The Future of Electric Rates

Bob Dylan, that well known electric utility analyst, famously noted that “The times they are a changing…the waters around you have grown…you better start swimmin’ Or you’ll sink like a stone…” Who knew he was talking about electric rates, but he was.

The waters are rising because of new technologies and new customer behaviors and expectations. Together, these factors are transforming electricity markets in at least two ways that are making legacy rates obsolete. The first involves the utility’s changing role in the market; and related to this, its cost structure. As distributed energy grows, the utility’s role in the market is changing. It is no longer an exclusive supplier of electric power. Whether it operates in a jurisdiction that has introduced retail choice, or remains a vertically integrated supplier, the utility is experiencing significant growth in distributed sources on the customer side of the meter. As this happens, the utility’s public service obligation is now responsible for building and operating a delivery system that can integrate an increasingly diverse set of supply resources and manage operations that are becoming far more dynamic as a result. And as it grows into a provider of modern network services, the utility’s cost structure is shifting inexorably toward fixed costs (i.e., costs which do not vary with the volume of energy that flows across the delivery system).

The second transformation involves the growing demand for custom energy services. As more customers deploy distributed energy resources on their side of the meter (distributed generators, energy efficiency retrofits, demand response, storage) they have become increasingly differentiated in the way they use the grid, and in the kinds of services they’re looking for.

Considering these transformations together, it’s obvious that legacy rate designs are increasingly out of date. They are premised on one-size-fits-all “standard service,” which a growing segment of customers no longer want; and they recover fixed costs through volumetric (kWh) rates, which undermine the utility’s credit worthiness at a time when it needs to modernize its distribution system, while experiencing zero to declining growth in kWh use.

The recent interest in subscription rates, which are an update of the flat bill concept pioneered by Georgia Power, suggests a starting point for a new approach to rate design.1 Considering how different customers are using the grid, we can imagine further development based on three basic plans, as follows:

  • Traditional Plan for customers who have no interest in deploying their own DER and want to continue to rely on the grid as they always have (Note: a variant of this plan could support non-DER customers whose power supply comes from a third party),
  • Self-supply plan for DER customers who use all of their DER production themselves, and
  • Export Plan for prosumers who size their DER with the intention of feeding power back into the grid.

This is the path that Hawaii took with their interim post-NEM DER rates that segmented customers that sought to self-supply (Customer Self Supply rate) from those that sought to export and sell excess energy to Hawaiian Electric with or without a paired battery (Customer Grid Supply and Smart Export, respectively). These were in addition to existing flat and TOU retail rates for non-DER customers.  Today, the Hawaii commission is exploring the replacement of those interim rates with new DER rate designs that will attempt to balance the value of DER for customers and all ratepayers with financially sound cost allocation and recovery.

Of course, DER rate designs will entail significant new cost allocation challenges. For example, what is the value of export energy and any grid services at certain time periods? Is it acceptable to differentiate retail rates based on location as opposed to traditional postage stamp rates?  How is the bi-directional use of distribution addressed in rates? Similar to wholesale market participation, there should seemingly be a distribution access charge to recover fixed distribution capital costs? If there are subsidized values included in a DER rate, how will this spur market development in contrast to community and large scale renewable development to achieve an affordable overall renewable portfolio? 

Clearly, designing regulated electric rates is not going to get any easier! But approaching rates in entirely new ways is will be necessary to avoid sinking like a stone as electricity markets evolve.


1 What Netflix and Amazon Pricing Tell Us About Rate Design’s Future, by Huber and Bachmeier, Utilities Fortnightly, Sept. 2, 2018.

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