SDG&E: Rate structure incentivizes customers 'to do the wrong thing'

If you work in the U.S. electric utility industry, you have – without a doubt – heard the common refrain: “The industry is changing.” Not surprisingly, utility executives repeated those exact words this week at the Grid Edge conference in San Diego, California.

“For those of you who don’t think that is true,” said James Avery, San Diego Gas & Electric’s senior vice president of power supply, “just keep an open mind.”

California is a microcosm of the industry’s future, Avery explained. “What we are experiencing now are things you will experience in the future.”

But “perhaps the biggest challenge in our industry at this very moment is that the way we charge for the services we provide is based on a model that predates the dinosaur,” he continued. “It has nothing to do with the way we actually provide services.”

“If you do not get ahead of these issues today,” Avery warned, “the problems you will face in the future are the same ones we are facing in California right now.”

The problem with California’s rate structure

California’s two-tiered residential rate structure is designed to encourage customers to use less energy, Avery noted. The first-tier block essentially rewards low energy usage with low rates while the second-tier block penalizes high energy usage through high rates.

“When you didn’t have things like distributed generation, electric vehicles and a host of other technologies coming about today, that might have made sense,” he said. “But it doesn’t make sense today.”

The two-tiered rate structure has actually “made our system less and less efficient,” Avery explained -- the exact opposite of its goal.

SDG&E used to have a load factor in the 60% range, Avery said, but today the utility is only at around 50% -- and heading down towards 45%.

 
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“Our capacity factor is going down every single year,” Avery explained, “because we are trying to avoid energy without understanding when and how that energy is being used.”

The primary driver for misguided energy efficiency, Avery said, is the rate structure, which does not incentivize customers to curtail energy during the right time periods.

SDG&E’s peak is between 2 p.m. and 9 p.m., Avery explained, with an exact peak between 5 p.m. and 6 p.m.

If a customer is simply trying to avoid using energy, he will not turn on the air conditioner in the middle of the day when he is not likely to be home, he said. Customers will wait until they get home to turn the air conditioner on.

Instead of simply cycling because the house has been pre-cooled, the air conditioner “runs full bore” through the peak period, Avery observed. When the peak is over – and the heat starts to dissipate – the customer will turn the air conditioner off.

This is one of the main reasons that SDG&E’s load factor is going down, he noted.

“Trying to curtail energy at the wrong times of the day actually forces you to increase your distribution costs, your transmission costs, your commodity costs,” Avery said.

“For every kilowatt-hour we reduce, we only reduce 15% of our costs,” Avery added. “That’s because the vast majority of our costs are fixed in nature.”

 
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Customers ‘incented to do the wrong thing’

SDG&E’s customers are trying to use energy wisely, Avery said, “but they are incented to do the wrong thing.”

SDG&E’s peak is about 4,600 MW, according to Avery. That amounts to about 2000 MW of base load generation and 2600 MW of flexible generation to serve the peak at the end of the day.

 
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“The only incentives [customers] have today are to try to manage their way around the utility rates,” Avery said. Putting solar on the rooftop “avoids energy, but it doesn’t do anything to serve the capacity needs on our grid.” 

Customers are incented to use solar to avoid utility system energy consumption, but they are also inadvertently “making it harder and harder for us to operate the grid.”

Further adding to the problem is the fact that “customers who don’t put solar on the system are essentially subsidizing those who are,” Avery said, because the fixed costs of operating the grid do not change with growing residential solar penetration.

In other words, whether a customer has solar or not, they are “still part of the peak equation,” which equates to about 70% to 85% of the utility’s costs, according to Avery.

This results in a cost shift of $67 million per year from solar customers to non-solar customers, Avery said. By the end of this year, the cost shift will probably break $100 million per year.

The solution

There is a solution to this problem, Avery said.

Imagine if the customer understood that, in order to be energy efficient, he needed to run his air conditioner around noon -- when there is an abundance of solar power on the system -- until the peak period. Or if, for example, customers tilted their solar panels by 45 degrees to physically shift the solar shape closer to the end of the day – or the system’s peak.

At the moment, there are no incentives for customers to perform these actions, Avery noted, but they could translate to significant rate reductions if only even a small percentage of customers acted.

But don’t just take his word for it. Avery ran an experiment with his home to see what could be done about the problem.

Avery compared his energy usage with his neighbor, whose energy profile is “almost identical.” They have similar homes and similar usage patterns; they both have electric vehicles, solar panels and a pool.

Avery decided to set a clock on his pool to run “when my solar is running.” He added a controller to shut it down when it’s shady and that “immediately took two kilowatts off the end of the day.”

Avery changed the most-used lights in his house and replaced them LEDs, also adding timers. He started to precool his house – having the air conditioner run between midnight and 6 a.m., cooling the house to 65 degrees, and then having it run to 68 degrees until noon. Then, the air conditioner would turn off and not run again until midnight. “What that does, very simply, is it keeps my house between 72 and 74 degrees at the peak of the day,” Avery said.

 
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Avery and his neighbor's “utility bills are almost identical, but our burden on the utility system is dramatically different,” he explained. “I was not incented to do this through rate design, but this is what would happen if rates were designed properly.”

“If 20% of our customers were to do the exact same thing, it would translate to about a 20% rate reduction to our customers because it reduces our peak demand exposure,” Avery said.

“I asked my neighbor, ‘Why don’t you do the same thing?’” Avery added. “He said, ‘Change the rates and I’ll do it.’”

The future

In the past, the barrier to changing rate structures was that utilities could not get an understanding of their customers’ energy usage beyond the monthly data from the meter, according to Avery. But today -- with the deployment of smart meters -- SDG&E can pin down customers’ real-time and past energy use in 15-minute intervals.

This type of sophisticated information “creates opportunity for a wealth of new technologies to start to come into our industry,” Avery said. But without a different rate structure, “there will be no incentive for the customers to take advantage” of these new technologies.

SDG&E is exploring ways to redesign the rate structure to, for example, encourage customers with solar to pre-cool the house before the peak period, Avery said, so that when the peak period starts, the air conditioner only runs at 15 to 20% of full capacity to keep the house cool.

“This will create a whole new market for new market entrants to actually help customers use energy more wisely,” Avery said. “We really need to change the dynamic relationship we have with our customers and start educating our customers so they can be part of the equation, part of the solution.”

“This is the future,” he added. “We’re going to have an integration of renewables. We’re going to have electric vehicles scattered across the grid. We’re going to have solar on rooftops. We’re still going to have some large baseload facilities. We’ll have all types of loads that will be speaking to each other. We’ll be extracting energy from batteries. We’ll be using some available distributed resources and we’ll be part of the equation for the future.”

“But what we really need to do,” he concluded “is incent these market entrants.”

 
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