Podcast- Demand Rates – a Primer

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Transcript

Alan Elliott:

Hey everybody, this is Alan Elliot. I’m a director with opinion dynamics. I’m excited to be here today for a discussion about demand rates. Demand rates are something that you might have heard of before, if you’ve ever dabbled in the world of time-of-use rates especially. But you might not know a ton about it, because it’s a fairly niche topic and a niche approach to alternative rate structures. Luckily, today, we’ve got Jordan Folks who’s an associate director with opinion dynamics, who for the better half of the last decade, has been researching innovative pricing topics doing customer research that are supporting utilities, in piloting new dynamic pricing options for residential customers, Jordan is also really active in the industry around flexible load-related topics. He’s the co-chair of the peak load management alliances retail pricing interest group, he also serves as the research committee chair for the smart energy consumer collaborative. Hey, Jordan, how’s it going?

Jordan Folks:

Hey, good to see you.

Alan:

Great. Well, my first question is the obvious one, which is what are demand rates exactly? And now I know what a time of use rate is, essentially, you charge customers different rates based on when they use their energy, and typically, you’re charging more when per kilowatt-hour when the grid is most constrained. So how are demand rates different from this, if at all?

Jordan:

Right, well, I think that you hit the nail on the head there, the big difference is that it’s kWh versus kW, where a time of use rate is simply charging a higher kWh price during certain hours of the day, oftentimes, the afternoon and the summer. And there are some winter peaking utilities, it could even be in the morning for the peak hours. And other times cheaper. And there’s obviously some variations there, you can have super off-peak and super peak, but generally speaking, certain hours of the day, cost more certain hours of the day cost less. And, but it’s just measuring cumulative usage, right. So they know how much usage you use during the peak hours, they know how much you use during off-peak hours. And then there’s your bill. But demand is specifically measuring and billing on kW. So actual demand. So the big difference there is that the customer if they’re using a bunch of appliances at once, they’re going to pay more because they’re, you know, ultimate use that with this in this kind of coincidental scenario where they’re stacking appliances at the same time – is going to have a greater demand, and thus a greater demand charge.

Alan:

So let’s just, you know, draw an analogy here. So, let’s say I’m a customer, I’m using my dryer and my dishwasher at the same time and I usually do it right at four o’clock when I get home from work. That’s the middle of the peak period, if I’m on a usual time-of-use rate, if I just sort of shift that to nine o’clock here in California, then I’m doing better on a time-of-use rate but on-demand rate, is that the same thing?

Jordan:

Well, what you’re getting at here is kind of how time-of-use rates are a bit of a corollary, really, for achieving demand reduction. So, why do we charge more for certain hours of the day, it’s to encourage people to use their energy, or concentrate their energy use outside of those peak hours. And the net effects on the grid is a demand reduction. But we’re using kWh pricing signals to encourage that. So with demand rate, we kind of cut to the chase, let’s just charge for demand. And what you’ve exposed there is it gives customers a new way to save money on their energy bill. With a ton of use pricing, all you can really do is shift – use your dryer after the peak hours are over or before they start. And that’s great. But we can go one step further. Where now we can also add staggering. So, in a world where a demand rate is also time-of-day based, where demand costs more during certain hours of the day, we can clearly shift our usage outside of those hours and save on energy bills. But on top of that we can do what’s known as staggering – where you can use, you know, Device A, like your dryer at let’s say 9 pm and once that’s done, then you start device B, like your dishwasher at like10 pm. And so, by staggering them, we’ve lowered our demand, but still, accomplish the same tasks. And so it gives customers one more, you know, no-cost tool in their energy-saving toolkit to save on energy bills each month.

Alan:

So that makes sense. I guess what I’m still trying to puzzle through in my head is, okay, if it still kind of ultimately gets to that same concept of reducing usage when the greatest most constraint, why does a utility potentially go for a demand rate? In addition to or maybe even instead of a time- of-use rate?

Jordan:

Well, I think that from the utility’s perspective, it’s a much better way to like align the retail rate with the actual costs on the utility-side of the meter, right. And ultimately, it sends a more accurate price signal to customers. So I think that there’s some really strong arguments from that perspective, but not to mention the addition of the consumer benefit that I just mentioned.

Alan:

Right? Yeah. And you were talking about how the strategies start to defer when you’re in sort of demand rates framework. So ultimately, as with any of these sort of alternative rates and pricing solutions, this is really a partnership between the utility and the customer. And the customers really got to also see benefits to their bottom line, as well as meet grid and utility needs at the same time. So really, you sort of need to rely on customer education and make sure they know what they’re doing in a way that benefits not only them, but the utility in the grid. But this all sounds really complicated, much more complicated than a time of use rate. And I’ll be it I don’t know that how many customers truly understand the basic volumetric rates. So do customers understand these? Or how do you get them to understand them in a way that they better ultimately benefit know how to benefit from being on a demand rate?

