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Could Energy-Based Subscriptions Give Residential Customers What Some TOU Rates Lack?

Jan 02, 2019

Overhead Power Lines 1

The new year marks the start of California’s transition of residential electricity customers to time varying electricity prices. Throughout 2019 and 2020, California’s three investor-owned utilities (IOUs) will default residential customers to time-of-use (TOU) rates. TOU rates vary the cents/kilowatt-hour cost of electricity dependent on electricity demand, with higher hourly rates during peak early evening times and on weekends. California commercial, industrial, and agricultural customers are on TOU rates, and approximately half of all US IOUs offer residential customers an optional TOU rate today. In 2016, Guidehouse Insights projected that over 113 million North American customers would enroll in some time varying electricity pricing by 2025.

Economics 101

TOU pricing schemes are designed to provide customers with an additional way to save by shifting usage to different times of the day—not just reduce usage like under most existing flat rates. As with current rates, price risk is shifted onto the customer, who is incentivized to reduce electricity during peak demand times. TOU rates suggest rational customers will achieve a decrease in utility bills by responding to these peak price signals. However, it appears utility customers might not act rationally, at least as defined in classical economics texts. 

A recent Ohio State University (OSU) study found that utility customers might let overly simplified perceptions of TOU rates, rather than their savings realities, guide home energy management decisions. The study followed the energy consumption of over 8,700 residential customers of an unnamed southwestern utility during a 1-year pilot program and found that customers overestimated their savings from a variety of TOU programs offered. 

Without closely examining bills, customers might not achieve an accurate understanding of the exact financial effect of shifting their energy-intensive activities to off-peak times of day. A deeper understanding of actual TOU rate-savings may make such plans less attractive than marketing might lead a typical residential customer to believe. Utility Dive’s recent overview of the OSU study states that residential customers in the pilot programs saved only about 3% on their electricity bills. This reduction alone is perhaps too small to encourage customers’ continued participation in an optional TOU program. While Guidehouse has designed TOU rates that likely provide a better response to savings reward, this case shows what happens when there is a gap between customer perception and reality. In these situations, utility communication and savings feedback at regular intervals is key.

Subscriptions: The New Normal

Though time varying pricing schemes will likely grow alongside distributed energy resources proliferation and grid modernization efforts, Guidehouse is exploring a perhaps more customer- and budget-friendly option: energy service subscription plans. Subscription services pervade all facets of modern life and generated a combined $2.6+ billion in sales in 2016

Sample Energy Service Subscription Plans

Sample Energy Service Subscription Plan

(Source: Guidehouse, Inc.)

Utilities like Tucson Electric Power and retail suppliers such as clean energy Inspire are exploring or actively offering residential customers subscription electricity service. Subscriptions help customers to budget their monthly energy spending and shift risk back to the service provider. The price is known ahead of time and does not change from month to month, thereby eliminating misaligned expectations. Bundled into subscriptions, however, can be energy-saving tools that might otherwise be cost-prohibitive for subscription-loving demographics like millennials. With a variety of monthly plans offered, these companies can offer financed energy-saving and home comfort technologies like smart thermostats and wall plugs; technologies that simultaneously reduce providers’ risks. While the subscription model for electricity is more nascent than time varying pricing, the coming years will likely include a mix of both solutions. Guidehouse Insights looks forward to tracking the development of these solutions as the Energy Cloud 4.0 approaches.