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Global Best Practices in Residential Electric Rate Design

Jim Lazar Senior Advisor

May, 2013

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Global Best Practices

• RAP has published three recent papers on rate design:

– Time-Varying and Dynamic Rate Design (Faruqui)

– Rate Design Where Advanced Metering Infrastructure Has Not Been Fully Deployed (Lazar)

– Pricing Do’s and Don’ts (Lazar et. al.)

• First two seek to identify examples of creative and forward-looking rate design from around the world.

• Part of RAP Global Best Practices series. Also looked at resource planning, finance, and other topics.

• All focus on the need to align rates with long-run marginal costs, so consumers make good long-run choices.

From Simple to Complex

• Residential Rate Types

– Flat Rate: Uniform rate per kWh for all usage

– Inclining Block: two or more blocks of usage, with incremental usage at a higher price.

– TOU: Two or more time of use periods, with higher prices during higher-cost periods

– TOU with Inclining Block: A TOU rate that includes a lower price for lower levels of usage.

– Critical Peak: A TOU price that has a much higher price for a limited number of hours that are not known until 1 day ahead.

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4

Peak Load Benefits of Different

Residential Rate Designs

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Usage Impacts of Rate Design

Start With Example Bill Frequency

Bills

kWh Usage

by Customers

Ending in

Block

% of Sales to

Customer Using

More than Block

Total Block

Sales Including

Sales to

Customers

Exceeding

Block Limit

% of Sales In

Block

0 - 250 154,281 22,705,353 92% 118,791,853 42%

250 - 500 176,985 64,370,066 69% 71,964,066 25%

500 - 750 94,209 57,617,207 49% 38,800,707 14%

750 - 1,000 49,741 42,864,074 34% 21,411,074 8%

>1,000 63,411 95,831,158 0% 32,420,158 11%

538,627 283,387,858 283,387,858

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Flat vs. Inclining Block

Flat Rate Design

Total Sales 283,387,858

Flat Rate: 0.15$

Revenue 42,508,179$

Inclining Block Rate Design, 2 blocks, 1 : 1.5 Ratio

Block Sales Rate Revenue

0 - 250 118,791,853 0.11624$ 13,808,643$

>250 164,596,005 0.17436$ 28,699,536$

Total: 42,508,179$

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Elasticity Impact of Inclining

Block Rate Design

Elasticity Effect of 2 Block Rate

Block

Sales Subject

to End Block

Rate Change

From Flat

Rate % Rate Change

Change In

Usage With

-0.2 Elasticity

0 - 250 22,705,353 (0.0338)$ -22.5% 1,021,973

>250 260,682,505 0.0244$ 16.2% -8,468,186

Net Impact on Consumption: -7,446,213

% Change in Consumption -2.6%

Inclining Block Rate with Constant Elasticity of -0.20 for Both Blocks

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Effect of a

High Customer Charge • Instead of an inclining block rate, what happens if we

introduce a $25/month customer charge?

Imposing a Customer Charge of $25/month

Monthly Bills 538,627

Customer Charge Revenue @ $25/month 13,465,675$

Energy Revenue Requirement 29,042,504$

Energy Sales (kWh) 283,387,858

Price per kWh 0.1025$

Rate change (0.0475)$

Percent Rate change -31.7%

Elasticity Effect at -0.2 17,954,233

% Increase in Sales 6.3%

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The Most Common Residential

Rate Design: Inclining Block

• Globally, we found that the most common residential rate design was the inclining block rate. Nearly universal in the Western US, Mexico, China, India, Brazil, South Africa, and parts of Europe.

• Most have zero or very low service charges.

• Goals include:

– Allocation of limited low-cost resources

– Recognition of declining load factor as usage increases

– Encouragement of conservation

– Providing for essential needs at affordable cost

– Benefit to low-income consumers

What Does This Rate Design Say?

The average cost of ice cream is $1.50/scoop, $1.125/scoop, and $.9167/scoop? Or:

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Eat more ice cream!

Inclining Block Rate

Based on Resource Types

• Start with typical cost of resources;

• Determine how much of each the utility has available for the class;

• Set blocks to recover costs;

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Block kWh Energy Delivery Total

Hydro 250 0.02$ 0.06$ 0.08$

Coal 251 - 750 0.04$ 0.06$ 0.10$

New Supply >750 0.10$ 0.06$ 0.16$

Inclining Block Rate

Based on Load Factor

• Start with a typical Commercial rate:

–$10/kW/month + $.08/kWh

• Determine Load Factor of Each Usage Block

• Compute Block Rates

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Primary Usage kWh

Load

Factor Demand Energy Total

Lights/Appliances 400 70% 0.020$ 0.08$ 0.100$

Water Heat 401- 800 40% 0.035$ 0.08$ 0.115$

Space Conditioning >800 20% 0.069$ 0.08$ 0.149$

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California

• California IOUs have steeply inclining block rates with low customer charges, as do some POUs.