Jordan:

It’s a good question. And it is tough. And I think that we as an industry are still kind of working through how to best communicate these things. And I think that there’s a few basic principles that could guide this, you know, use clear language use language that people can understand. And that’s tough when it’s such a complicated issue. So I think that you have to strike that balance between, you know, readability, but also transparency, so they actually understand it. And, you know, you got to understand that customers might not open every letter, you know, open every email. So using multiple modes and multiple messages, and striking that good cadence where it’s long enough to give them the essential information they need, but not so long that you know, some book that they’re just going to toss them recycling, because they don’t have an interest in reading all the fine print. So you know, hitting the main messages, shifting, staggering, peak hours, and just give them the really important core pieces of information so they can succeed. And what we’ve seen in our research is that oftentimes, customers don’t understand all of the nitty-gritty details of these, arguably complicated rate structures, but they don’t necessarily need to, you know, be prepared to defend them in a rate proceeding with all of the, you know, nuanced components of the tariff, to understand the concepts like shifting and staggering. And so it’s been really interesting to observe that high levels of understanding are not necessarily a prerequisite to succeeding on the rate.

Alan:

Right. So maybe give them a couple – sort of informed infographics if they’re interested, but really just stick to sort of like the simple messaging and the strategies, they don’t necessarily need to understand the ins and outs of these rates to be successful.

Jordan:

Yeah, I mean, we’re, I think, we’re still learning but it’s all about striking that right balance, so you get their attention, and you get the important messages in there. And then, you know, clearly have a website or something that has all the details for those that are interested in that.

Alan:

Right, absolutely. So alright, I’m a utility, I decided I want to it/makes sense to go ahead and implement a demand rate. How do I get customers to do that? How do I get them to enroll in something that is really complicated, sort of esoteric, probably can’t expect them to take a lot of time to learn about this rate? Can we expect them to do this on their own or is automatic enrollment better kind of like a TOU default? Or? Or how do you approach this? And how do you do it in a way that not only gets people to enroll and get your participation up? But also make sure you’re protecting customers in case it doesn’t work out for them?

Jordan:

Yeah, that’s a really good question. And it’s tough to get a lot of enrollment in these kinds of things. You know, there’s been a lot of research over the last couple of decades in our industry around this kind of topic in a broader perspective. And what we’ve learned time and time again, is if you have some sort of program, you’re going to have a lot more enrollees if you use an opt-out method as opposed to an opt-in. So what that means is, if we automatically enroll people in something, you’re gonna have a lot more people on that something than if you ask them, “Hey, would you be interested in joining this program?” So that’s why you know, Home Energy Reports are opt-out, they just automatically send it to you. But a rate is not a free piece of information that’s telling you how much energy you’ve used. So, I think we have to treat it a little differently than a Home Energy Report and I think that if a utility has a well-designed rate and a regulatory environment that allows it, a default strategy is a really good one, because you’re going to get a lot more people on the rate. But if you do that, you got to be really careful to make sure that people understand what’s happening. That they understand that they have a choice that they can choose to opt-out before the rate ever goes live, that they can opt-out of the rate once it does go live. And they can return back to their old rate. And give them a sense of what to expect, like we said earlier, explain how the rate works and what it means. But shadow billing, where you actually run the numbers and anticipate what their bills would be like under a different tariff is a really good way to give them the information they need to decide whether this is right for their household. And then finally, I think that it’s really important to offer some sort of bill protection, kind of a try before you buy clause, so that people can really give these rates try risk-free. And if it doesn’t work out for them, they can receive a bill credit at the end of their first year or two on the rate. And then that way, they can really learn what it’s like to be on the rate and maybe not be just tempted to immediately opt-out before giving it a try.

Alan:

So, I want to circle back to this concept that you touched on somewhat tangentially here, which is that some people are going to do well, and some people aren’t going to do well. We call these sometimes structural winners, structural losers just sort of based on their energy and load profiles, whether they’re set up to do well or not so well, on a rate, how much do we know right now in our industry about what kind of customers do well and do not do so well on-demand rate? Or is it the classic ‘it depends’?

Jordan:

Everything always depends in this industry, right. And so, yeah, that’d be a really interesting meta analysis to kind of see if we could net out these things. Because there’s some really important corollaries here, like climate, fuel-use technologies in the home. And so it really depends on you know, where you are, what you’re using, and what your load shape looks like. We do see a correlation with income, which is also correlated with square footage and energy use. And so basically, the peakier and more energy-intensive homes could be more likely to be a structural loser or non-benefiter, as some call it. But, you know, it’s still not a guaranteed loss. That’s where behavior change comes in. And with energy efficiency and load shifting, and load staggering, maybe anyone could be a winner at the end of the day. So, there are definitely some kind of trends there. But on the flip side, what that means is that low-income customers are really likely to be structural winners here, because they tend to have flatter load profiles. Now, there’s been a lot of concern in the industry that these new AMI-enabled rates are going to be really problematic for low-income households, because they can’t afford the technologies that they would need to respond to the rate or there’s been other concerns that they won’t – they’re too busy, and they work schedules and maybe have, you know, extended families, seniors in the home with disabilities, and we can’t burden them with these things. But we’ve seen time and time again, that low-income customers can do really well on these rates. Not only are they more likely to be structural winners, but it gives them a no-cost way to save energy at home and providing them in a really important equity enhancing avenue to lowering their bills that they’ve been largely excluded from from traditional rebate programs that we’ve seen the energy efficiency side.

Alan:

Got it. Well, Jordan, thanks so much for your time today. And dropping some knowledge on me about demand rates. I definitely knew a little bit about it, but knew there was so much more to learn. And I really feel like we’re just kind of hitting the tip of the iceberg here. So we’ll also put a link to Jordan’s email in those show notes as well, just in case you want to reach out to directly and ask an expert your burning questions about demand rates. Thanks a lot Jordan.

Jordan:

Thank you.