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A California Experiment Could Shape Texas Electricity Rates

Making TOU rates a reality for residential customers in Texas could help solve challenges facing the electric grid.

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Photograph by john randall alves/iStock

In 2015, the California Public Utilities Commission (CPUC) announced the state will become the first to make time-of-use (TOU) electricity rates the default option for residential customers by 2019. Typically, residential customers pay a flat fee for every kilowatt-hour (kWh). TOU rates, however, change the price of electricity throughout the day according to a predetermined schedule to mimic average electricity market conditions.

The CPUC decision calls for TOU rates that could help customers save money if they adjust their consumption patterns. By shifting how electricity is consumed, California might solve major energy challenges they face. One challenge, known as the duck curve, occurs because large amounts of solar energy are produced mid-day, falling off just as demand for electricity ramps up. The resultant net-load curve resembles a duck (sort of).

The steepness of the net-load curve in the late afternoon poses a challenge for the grid. Data for March 29, 2015. Source: National Renewable Energy Laboratory. Copyright: Scott Vitter.

Graphic courtesy of the National Renewable Energy Laboratory, Copyright: Scott Vitter

Dealing with the duck curve is difficult. Traditional solutions call for more power plants, grid-scale batteries, or transmission lines. By making TOU rates the default option, California is trying to get residential customers to be part of the solution. If Californians shift their energy usage to other times of the day, the duck curve might not end up looking so bad—or much like a duck.

The Texas electricity grid faces similar challenges. Peak electricity demand is higher than ever, with about half coming from the residential sector, mostly from air conditioning. High demand can cause price spikes on the wholesale market, signaling the need for new plants or expanded transmission lines. Meanwhile, TX residential customers pay a flat fee for electricity, even during peak hours. Time-of-use pricing could align residential consumption with price signals, leveling demand and helping the grid get more out of the infrastructure that is already built.

For TOU to work, Texans will need to engage with their electricity use. By planning ahead, customers could take advantage of cheap electricity in off-hours while avoiding on-peak use. Energy management systems could also help customers shift their electricity use. For example, controllable thermostats can reduce demand during the highest pricing periods. Batteries like the Tesla Powerwall can charge when electricity is cheap and discharge when prices increase. Ice storage air-conditioning technology allows cooling equipment to run at night using cheap electricity instead of during the hot, on-peak hours of the day.

However, a plan for time-of-use rates will need to protect Texans from unfair consequences. For example, senior citizens and low-income groups might not have flexibility to adjust to new rates. People who rent would also probably lack the ability to make their money back from buying energy management systems or smart appliances.

California will address these potential issues by allowing customers to opt out of TOU rates and by educating them about their billing data. Customers will also have “bill protection” to protect them from bill increases in the first year, giving them time to adjust to life under TOU rates.

Similar provisions would make sense for Texas. Additionally, the state could lead by rolling out smart phone apps to help customers track their usage. Finding ways to help renters and low-income groups gain access to energy-management equipment would also help. One model could be energy savings performance contracts, which the federal government uses to improve energy efficiency without spending money up-front. Texas could create a market for energy service companies (ESC) to provide smart appliances to residential customers, helping them load-shift by using less energy during peak hours. Customer savings from load shifting would help the ESC recover their costs. Over time, savings beyond the initial investment could be shared by the ESC and the customer.

Scott Vitter is a Ph.D. candidate at the University of Texas at Austin, where he studies urban water systems and their potential to provide demand-side services to the electric grid.

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  • mikegiberson

    While in California most rates are regulated directly by the California PUC, in most of Texas consumers sign up with competitive retail electric suppliers. These competitive suppliers can already offer consumers a TOU rate, at least if the consumer has a smart meter, and if wholesale prices provide the right incentives then competitive suppliers will have reason enough to encourage consumers to sign up. Right?

    Competitive suppliers could market their own smart phone apps to manage consumer use as rates adjust. Does the Texas PUC need to be involved?

    • Scott Vitter

      I think those are good points. I agree that we could see retail electricity providers in competitive areas introduce residential TOU rates. Smart meters are still relatively new in Texas, so it could take time (I think total deployments reached 6 million meters by 2013). But REPs also have reasons holding them back. For example, the potential for more profit could look small compared to the marketing/outreach bill, and introducing residential TOU rates could be risky if the rate design does not match well with average wholesale prices.

      I think the potential benefits of residential TOU rates are beyond what the REP would see. Encouraging electricity consumption behavior that eases the supply-demand balance on the grid should be good for system reliability, especially as more wind and solar generation are added in the future.

      Texas could see residential TOU rates first in municipally-owned electric utilities like Austin Energy or CPS Energy in San Antonio. Austin Energy actually has a time-of-use option for General Service commercial customers, although the rate is currently suspended for new customers wanting to sign up.

      • Bobby Anderson

        While your intentions are good, you don’t detail any type of cost with marketing this type of product as the go-to in Texas. There are already TOU products in Texas, but most involve a “Free” portion of the day, as using the word Free in your product is easy marketing and doesn’t cost anything to get customers on.

        Most people don’t understand electricity, and can you imagine what it would be like in a call center with customers trying to argue that their smart meter isn’t correct, they weren’t home during a certain time of day/period, and how did their bill get to be calculated like it is?

        Unless you are going to force it on customers, this isn’t going to have to work and we will need to continue to lean on large C&I customers to help relieve demand using pricing signals (which is already being done).

        • Scott Vitter

          I agree – I don’t know a ton about marketing and education costs that might be associated with a new plan. But TOU rates could save people money relative to flat rates, so I think a large amount of people could be interested eventually. I’m familiar with the TXU “free nights and weekend plan.” The idea is interesting but I expect what California rolls out will be more reflective of the wholesale market prices.

          Outside of competitive-choice areas, municipally-owned utilities and electric co-ops could take a similar approach to what the California PUC is implementing. So maybe that is a more realistic case for Texas.

          I agree that commercial and industrial loads are hugely important sources of demand-side flexibility, demand response, and/or load shifting. But I think the grid could benefit from even more in the future, and the residential sector seems like a natural place to look. TOU rates are one way to change residential behavior – certainly not the only way. Depending on how the TOU experiment goes in California should tell us a lot about how/if it could work in Texas.

          There are probably some things that the State could do to reduce barriers to adoption (without forcing adoption) like promoting educational resources or improving the Smart Meter Texas portal (https://www.smartmetertexas.com/).