• CPUC is examining possible changes, including mandatory TOU and higher customer charges.

Palo Alto

Customer Charge None

First 300 kWh 0.0954$

Next 300 kwh 0.1302$

Over 600 kWh 0.1740$

PG&E

Customer Charge None

Baseline Usage 0.1323$

101% - 130% 0.1504$

131% - 200% 0.3111$

Over 200% 0.3511$

Baseline = 270 - 1,200 kWh/mo

SCE

Customer Charge 3.00$

Baseline Usage 0.1295$

101% - 130% 0.1607$

131% - 200% 0.2719$

Over 200% 0.3119$

Baseline = 270 - 1,200 kWh/mo

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China and India • One-third of the world’s population.

• Developing countries, but with near-universal service

• Steeply inclining blocks, with zero customer charge

Zhejiang Province Rates China Daily, July 2, 2012

Annual Usage

Equivalent

Monthly

Usage RMB/kWh $/kWh

<2,760 <230 0.538 0.087$

2,761 - 4,800 230 - 400 0.558 0.090$

>4,800 >400 0.838 0.136$

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South Africa • Half of electricity consumption in Africa

• Very sophisticated utility; moving to TOU and CPP

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Mexico

• One national utility, serving 100 million people.

• Multiple rate zones; slightly different rates

• Huge step-up above 450 kWh/month

• Solar water heating nearly universal in new construction.

Federal Electricity Commission

Zone 1C Rates at 4/25/2013

kWh Pesos USD

Customer Charge None

<150 kWh $0.69 $0.056

150 - 300 $0.80 $0.065

300 - 450 $1.03 $0.084

Over 450 kwh $2.74 $0.225

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Hungary

• High costs, including about 25% in taxes, embedded in electricity rates.

• Very low usage per household; little A/C and mostly district heating and hot water.

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Indonesia: Differentials Based on

Connected Load

• PLN is the world’s largest electric utility, serving about 250 million people.

• Government support provided for line extensions to unserved population.

• Limited low-cost government-owned hydro

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Arizona Public Service

Seasonal + Inclining Block • Arizona has a very distinct summer daytime peak,

driven by air conditioning load.

• Load-Factor Based Inclining Block Rate

• Optional TOU Rate Available

Arizona Public Service Company

Standard Plan (Optional TOU Available)

Winter Summer

0 - 400 kWh 0.0942$ 0.0969$

401 - 800 kWh 0.0942$ 0.1382$

801 - 3,000 kWh 0.0942$ 0.1617$

Over 3,000 kWh 0.0942$ 0.1726$

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Fixed Period TOU Rates • Many utilities have introduced fixed-period TOU rates.

• These require interval meters, but not AMI

• France (70% nuclear) has been a leader.

• Annual subscription is a 100% demand ratchet

EDF Heures

Rate:

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Fixed-Period Time of Use Rates

California: Pro-Rated Usage • California IOUs retain the inclining block rate design

within their TOU (optional) rate designs;

• Usage is pro-rated among the tiers (if 15% of your total use is on-peak, then 15% of your use is charged on-peak)

PG&E TOU Rate Rate E-6 Off-Peak Mid-Peak Peak

Customer Charge 7.59$

Baseline Usage 0.1007$ 0.1753$ 0.2872$

101% - 130% 0.1188$ 0.1934$ 0.3053$

131% - 200% 0.2798$ 0.3543$ 0.4662$

Over 200% 0.3198$ 0.3943$ 0.5062$

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Fixed-Period TOU Rates

With Inclining Block Design • An alternative to pro-rating is to provide a fixed $/kWh

discount (or surcharge) below (above) the baseline level.

• Puget Sound Energy did this for their TOU rate

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Peak Load Management

Without AMI • Many utilities

have peak interruption programs controlled by the utility.

• Midwest coops often REQUIRE that electric water heaters be under utility control.

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Rates That Require AMI

PTR; CPP; VPP; RTP

• Peak-Time Rebate: A customer gets a credit if they reduce their usage during peak events. No penalty if they do not.

• Critical Peak Price: A high price defined in advance that takes effect on a day-ahead notice basis.

