July 21 2015
Electricity conservation through rate design
When I joined the electricity industry conservation was not a priority. In fact the utilities had their own showrooms full of competitively priced energy hogs. Electric cookers and electric heaters were aggressively promoted because once the customer had committed to the investment, they were also committed to long term purchases of electricity to use them. Electricity growth was the name of the game.
How things have changed. Today every utility is promoting conservation strategies. Regulatory bodies and system operators scrutinise the cost of generation and seek to avoid the need for expensive peaking plant that only operates for a few hours each year. Much better to avoid the peak demand in the first place. And it has become accepted wisdom that efficiency is cheaper than new build generation.
But how to encourage consumers to reduce demand?? Could rate design be part of the answer?
The simplest way to reduce demand would be to hike prices until demand falls. This would be effective but would be socially divisive (having a disproportionate effect on low income households) and political suicide for any legislators that imposed this.
Better solutions are available – but are they being used? For a forthcoming report from Sageline Consulting, I researched tariffs of 15 utilities across Canada. The results were disappointing. Two-thirds of the utilities have a simple flat tariff that provides consumers with no incentives to conserve.
Atco Electric Yukon has a three tier tariff. The top rates are 15% higher than the base rate. The three tier tariff is an innovative step but the rate differentials need to be greater to be truly effective.
BC Hydro and Hydro Quebec both have a two tier structure where the top rate is 50% higher than the base rate. These are progressive tariffs and both companies should be commended.
Ontario Utilities have implemented time of use rates. These three tiered rates have a top rate which is 65% higher than the base rate. The highest rates are targeted at times of provincial peak demands. These tariffs are not intended to restrict total energy use but instead to shift it from peak times to off peak times.
The biggest disappointment for me was Maritime Electric which has a two tier tariff where the rate for the highest use is 20% below the base rate. This rate appears designed to reward excessive use.
There are opportunities for further innovation in rate design. The majority of Canadian utilities who currently offer a single tariff should look to their neighbours for inspiration. Perhaps combinations of Time of Use rates with multiple tiers for the highest users could be effective.
What tariff design would encourage you to conserve electricity?