As intermittent renewable energy generation, distributed energy resources (DERs) and electric vehicles (EVs) are increasingly integrated into the grid, electricity providers across the United States are piloting or actively deploying alternative, time-varying electric rates as a means to reduce spikes in demand.
While California’s much-discussed transition to mandatory time-of-use (TOU) rates is arguably the most significant implementation of time-varying rates today, most electricity providers – including investor-owned utilities, electric cooperatives, municipal utilities and retail electricity providers – are offering some type of opt-in, time-varying electric rate or related program, such as peak-time rebates or critical peak pricing.
With alternative electric rates likely to be a key component of the energy ecosystem going forward, the Smart Energy Consumer Collaborative (SECC) conducted the “Rate Design: What Do Consumers Want and Need?” study to assess what residential energy customers think about alternative rate designs and what types of programs, messaging and incentives will encourage engagement. The study reached a nationally representative sample of 1,138 residential consumers via online consumer survey panels in July 2019.
Based on the report’s top findings, here are three key takeaways about what residential customers think about alternative rate designs and what’s important to them when it comes to electric rates:
1) Although largely unaware of alternative electric rates, residential customers prefer them – especially TOU rates – over traditional rates when given the option.
When asked about current level of awareness of electric rate plan types, consumers’ rate literacy proved to be fairly low; not even two-thirds reported being aware of traditional, flat electric rates, and only about one-third (36 percent) reported being aware of TOU rates. For electric vehicle rates, real-time pricing, critical peak pricing and others, awareness was negligible.
To learn more about preference for alternative rates when consumers report knowing very little about them, the research utilized a conjoint analysis method to learn consumers’ revealed preferences rather than stated preferences. In the conjoint part of the survey, respondents were prompted to select their favorite of four rate plans (with varying pricing models, demand charges, renewable energy sources, sign-on benefits, etc.) on a series of screens. Each time, they have new options to select, and through this process, repeated across all the respondents, what’s really important to consumers came into focus.
The analysis found that the rate design that will garner the greatest consumer interest is a two-tiered TOU rate with no demand charges, a $50 sign-on bonus and a solar power source with no associated green power premium. Over 60 percent of consumers would prefer enrolling in this optimal rate plan compared to a standard rate. The conjoint analysis revealed that consumers generally tend to prefer alternative rates over standard rates, especially Gen Xers, millennials, moderate-to-high income customers and the Tech-savvy Protégés and Green Innovators customer segments (see the “Consumer Pulse and Market Segmentation – Wave 7” report).
2) Residential customers are generally willing to shift their energy use in response to time-varying rates, critical peak pricing or peak-time rebate programs.
In addition to questions about consumers’ awareness of and preference for electric rate designs, the survey asked respondents about their willingness to shift or reduce their energy use away from costly peak demand hours. Consumers were asked to rate their willingness to make changes – e.g., avoid running a pool pump and stop charging electric vehicles – on a 10-point scale, with 10 meaning “totally willing”.
The report found a general willingness among all consumers to make some adjustments, especially turning off unnecessary lights (9.3), turning off office equipment that is not in use (8.6), not running the dishwasher (7.7) and turning off home entertainment systems (7.6). Even the Energy Indifferent segment – a subset of consumers that favors simplicity and is generally reluctant to participate in energy-efficient actions – reported a moderately high level of willingness to make these changes.
There remains a considerable hurdle of how to effectively educate consumers on the specific times when they should be using less energy; however, the report revealed that the vast majority of consumers are inclined to make changes, and this is especially true for the demographics and behavioral segments mentioned above that are more likely to prefer alternative rates.
3) Additional fees and charges – including demand charges and green power premiums – stifle consumer interest in alternative rates.
During the conjoint exercise, two of the variables presented to consumers were additional fees or charges: demand charges and a fee associated with a renewable energy source (i.e., solar, wind, biomass and landfill gas-to-energy). Consumers were given four fee options – none, 3 percent, 5 percent and 7 percent – and the exercise revealed, unsurprisingly, that consumers become progressively less interested in alternative rates as these additional fees are applied and then increased. While some consumers would still select an alternative rate plan with a 5-percent demand charge, for example, consumer interest is much lower than a plan with a 3-percent charge or particularly with no charge at all.
Survey respondents were also asked to rate the acceptability of demand charges on a 10-point scale after being shown a definition of demand charges and a brief explanation of why electricity providers utilize them. Residential respondents reported demand charges to be largely unacceptable to them (3.3 out of 10, with 0 representing “not at all acceptable”), and this did not vary significantly across SECC’s consumer segments. Electricity providers should avoid added fees in order to maximize customer engagement with alternative rates.
Conclusion: Most residential consumers are ready for alternative rates
Ultimately, the “Rate Design: What Do Consumers Want and Need?” report found a surprising preference among residential customers to try alternative, time-varying electric rates and a willingness to make the changes needed to help them save money and the grid address peak demand. However, an equally important takeaway from the research is that today’s consumers actually know very little about electric rates, especially time-varying rates and programs like peak-time rebates and critical peak pricing. If electricity providers can successfully educate consumers about their rate options and help them take meaningful actions to engage with time-varying rates, alternative electric rates can create a positive, win-win scenario for both consumers and providers.
To learn more about what today’s residential customers want from electric rate designs, download the “Rate Design: What Consumers Need and Want ” report here.