• Variable Peak Price: A price that is set one day ahead that takes effect when noticed by the utility

• Real-Time Price: A price that is set by the market, and may change with one-hour notice.

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Peak Time Rebate (PTR)

• Risk-Free: Customer can win, but cannot lose.

• Events are noticed, generally day-ahead

• San Diego Gas and Electric “Reduce Your Use” Rate

– A “Use Less Than” amount is set at program signup

– Email or Text notification when events occur

– 11 AM to 6 PM time period

– $.75/kWh for manual reduction

– $1.25/kWh for technology-enabled reduction

– No minimum or maximum periods per year

• “Training wheels” for Critical Peak Pricing (CPP)

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Critical Peak Pricing

Eskom South Africa “RuralFlex”

• 17 days per year maximum; Day-Ahead Notice

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Critical Peak Pricing:

France: TEMPO • Tempo unit shows what price in effect

• All days have on-peak and off-peak

• Inclining customer charge tied to kVa

• Maximum 22 Red days per year

EDF Tempo

Rate

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Enabling Technology

For CPP and RTP

• Installation of energy management devices that automatically adjust energy use when a price signal is received.

– Air conditioning

– Process and water heat

– Cold storage refrigeration

– Eventually, minor loads like refrigerators, freezers, and laundry equipment

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Enabling Technology Improves

Price Response

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Peak Load Reduction

Varies by Pricing Approach

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Peak Reduction vs.

Energy Reduction

• Inclining block rates produce the most overall reduction in energy usage. This occurs because incremental usage is most discretionary.

• Time-varying prices produce peak load reduction, but may or may not reduce total energy use

– Pre-cooling of buildings may increase total kWh usage

– Curtailment of A/C may lead customers to “not be home” at all, reducing other energy usage

• More complex rates work best with technology enablement.

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Inclining Block Rates Save Energy

Complex Rates Save Peak

USEPA, Customer Incentives for Energy Efficiency Through Electric and Natural Gas Rate Design, September, 2009

Bill Simplification

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Which Pricing Approach is More Useful

to You as a Consumer?

Crude Oil 2.237$

Tanker to Refinery 0.114$

Refinery Capital 0.213$

Refinery Operating 0.235$

Product Pipeline 0.113$

Terminal Rack 0.023$

Truck to MiniMart 0.114$

Mini-Mart Profit 0.217$

State Taxes 0.349$

Federal Taxes 0.184$

So Why Do We

Confuse Electric Consumers?

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Your Usage: 1,266 kWh

Base Rate Rate Usage Amount

First 500 kWh 0.04000$ 500 20.00$

Next 500 kWh 0.06000$ 500 30.00$

Over 1,000 kwh 0.08000$ 266 21.28$

Fuel Adjustment Charge 0.03456$ 1,266 43.75$

Infrastructure Tracker 0.00789$ 1,266 9.99$

Decoupling Adjustment (0.00057)$ 1,266 (0.72)$

Conservation Program Charge 0.00123$ 1,266 1.56$

Nuclear Decommissioning 0.00037$ 1,266 0.47$

Subtotal: 126.33$

State Tax 5% 6.32$

City Tax 6% 7.96$

Total Due 140.60$

When This is What It Really Means

SIMPLIFY WHAT YOU

PUT ON THE BILL!

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EFFECTIVE RATE INCLUDING ALL ADJUSTMENTS

First 500 kWh 0.09291$ 500 46.46$

Next 500 kWh 0.11517$ 500 57.59$

Over 1,000 kwh 0.13743$ 266 36.56$

140.60$

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Recommended Publications

Rate Design Where Advanced Metering Infrastructure Has Not

Been Fully Deployed

http://www.raponline.org/document/download/id/6516

Time-Varying and Dynamic Rate Design

http://www.raponline.org/document/download/id/5131

Pricing Do's and Don'ts: Designing Retail Rates as if

Efficiency Counts

http://www.raponline.org/document/download/id/939

Customer Incentives for Energy Efficiency Through Electric

and Natural Gas Rate Design

http://www.epa.gov/cleanenergy/documents/suca/rate_design.

pdf

About RAP

The Regulatory Assistance Project (RAP) is a global, non-profit team of experts that focuses on the long-term economic and environmental sustainability of the power and natural gas sectors. RAP has deep expertise in regulatory and market policies that:

Promote economic efficiency Protect the environment Ensure system reliability Allocate system benefits fairly among all consumers

Learn more about RAP at www.raponline.org

Jim Lazar, RAP Senior Advisor

jlazar@raponline.org