Is it Time for Utilities to Expand “Time of Use” Rate Structures?

By Rick Rys

Category:
Industry Trends

The 1988 article on "Spot Pricing of Electricity” illustrated how the cost of power varies by location, time of day, and season. Ever since this influential paper, utilities have been creating new market mechanisms such as the wholesale energy markets to make power more reliable and lower cost. With more intermittent generators on the grid, utilities are using the capability of Smart Grid technology to take TOU (Time of Use) to the next level.

Why would your utility want to complicate your life and theirs with TOU or “time of use” billing? There are several good reasons, and this article will explain some of the reasons why your utility is motivated to move away from simple fixed billing rates. Utilities want to provide customers reliable power at the lowest cost, and transition to non-carbon emitting power sources. Reliability, cost, and environmental responsibility are the three pillars that keep utilities up at night. Perhaps you may not realize it, but the cost of the utilities' power changes during the day, over the seasons, and increasingly due to the wind and sunshine. When you pay your power bill every month, the utility needs to cover the cost to provide that power. In this article, we take a closer look at TOU in a municipal power utility in the New England region.

The Cost of Power

ISO New England manages the “Wholesale Energy” market in New England. You can see this price in real-time using the “HOURLY LMP GRAPH CHART” at: https://www.iso-ne.com/isoexpress/web/charts. LMP stands for “local marginal price” and this is the price utilities can buy or sell power in the so-called real-time market. 

The chart below shows the actual LMP prices for an ISO-NE zone for a summer month and a winter month.  This chart shows several interesting things. Most notably, the chart shows a big difference in wholesale energy price from summer to winter, and it also shows you can reliably buy power at 1 am and sell it at 5 pm for a profit as prices are based on the demand for power. Notice the grid is spaced in 24-hour increments for each grid line and the peak price happens at roughly the same time each day. If you can buy and store power between 1-5 am and sell it the next day between 5-9 pm you can make money every day. As you will see, this “arbitrage method” is only one way you can use energy storage devices to make money. It also shows the price can go to zero or even negative, as was the case at 4 am on January 13th (hour 292 in the month). As you might guess, this volatility will increase with the expected addition of more wind and solar generation in the New England region over the next five years. Utilities lament “if only our customers would buy power when LMP price is low and use less power when LMP price is high it would make our grid easier to operate, reduce the cost of power, and enable us to add more wind and solar.” Of course, it is the utilities that must give customers the incentive to do that.

Wholesale Cost of Power in New England During January and July

How Does a Utility and its Customer Both Benefit from TOU?

TOU policy will vary for each utility and will depend on how that utility selects the rates, the time slots, the smart metering system, and how the utility estimates customer behavior. When developing a TOU policy, the utility must consider the specific details of their contracts to buy power for their customers. Few utilities simply buy power from the real-time market alone. PPA’s or Power Purchase Agreements can vary widely, and the purchased power may be a mix of fossil, nuclear, hydro, solar, wind, bio, geothermal, and maybe some power from LMP to fill the gaps. As more utilities move to wind and solar the LMP price seems likely to get very high at times. In New England, power cost (actual energy in megawatt-hours or kilowatt-hours) is reconciled on an hourly basis with ISO-NE involved in computing settlements. 

Transmission and Capacity

There is another very important cost when a utility buys power from entities outside their own town. There are costs to using transmission lines to move that power from the generating source to the point of connection for your utility. In addition, all users of the transmission system must pay into a service fund to ensure the grid always keeps a reserve capacity of power generation so the grid operator can call on such generating resources when they are needed such as meeting a peak load demand on a hot summer day or a frigid winter night. Unlike the wholesale cost of energy, these transmission and capacity charges are service costs. Utilities are charged a transmission service fee based on how much electric power they used for the peak hour every month. The capacity service charge is based on the single-day annual peak hour in our region.  Because the transmission and capacity tend to be dynamic charges that are coincident to peak loads, the TOU rate structure tends to reduce these expensive charges. It has been common for many New England utilities to justify using a diesel generator or a grid-scale battery and operate that generator or battery just to reduce their peak transmission and capacity power peaks. This means the battery is kept fully charged but only discharged when a new peak hour is predicted for that month. It is possible to miss that peak if your timing is off.

The Belmont TOU System Pilot Program

After debating a number of TOU options, Belmont has enrolled a number of customers in a pilot program that will end on Dec 31, 2022. The Belmont TOU policy is shown in the chart below. 

