The Future of Electricity Rates

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There is an ongoing debate among utilities and states about how best to charge electricity customers for their usage.  This debate has been fueled by an ongoing lack of growth in electricity consumption driven by an increased use of distributed energy resources (DERs) and continually improving energy efficiency, both of the buildings we live in and use and the “things” that we use in those buildings.  Industry experts often cite the need to charge more for fixed costs including equipment and distribution.  Some have gone so far as to suggest that a non-volumetric pricing structure similar to cell phones, Internet and cable television may be the best way to compensate utilities and retail electricity suppliers for the products and services they offer.  However, state regulators and legislators appear hesitant to make significant wholesale changes to the electricity pricing structure.

In lieu of ongoing developments in the electricity market, utilities have been asking for (and in many cases getting) increases in the fixed rate portion of electricity bills as a means to cover a greater proportion of their fixed costs.  However, increases in these fixed rates/fees often have a disproportionate effect on low-income/low-energy users.  There appears to be agreement that electricity rates and fee structures need to change, however the best way to restructure is still up for debate.

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Over the past 35 years, the US economy has more than doubled, from $6.5T in 1980 to $16.6T in 2016; however, over the same period, US energy use has increased by only 26%.  Moreover, efforts to further improve energy efficiency point to continued slow growth of energy consumption. This is clearly evident in the residential sector, where total energy consumption has declined, despite a 50%+ increase in the number of households.

Sounds great, right?  It certainly is for consumers, who have seen energy expenditures as a percent of their income continue to decline.  However, this same story is not beneficial to the energy providers in the US, including utilities and retail electricity suppliers.  Utilities continue to primarily charge their customers based on the volume of electricity they consume.  With the slow annual growth of electricity consumption, utilities and retail electricity suppliers often are struggling to recuperate their costs without requesting annual rate increases.  As such, many utilities have started shifting their tactics and have instead requested increases on the fixed portion of both residential and commercial electricity bills as a means to regulate their income and recuperate a higher percentage of their fixed costs.

Utilities cite several factors in their requests to increase fixed charges:

  • Improve revenue stability
  • Account for increased installation of distributed energy resources; particularly solar power
  • Account for increased energy efficiency and continued slow growth of electricity consumption
  • Plan for anticipated upgrades to obsolete generation and distribution equipment

So what does this mean for electricity customers?  For the majority of customers, it won’t mean much.  Many of the rate change proposals also include a decrease in the charge per kWh, so the average customer will see no significant change in their total bill.  However, low-usage customers, which includes many low-income customers and customers who have installed solar power on their home or business, will likely see an increase in their total bill, as a greater portion of the bill will be based on fixed charges and a lesser portion on the electricity they actually use.

In addition, industry analysts believe that “de-coupling” fixed costs from usage, and lowering the cost per kWh, will serve as a disincentive to improving energy efficiency and conservation efforts and will result in increasedconsumption of electricity.  They believe that consumers will react based on a classic economic theory:  if you charge less for something, people will buy more of it.  However, there is another faction that believes that consumers look at their total bill and are generally unaware of what they pay per kWh.  This camp believes that most consumers will not change their consumption habits or energy efficiency efforts and that electricity consumption will continue to stagnate.  They also cite efforts at the product manufacturer level to further improve the energy efficiency of the products they sell as a key driver of low electricity consumption growth.

With the ongoing changes in the electricity industry, it seems clear that pricing structures need to change.  The ultimate goal of any future pricing structure must be to ensure that customers pay a fair price for the electricity they use and that utilities and retail electricity providers generate revenue that is fair based on the products and services they provide.  It does not appear that electricity billing will ever move to a completely non-volumetric pricing structure (at least not anytime soon), but changes to how electricity is billed to customers seem inevitable.

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