AARP Hearing Center
Background
The costs to generate and distribute electricity fluctuate throughout the day as the demand for electricity changes. Electricity generated at peak periods is generally more expensive to produce and transmit in the local and regional power systems. This is because utilities must rely on extra power plants or build more transmission lines that may be less efficient and costly. However, most consumers pay the same price for electricity regardless of the time of day or season. There is a growing call for programs that reduce or shift usage away from more expensive peak hours. Doing so could potentially reduce the cost of generation and long-distance transmission systems.
Some jurisdictions have implemented programs to reduce demand during peak hours. These use incentives or rates to reduce energy usage during more expensive peak hours and shift demand to off-peak hours. There are two models for programs that target peak energy usage:
- Incentives: This “carrot” approach provides customers with a credit on their bills for reducing energy usage during peak periods. The base rate remains unchanged, but the customer can save money by using less energy during peak hours.
- Time-of-use rates: This “stick” approach charges customers a higher rate when they use electricity during peak periods.
Many consumer advocates prefer the carrots approach to the sticks approach. It ensures an affordable rate for households with low and moderate incomes who have difficulty shifting usage to off-peak hours. For example, older adults are more likely to be home during peak hours. Many are also on fixed incomes. They may need to run medical equipment during peak hours or to care for family members who require heating and cooling during such timeframes. Mandatory time-of-use rates can leave them with unaffordable bills to run essential heating and air-conditioning during peak periods.
RATE PROGRAMS TO SHIFT OR DECREASE ENERGY USE: Policy
RATE PROGRAMS TO SHIFT OR DECREASE ENERGY USE: Policy
Program design
Policymakers should emphasize incentive-based programs to reward customers for shifting or reducing electricity (see also Equitable Rate Structures).
Policymakers should prohibit any time-of-use metering and billing program that is likely to:
- have an adverse impact on residential customers generally,
- have an adverse impact on customers who cannot reasonably shift usage, or
- increase costs for households who use less electricity than average.
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 an individualized consumer education component. This should include a projection of the impact on a customer’s bill based on historical usage and current prices.
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 smart meters and associated digital communications systems, policymakers should order a thorough analysis of such an effort. They should 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.