As energy providers harness the power of their AMI upgrades and transition from volumetric to time-of-use (TOU) rate structures, there is concern that TOU rates could cause adverse financial impacts for low income and disadvantaged communities. However, there is a growing body of evidence that suggests the opposite: TOU rates can actually help lower energy bills for many low-income customers.
In this blog, we debunk some of the common myths and misconceptions about TOU rates and equip energy providers with key considerations and best practices to deliver equitable and mutually beneficial TOU rate structures to their most vulnerable customers.
Myth #1: TOU Rates Increase Financial Burdens for Low-Income Families
Under a typical volumetric rate, the cost of energy is levelized for all customers in each rate class. Wholesale prices can vary dramatically throughout the year; these traditional rates are designed so that a single “average” kWh price ultimately recoups the costs associated with procuring and delivering electricity to customers throughout the year. This “average” approach is advantageous for peakier energy users, as their energy needs can be more expensive for the energy providers to serve compared to those with flatter load shapes; yet peakier users are not financially liable for their “peakiness” under a volumetric rate system. Since variation in customer load profiles and associated supply-side costs are baked into the volumetric rate, those with flatter load shapes are effectively subsidizing the electric bills of peakier users. This poses an equity concern because research has revealed that impoverished households tend to have flatter load shapes than non-low-income customers (who are more likely to have larger households and more energy intensive appliances). At the end of the day, many low-income customers may be paying more than their fair share on a volumetric rate and their overpayment is helping reduce energy costs for more affluent households.
Enter TOU rates. Many low-income households will immediately experience financial benefits by switching to a TOU rate even without modifying their behavior, thanks to naturally flatter loads and a more equitable pricing structure. In addition to structural bill savings, low-income customers now have a no cost means to facilitate additional savings on each bill. As every industry veteran knows, traditional energy efficiency measures are often out of reach for low-income households, whether that’s because they have less disposable income for the upfront investment, they cannot access affordable financing, or they rent their homes and do not have the authority to make major upgrades. Every dollar counts for low-income families and switching to a TOU rate can have a dramatic, positive impact on monthly finances. Even better, our research has repeatedly shown that low-income households do not experience significant barriers to load shifting or shedding behaviors, creating an opportunity for program administrators to pair TOU deployment with messaging that motivates low-income customers to make behavior changes necessary to save even more on their new rate. The proof is in the pudding: evidence of structural and behavioral bill savings in the low-income sector continue to surface every year.
Myth #2: Low-Income Customers Are Homogeneous
Nonetheless, TOU rollouts must be thoughtful and targeted; lest the TOU rate becomes the new “one rate to rule them all.” Not all low-income households are guaranteed to benefit from a TOU rate. Just like any subsegment of the population, there is significant variation related to energy usage driven by factors that are not necessarily related to income; such as lifestyle, household size, and geography. Our research for the California IOUs exemplifies this nuance, where we found that low-income and non-low-income customers alike in particularly hot climates were prone to sometimes substantial bill increases on piloted TOU rates. And even within the low-income customer base, research has demonstrated significant variation in energy burden by natural gas access, race, and ethnicity.
Myth #3: Low-Income Customers Will Automatically Change Behaviors in Response to Price Signals
Despite their proclivity for behavior-based responses to electricity pricing signals, low-income households have less access to the latest grid-edge technologies (like smart thermostats) that assist in load shifting and shedding. These enabling technologies are not cheap, often require home broadband service, and as such are less commonly found in low-income households. Without the same access to these automation technologies, low-income households are missing out on a key strategy to guarantee bill savings.
In addition to the technology divide, research suggests that low-income households have lower “rate literacy” than non-low-income customers, with these customers being less aware of key rate details and offerings. Language barriers and skepticism toward utilities and governmental institutions disproportionately impact this sector and only serve to exacerbate this problem. If low-income households are not aware of, do not trust, or do not understand a possible rate change, they should not be expected to alter their behavior; or even believe that they could benefit from the rate change. This poses a significant barrier for low-income households to either opt into an optional new rate or to reap the financial benefits by changing their energy use patterns. A TOU rate default can compound these issues if energy providers do not strategically communicate and educate customers with culturally relevant messaging tactics prior to rollout.
Well-designed and well-deployed TOU rates can dramatically improve the economic livelihood of many low-income customers. Energy providers should be mindful of the myths above, however, and take every precaution possible to ensure that new rate offerings serve to benefit their most vulnerable customers. Beyond best practices of offering shadow bills and bill protection, we recommend energy providers conduct structural bill impact segmentation research prior to rolling out a new rate and to consider omitting any low-income structural losers from any default efforts or opt-in invitations. By equipping low-income customers with the information, technologies, and unique pricing products they need, energy providers can help alleviate energy poverty while realizing load flexibility goals.
For more information on our recent work surrounding TOU rates and low-income populations, and a deeper dive into the research presented in this blog, please read Assessing Equity in TOU – How low-income customers fare on Time of Use Rates.