For most consumers, electricity prices do not reflect the rise and fall in production costs. Costs fluctuate throughout the day as the demand for electricity changes. Electricity generated at peak periods is generally more expensive to produce. Peak periods include weekday afternoons, summers, and times of shortage. These peak periods may require the use of power plants that are infrequently used or inefficient.
Some utilities have created “demand-response” programs. They use incentives or price variations to encourage consumers to reduce electricity usage, especially during times of peak demand. For example, customers might be offered a payment to reduce usage during peak periods. In other programs, customers agree to let the utility control a major appliance, such as an air-conditioner or electric water heater. This reduces demand on the system by briefly turning off the designated appliance during peak periods. Customers can override this function if necessary.
Time-varying rates refer to pricing structures where customers receive price signals as an incentive to reduce energy usage. Some utility companies have proposed using smart meters to enable them to charge different prices for electricity based on when the consumer uses it. Many consumer advocates are concerned about the potential for disparate impact of such a system. Time-varying rates might benefit high-income and high-usage customers. However, they could lead to higher costs for customers who have limited options for reducing their demand to off-peak times. This includes those who already have lower usage and those who are more likely to be home during peak hours, including older adults. In that case, time-varying rates might achieve their overall goal of reducing peak demand at the expense of some potentially vulnerable consumers.
RATE PROGRAMS TO DECREASE ENERGY USE: Policy
Time-Varying Rates and Demand Response
Policymakers should prohibit any time-of-use metering and billing program that is likely to:
- have an adverse impact on residential customers generally or
- shift costs to those who use less than the average amount of electricity.
If such programs are allowed, they should require customers to opt in. Policymakers should prohibit any required or opt-out time-of-use metering and billing programs.
Policymakers should ensure that time-of-use metering and billing programs have a consumer education component.
Policymakers should ensure that any time-of-use (or related rate design) pilot program for residential customers includes and identifies customers with low incomes and measures the program’s impact on customers who do not or cannot take actions to avoid the higher peak-time prices.
For states considering the installation of advanced or prepaid meters, policymakers should order a thorough analysis of such an effort and conduct contested proceedings to determine the costs and benefits to lower-income customers, customers at different usage levels and with varying patterns of usage, and residential customers in general.