and pilots in recent years, perhaps the largest test of the effects of new rate designs on consumers will be in California. In a statewide initiative, all California investor-owned utilities have begun transitioning its customers to a new time-of-use rate as part of greater state goals to create a smarter energy future and a healthier environment for Californians.

Pacific Gas & Electric (PG&E), in particular, began their Phase 1 transition of roughly 150,000 customers in April of this year, and their full rollout is slated to start in 2020 (All of California’s IOUs are following a similar trajectory). However, leading up this point, PG&E has conducted extensive customer research and communications development to ensure that the process goes as smoothly as possible for customers.

The customer research, in particular, revealed a number of potential barriers to automatically transitioning customers to a TOU rate. These include consumers’ low involvement with energy usage and the electric utility, general confusion around electric rates and what rate consumers are on currently, a perceived overwhelming amount of information around the TOU rate and a general feeling of risk on the part of the customer.

However, PG&E has developed a wide range of communications that deal directly with these potential consumer “pain points”, especially around the perceived risk of the TOU rate. In their customer communications, PG&E has emphasized its bill protection program, which means that customers can try the new rate plan for 12 months and will be credited with any differences if they pay more on this rate than their previous rate. PG&E also wanted to emphasize the consumer choice aspect; consumers are able to opt-out of the TOU rate at any time – before or after the transition – through multiple options.

By focusing on these two elements – price sensitivity and customer choice – PG&E’s internal research found that customers become much more comfortable with adopting the new TOU rate. This aligns closely with SECC’s customer research that has found that cost and control are major factors in determining consumer interest in an energy program or service.

While many electricity providers seem set to roll out new rate design options for residential customers in the years ahead, the success of these new rate plans will be determined by providers’ ability to design rates that actually encourage reduced energy consumption and that effectively connect with and empower consumers. There are valuable lessons to be learned from the experiences of Illinois, California and other utilities across the country who have implemented TOU rates for their customers. In addition, SECC will be publishing new research on this topic in the third quarter of 2019 titled “Rate Design: What Do Residential and SMB Customers Want?” This study will speak directly to consumers and smaller businesses, enabling industry stakeholders can learn exactly what customers want and need from new rate designs.

To learn more about rate design and consumer engagement strategies, please join us on Monday, Feb. 4 in New Orleans for our annual Consumer Symposium: Exploring the Evolving World of Energy.