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.