A report released moments ago by the Electricity Innovation Lab and the Rocky Mountain Institute indicates that fine-tuning electric utility pricing to reflect a more diverse grid will benefit the utilities, customers, and third-party providers. Rate Design for the Distribution Edge: Electricity Pricing for a Distributed Resource Future offers succinct analysis and answers as distributed energy investments continue to add robustness to the rapidly evolving 21st century grid.
The e-Lab participants say that today’s block volumetric prices conceal key aspects of the electricity system from DER decisionmakers and at the consumer end. Most noteworthy: the importance of timing in producing and delivering electricity.
Block prices worked in the past when electricity sources were monolithic, confined to large utilities. That type of utility pricing is much less appropriate now that affordable distributed resources are filling previously unmet needs and quickly expanding our ways of handling electricity.
Over time, e-Lab consultants report, we can deploy and manage distributed energy resource investments in ways that create more value for all electricity stakeholders. Tweaking price signals to reflect costs and benefits more reliably can bring us to this point. More sophisticated utility pricing will better capture intrinsic value and foster grid flexibility and further innovation.
The e-Lab report identifies three opportunities for utilities and regulators to move from the existing and unwieldy turnkey pricing system to one that better reflects technology advances and more closely meets customer needs:
- Attribute unbundling—Breaking apart a bundled kilowatt-hour into cost- and value-based components such as energy, capacity, and ancillary services
- Time-based pricing—Allowing consumers more flexibility with power decisions by increasing transparency about the time-varying costs of electricity production and delivery
- Location-based pricing—Shifting to pricing that better directs DER deployment to locations on the grid where they can deliver the greatest value
These more sophisticated rate structures complement increasing utility and third-party innovations with smart devices and automated controls.
As the one-way utility-customer relationship transitions to a two- or three-party exchange, forward-thinking utilities can assure greater value for themselves by developing new rate structures that reflect the fast-evolving changes in the grid. Increasing the sophisticated pricing of grid resources will better direct investment from utilities, third-party technology providers, and customers themselves.
It’s a given that developing and implementing new utility pricing will require sound collaboration among these three groups and the regulators set up to assist them. “The stakes are high in getting the transition to new pricing structures right,” says RMI Managing Director James Newcomb. He points out that outside investments by DERs and customers rely on the price signals provided by the utility. Existing rate structures are so bulky that they cannot adequately reflect either technological advances or changing social priorities.
e-Lab’s Rate Design for the Distribution Edge: Electricity Pricing for a Distributed Resource Future report is available for download here. Its bottom line: collaborating stakeholders can work together toward a shared vision of the future. New pricing structures will enable DERs to bring increased value to customers and the system as a whole.
*A diverse working group of thought leaders and decisionmakers from the U.S. electricity sector, e-Lab addresses the economic deployment and integration of US distributed resources. The long-established Rocky Mountain Institute supports its efforts by facilitating e-Lab meetings and producing actionable work products on its behalf.