Why Electricity Pricing Remains a Mystery…and How that Has to Change

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electricity pricingThe success of any product depends on getting the pricing right.  That’s not happening with electricity pricing. As a result, we’re not getting the most out of  energy efficiency, microgrids, solar, plug-in electric vehicles and other forms of distributed energy.

That’s the message of a new report issued August 26 by the Rocky Mountain Institute’s Electricity Innovation Lab (e-lab), which calls for fundamental changes in how utilities price electricity.

Electricity pricing changes almost constantly based on time, location and energy source. But the rates charged by most utilities – block volumetric pricing – don’t allow homes and small businesses to take advantage of these price differences.

Meanwhile, more and more distributed energy resources (DERs) are being installed that can benefit the larger grid in various ways – if they are managed properly. But little  or no financial incentive exists for homeowners and businesses to do so.

“Utilities need new rate structures that more closely align with this evolving, 21st-century grid –  categorizing, charging and compensating customers and third-party providers for the values and services their DERs provide to the grid or get from it,” said Owen Smith, RMI electricity principal.

Grid economics improves when generation is available at the right time and place, such as on a summer afternoon when a lot of air conditioners are running or in hot spots on the grid where lines are overloaded. But today’s electricity pricing rarely give homes or businesses incentive to install or manage distributed resources to meet these grid needs.

Further, to function properly, the electric grid needs not only energy but several services, such as capacity guarantees, demand response, frequency support, regulation and balancing. Power plant operators sell many of these services into the wholesale market. But few mechanisms exist for distributed generators to do the same.

The report, “Rate Design for the Distribution Edge: Electricity Pricing for a Distributed Resource Future,” recommends three changes in retail electricity pricing that would create the proper price signals for installation and best management of distributed energy.  RMI calls these the what, where and when of electricity pricing.

  1. Attribute unbundling— Breaking apart a bundled kilowatt-hour into cost- and value-based components such as energy, capacity, and ancillary services
  2. Time-based pricing—Moving to pricing structures that reflect the time-varying cost to generate and deliver electricity
  3. Location-based pricing—Shifting to pricing that better directs the deployment of DERs to the locations on the grid where they can provide the most value

Consumers may balk if change is made too quickly or if the new electricity pricing places demands on their time. So the report recommends, gradually over time, creating multiple options with different degrees of sophistication and granularity.

Few will want to jump in and manage their electricity pricing as it changes in five-minute intervals; and some may never want to do so. But RMI envisions third-party services and new technologies emerging to make energy management easier for consumers.

The electricity price changes are important. Installation of solar, microgrids and other distributed energy is on the rise. Consumers and businesses will manage the installations solely to benefit their own operations, and not for the grid as a whole, unless pricing accurately reflects the advantage of doing so.

“The stakes are high in getting the transition to new pricing structures right. Every day, DER developers and customers are optimizing their investments and business models against the price signals provided by the utility, regardless of whether these prices are aligned to create the greatest value for society as a whole,” said James Newcomb, RMI managing director “Now is the time to begin the transition to 21st-century rate design.”

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Can RMI’s electricity price proposal work? Join our LinkedIn Groups, Energy Efficiency Markets and Microgrid Knowledge, and tell us what you think.

 

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Elisa Wood About Elisa Wood

Elisa Wood is the chief editor of MicrogridKnowledge.com. She has been writing about energy for more than two decades for top industry publications. Her work also has been picked up by CNN, the New York Times, Reuters, the Wall Street Journal Online and the Washington Post.

Comments

  1. “Electricity pricing changes almost constantly based on time, location and energy source. But the rates charged by most utilities – block volumetric pricing – don’t allow homes and small businesses to take advantage of these price differences.”

    I would submit, utilities accept their “avoided costs” as “entitled costs”, by the movements of many utilities to take advantage of peoples work-a-day schedules to tailor their “duck curve” and actual solar PV and wind generation is curtailed and spot market fueled generation is used to ramp around grid demands. In the late afternoon and early evening, a TOU electricity rate spiking period is observed each day. There have been and will continue to be, court cases brought against “net metering” to be exchanged for “net billing” and the suspicious lobbying group NERA trying to change Federal law and FERCs “mandate” into the all encompassing electricity regulator. This would be one way around set PPAs that are net metering for 20 to 25 years. Put the pricing under Federal law, which would supposedly cancel the “net metering” PPAs and insert the Federal standard, “net billing” in place as the PPA in place now and in the future.

    ” RMI calls these the what, where and when of electricity pricing.

    Attribute unbundling— Breaking apart a bundled kilowatt-hour into cost- and value-based components such as energy, capacity, and ancillary services
    Time-based pricing—Moving to pricing structures that reflect the time-varying cost to generate and deliver electricity
    Location-based pricing—Shifting to pricing that better directs the deployment of DERs to the locations on the grid where they can provide the most value”

    This is nothing, a smart ESS can be programmed to do these things now. Another interesting aspect of “unbundling” costs from the price per kWh used is the often called out “fuel” charge. IF my solar PV system is sending excess generation back onto the grid and it goes right next door to my neighbor’s house and this “non-fueled” electricity is used, then the “fuel charge” should be removed from every kWh of solar PV used by the neighbor. When my neighbor is using excess solar PV generated electricity from my system, does the utility remove or reduce the TD&D charges since the connection between my house and his house may not even go through a utility transformer and not even make the TD&D system.

    “Few will want to jump in and manage their electricity pricing as it changes in five-minute intervals; and some may never want to do so. But RMI envisions third-party services and new technologies emerging to make energy management easier for consumers.”

    Just released the SolarEdge “energy hub” smart inverter. This unit is capable of using string wired solar PV panels creating the 300 to 400VDC buss that can be stored in something like the LG Chem RESU10H battery and can be switched out after the sun goes down or when utility power fails. This inverter monitors the C.B. panel current draw and can make decisions as to how much power is switched out, how much is kept in the battery and when power from the battery is to be used to power the home.

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