Originally published on SEPA Power.
Not since Edison established the Pearl Street Station in New York in 1882, kickstarting mass electrification in the U.S., has there been a more exciting time in the energy sector. Adoption of distributed energy resources (DERs) – such as smart water heaters and battery storage systems – are increasing rapidly. Navigant forecasts a compound annual growth rate of 60-80% through 2027.
Consumer adoption of DERs is challenging the traditional utility business model. At the same time, utilities are under pressure to realize the benefits of their investments in Advanced Metering Infrastructure (AMI) to unlock value from DERs. These challenges will magnify with growth of variable renewable energy sources, making supply more dynamic, and cost-recovery forecasting more difficult for utilities, investors and commissions.
In response, many utilities are implementing time-of-use (TOU) rates to better match supply with demand. Half of investor owned utilities (IOUs) and 14% of U.S. utilities offer TOU rate options for residential customers, yet only a few cases exist where adoption (especially on an opt-in basis) exceeds 10%. As highlighted in the SEPA 2018 Utility Demand Response Snapshot, the key barrier to greater adoption is the lack of proactive engagement and education by utilities, noting “customers are often unwilling to enroll in TOU rates due to fears of bill volatility” and have difficulty understanding the rate structures.
Adopting best practice principles for implementing TOU rates can deliver significant benefits for utilities and customers. For example, a longitudinal study published by The Brattle Group found that customers can achieve a 5-12% reduction in peak load consumption on average through effective engagement and education methods alone, and 10-30% through the use of enabling technologies – such as smart thermostats. When amassed, even a 5% reduction in U.S. peak demand has the potential to save consumers $3 billion annually.
Best Practices for a TOU Rate Transition
A TOU rate transition can be stressful for both utility employees and customers. It can seem that customer needs are at odds with regulatory and internal requirements. Thankfully, utilities have gained experience helping customers through rate transitions. This experience identified best practices of the three e’s: empathize, educate and empower.
First, it is important to view the change through the eyes of customers. Many utilities design TOU rates to be as neutral to the customer as possible over the course of a year, but fail to recognize the large potential variation in bills between winter and summer rates. This can have significant consequences for many customers, particularly low and fixed-income customers. The Sacramento Municipal Utility District (SMUD) was able to maintain high customer satisfaction during their TOU pilot through messaging about the positive benefits to customers. By using focus groups and journey mapping exercises, utilities can better understand customers’ perspectives and tailor changes based on their feedback.
Next, ensure customers understand the upcoming changes and, importantly, their impacts through repeated personalized education. Some customers read bill inserts, while others check the website, but many ignore utility messages. Xcel Energy’s pre-pilot market research showed that customers lack considerable knowledge about energy usage, therefore utilities need to educate customers on TOU rates. To have the greatest impact, Xcel employed a variety of channels and used messaging specific to the impacts of the new rate on customer’s bills. Xcel found that using language such as “the average customer will experience” only leads to frustration and confusion.
Once a customer understands the energy bill impacts of the new rate, utilities can empower them to make changes in their usage. Oklahoma Gas and Electric achieved high participation in their opt-in TOU plan by providing customers several rate options and a free smart thermostat to help them instantly take advantage of the new rate. Energy efficiency products and services that directly reduce peak demand serve to amplify the benefit of the new rate, thereby improving the customer experience. Utilities can also provide each customer with customized behavioral tips to help their home stay comfortable while lowering their bill. With minimal investment, utilities can empower customers to take control of their energy usage.
Leveraging Technology for Rate Adoption
Beyond the three e’s of empathize, educate, and empower, utilities can deploy technologies that provide customers with effortless ways to manage their energy and realize the benefits of TOU rates. Major loads in a household can be automatically programmed and managed with the growing number of smart home technologies, significantly lessening the need for individual intervention. Smart thermostats, a relatively inexpensive and increasingly common household device, have the potential to shift load significantly by better controlling heating and cooling. Many utilities offer smart thermostats through an online marketplace, where customers can instantly redeem rebates and incentives, schedule installations, and complete the installation process.
Smart thermostat control of HVAC can address over 50% of household demand on a typical summer day.
Utilities can design their smart thermostat program as a distributed energy resource by offering incentivizes for thermostat purchase on their marketplace as part of a bundled thermostat optimization and rate program. Once the customer installs and configures the thermostat, it can run an optimization algorithm to simultaneously manage the rate and customer comfort, removing need for the customer to directly manage their energy usage. Further, algorithms can accommodate other loads and energy sources such as electric vehicle charging or solar panels to improve customers’ ability to manage their energy use and bill. These expanded capabilities can make TOU rates more attractive, leading to increased adoption.
While the transition to TOU rates offers exciting opportunities, it can be a challenge for customers to understand and adopt the new rates. Fortunately, the lessons learned from successful programs and the array of technologies available can ease the transition for consumers and utilities. Implementing a multi-channel and personalized communication strategy, offering rebates and incentives on smart technology, and connecting the devices to an optimization program can all be effective strategies to ensure broad TOU rate adoption while maintaining customer satisfaction.