According to the Belmont website: “There are three main reasons for Belmont Light to implement TOU rates. When done correctly, TOU rates: lower costs for customers who are able to shift their electric usage to off-peak times; lower costs for Belmont Light as a whole by reducing the total amount of energy that it is necessary to purchase during peak times; and create more opportunity for a greener power supply since energy is more likely to come from fossil fuel sources during on-peak times.”

Belmont has a website portal for the pilot program participants to monitor their consumption patterns. To help pilot program participants understand how TOU would work, Belmont created software tools that customers used to estimate saving based on their previous year's power consumption history, a tool to calculate savings from load shifting, and also a calculator for solar owners.  If you look at the TOU schedule below, solar owners will like that peak loads are from 1 pm to 7 pm during the summer because that overlaps with PV production, although during the non-summer months PV production from 4-8 pm is minimal.  

Time of Use Program for the Town of Belmont, MA

Time of Use Program for the Town of Belmont, MA

Advantages

  • Utility customers that adjust when they use power can reduce their power bill. Customers that ignore the TOU rates and use power during peak hours will likely see their bills increase. Simple time schedules make it easy to understand. Overall, the cost of power is lower without any capital investment.
  • The town of Belmont, MA carefully modeled their cost and TOU rate structures and used pilot programs to gather customer feedback and make adjustments. This allowed for a smoother pilot program roll out with the customer, the utility, and the regional grid benefitting. One important aspect that customers like is access to the data so they can visually see how they are doing and monitor their progress. AMI (Advanced Metering Infrastructure) packages for smart meters vary considerably regarding how customers perceive their ability to clearly see their power consumption history and situation.  

Disadvantages

  • TOU must be simple so that customers understand it and it must provide enough differential to motivate behavior. This simplicity does not deal with many dynamic pricing events that we see in LMP pricing or the complex problem of minimizing loads during a single peak hour in a month. TOU does not address the many opportunities in the area of “ancillary services”.
  • TOU pricing cannot replace energy storage but may reduce the need for storage. There are many loads that are not discretionary, like refrigerators, freezers, cooking, and some space heating loads. The easy applications are EV chargers which come with scheduling tools, but some devices like electric water heaters need automation so the homeowner is not toggling circuit breakers. This could be a simple timer, but new Smart Grid automation options are being developed. 

The Future

What is holding us up? TOU is only one aspect of demand response, and it requires Smart Meters, Smart Meter AMI, and innovative utilities willing to invest the time to develop a TOU metering and billing system.

  • The future will need more effective management and automation of power-consuming devices. Those participants in the Belmont pilot program can monitor their portal, look at their smartwatch and then manually adjust operating modes of their power-consuming equipment. Programs like TOU will encourage more automation, and communications standards like OpenADR can make this happen. Today EV chargers (Charge Point, Juice Box, Tesla), Solar PV inverters (Enphase, Generac, Solar Edge, Sungrow), and Mini-split HVAC system (Mitsubishi, Daiken, Fujitsu) have their own proprietary communications typically using WiFi. Heat Pump hot water heaters are only now getting smart with most installed equipment simply powered from a dumb circuit breaker. 
  • As utilities across the globe struggle with securing a diverse and growing collection of communication standards used for coordinating and managing customer DERs such as solar PV, battery storage, electric vehicles, and other demand-side management (DSM) resources, the OpenADR Alliance has seen a growing interest and adoption of OpenADR implementations.  Utilities are finding ways to help customers manage their power-consuming devices and they need to find a cost-effective and secure way to manage periods of resource need on the electrical grid with load management, demand response, and dynamic pricing programs.
  • Eaton has new WiFi circuit breakers, and new breaker panels like the SPAN panel have complete WiFi-enabled circuit breakers that enable automation. Many EV companies promise future EV models will be enabled with “bidirectional charging” or V2G or Vehicle to Grid. Utilities are keen to turn the threat that EVs can exasperate peak loads into an opportunity where they are managed to consume DER power when it is available and at a low cost. 
  • There are many benefits that demand response and energy storage can provide that existing markets are currently unable to monetize and are a lost opportunity. There is still a need for new federal, state, and local policy best practices for demand response and energy storage.  As each utility is different this is a challenging issue. Energy markets are generally designed for resources such as generators and load-reducers that provide a single service, but demand response and energy storage can provide multiple benefits depending on how they operate. Suffice it to say that we will see more innovative utility policies, regulations, markets, and programs like TOU that will be able to monetize the many benefits that demand response and energy storage can provide.

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