Will Time Varying Rates Shift Demand and Reduce Costs in Massachusetts?  We Will Find Out (Eventually)

digtalclock_imageIn June, I wrote about the Massachusetts Department of Public Utilities’ proposal to shift “Basic Service”—the default electricity service provided by electric distribution companies and used by most residential customers—from a flat rate structure to a time varying rate.  On November 5th, the DPU adopted that proposal without modification.

That means that, in the future, the default service for retail customers in Massachusetts will have a time-of-use pricing structure.  The rate for electricity during “on-peak” hours, noon to 8:00 p.m. on weekdays, will be higher than the rate for “off-peak” hours.  In addition, during periods of extremely high wholesale prices, customers will receive advance notice and a higher, “critical peak pricing” rate will go into effect.  Customers will also be able to opt into a flat-rate service with a peak time rebate where their rate will not vary between on-peak and off-peak hours, but they will have an opportunity to obtain a rebate for reducing their electricity use during high-price periods.  Distribution rates (the portion of the bill that goes not to pay the cost of the electricity but rather the cost of bringing that electricity to the customer) will not include a time varying structure.  The change in basic service may also lead competitive suppliers to develop new options for consumers.

As I discussed in June, there are good policy rationales for time varying rates.  Exposing customers to something closer to the actual costs of their consumption is likely to lead to more efficient outcomes.  Customers should be able to save money, and with the help of emerging “smart” technologies, time varying rates may reduce the demand for electricity during peak periods, providing system-wide relief and savings.  Clean-tech innovators are likely to find ways to harness time varying rates to unlock efficiencies beyond simply shifting use of energy-intensive appliances.  Electric vehicles, energy storage, and solar generation could all benefit from rate structures that reflect variations in the cost of electricity over time.

Two major questions remain: when will these new rate structures go into effect, and how will customers respond?  Time varying rates require metering technologies capable of distinguishing between on-peak and off-peak usage.  The DPU has required utilities to submit proposals for achieving that capability within five years.  If the costs of achieving advanced metering functionality do not justify investments within five years, utilities may propose longer time frames.  (This is another reason to pay attention to the grid modernization plans currently under development by Massachusetts’s utilities.)  So it may not be soon, but we are likely to see widespread implementation of advanced metering functionality, and therefore time varying rates, in Massachusetts within the decade.

How customers respond to time varying rates will determine the effectiveness of the policy.  The DPU has stressed the ubiquity of time varying prices in other markets and the importance of customer education.  It also believes that pilots and rollouts in other jurisdictions support the rate structures it has adopted.  I tend to believe that customers will respond if the savings are meaningful.  We will probably have a long wait before we find out for sure how customers react.  But the utilities will present their best guesses in their grid modernization plans.  The DPU has specifically ordered them to collaborate on an approach to estimating customer responses to the proposed rate structures and to present company-specific expectations.

Leave a Reply

Your email address will not be published. Required fields are marked *