Momentum grows for piloting Netflix-like fixed subscription rates, but not everyone's on board
Momentum is growing for giving electricity customers the kind of predictable subscription bill options that smartphone and home entertainment customers get.
Fixed rates — once preferred to align costs and revenues — are losing regulatory support as variable supply and load make demand peaks the bigger concern. Dynamic rates with price signals that flatten peaks and shift load to match supply are becoming the favored rate design. But the subscription rate concept, coupled with enabling smart home energy management technologies, is gaining momentum and could offer the benefits of both.
"Energy costs today are higher than they should be because customers value bill simplicity more than savings or environmental impacts," Brattle Group Principal Ryan Hledik, co-author of a new paper outlining a subscription-based rate design, told Utility Dive. "A FixedBill+ rate can combine a fixed bill's simplicity with the energy use benefits of energy efficiency and demand response," he said.
"Many customers are no more interested in the electricity system details on their bills than they are in IT protocols and servers that stream their Netflix subscription."
Vice President for Rate Design and Strategic Solutions, Duke Energy
A groundbreaking 2018 subscription rate proposal by Lon Huber was less explicit about the role of enabling technologies and potential savings. Huber worked for Navigant at the time, but is now vice president for rate design and strategic solutions at Duke Energy.
"Many customers are no more interested in the electricity system details on their bills than they are in IT protocols and servers that stream their Netflix subscription," Huber told Utility Dive. "New energy service subscription concepts can stabilize the bill, increase clean resources, and lower electricity costs for all customers."
It is time for real world pilots of a subscription rate coupled with enabling technologies, Huber, Hledik and other advocates said.
But regulators must be cautious because poorly designed subscription approaches and those that do not include access to enabling technologies could lead to over-consumption that imposes costs on other customers and compromises utility revenues needed for a reliable power system, electricity retailers and authorities on rate design told Utility Dive.
Surveys show some customers "prefer simplicity and freedom from managing their energy," the June 2020 Brattle Group-Energy Impact Partners (EIP) paper found. Instead of a bill for the changing amount of electricity a customer consumes each month, FixedBill+ would offer a monthly bill "guaranteed to remain constant for a specified term."
The voluntary rate is like those from "a growing number of subscription-based consumer goods" providers, the paper reported. Though interest from utilities, competitive electricity retailers, and third-party energy managers is growing, there are few results of real-world applications for electricity, they told Utility Dive.
Huber, who originated the Energy Service Subscription Plan in a detailed 2018 Navigant paper, agreed. But the hypothetical Brattle case, which is an important addition, "appears to be based on reasonable assumptions" and "shows a customer can save, the system can benefit from demand side management programs, and the utility is compensated for taking on additional risk."
Electricity providers, including Georgia Power, Consumers Energy and retailers in Texas, have offered fixed rate "all-you-can-eat" plans with no incentives to reduce usage, the recent Brattle paper said. The opt-in FixedBill+ "is entirely stable and predictable for the full one-year term," but also includes "flexibility benefits, environmental benefits, and cost savings from energy efficiency (EE) and demand response (DR) programs."
The combination could lower customers' annual bills 3% relative to standard rates, and 6% relative to a conventional fixed bill, the paper's hypothetical case found.
"A fixed rate, and not a variable per-kWh rate, is the best way to align the cost of service with changing system costs."
Principal, The Brattle Group
The first element in a FixedBill+ that can allow those benefits is "comprehensive energy management" by electricity providers through smart demand side management (DSM) technologies, the paper said. Customers must also consent to "periodic adjustments" to the initial fixed rate, as their usage patterns evolve. Finally, there must be "incentives for energy providers to reduce costs," it said.
FixedBill+ shifts the financial risk from "the shoulders of customers" to "sophisticated electricity providers" who have the incentives, expertise and tools to reduce costs, Hledik said.
Duke's Huber agreed. Only if the provider delivers "a compelling value proposition" with energy management through smart technologies and DR measures will it fully align its interests with those of the customer and the system, he told Utility Dive in 2018.
Those DR and EE technologies and measures could provide 200 GW of cost-effective load flexibility potential in the U.S. by 2030 that would reduce U.S. peak load by 20%, according to a 2019 Brattle Group study.
Demand for more bill simplicity could accelerate interest in enabling EE and DR technologies and programs, Hledik added.
Along with customer demand, the power system's transition to fixed cost generation will drive adoption of FixedBill+ and other subscription rate approaches, the paper also reported.
"Fossil-fuel-based power is affected by variable costs" because it is "dependent on fuel prices," it said. Renewable generation requires "substantial up-front investment," but has few variable costs.
"A fixed rate, and not a variable per-kWh rate, is the best way to align the cost of service with changing system costs," Brattle's Hledik said. "This concept is ready for more market research, regulatory innovation and pilots."
"We are still in the early stages of what we can do with the concept and who we market it to," Duke's Huber agreed.
In the real world
The fixed charge part of the rate designs proposed by Brattle and Huber are not new, but have been rejected by state regulators who say they can drive overconsumption when not paired with home energy management technologies, said Autumn Proudlove, senior policy research manager at the North Carolina Clean Energy Technology Center, and lead author of the center's national policy activity quarterlies.
"Fixed charges are still being proposed, but we're seeing fewer of them," Proudlove told Utility Dive. And subscrtiption rates are still untested. The only subscription rate option to all residential customers that has even been proposed is from Arizona Public Service (APS), though Nevada's Senate Bill 300 ordered regulators to consider it, she added.
SCE sees "subscription pricing as a tool that customers can use to manage price or inflation risk" and supports studies and pilots "to further vet such pricing with and without smart technologies."
Principal Manager for Modeling, Forecasting and Economic Analysis, SCE
A recently completed proof-of-concept pilot tested a largely fixed subscription rate that included a small real-time pricing element, TeMix Founder/CEO Edward Cazalet, who partnered with Southern California Edison (SCE) on the pilot, told Utility Dive. Automated DR and EE technologies and programs were designed into the rate pilot.
Outcomes suggested that "on a widespread basis, those kinds of programs could significantly reduce peak load" and the pilot proved "automation works" when programable energy management technologies are available for customers to set to their preferences, Cazalet said.
SCE "has not formed an opinion on the practical adoption of such rates," SCE Principal Manager for Modeling, Forecasting and Economic Analysis Reuben Behlihomji emailed Utility Dive. But the utility sees "subscription pricing as a tool that customers can use to manage price or inflation risk" and supports studies and pilots "to further vet such pricing with and without smart technologies."
Voluntary fixed "budget bill" offerings from APS and Arizona's Salt River Project have given customers rate stability, Arizona Residential Utility Consumer Office (RUCO) Director Jorge Fuentes told Utility Dive. But APS's proposed subscription rate paired with smart DSM technologies and DR measures "can flow system benefits to all customers by helping to flatten peak demand," he said.
RUCO "would only support a pilot" of subscription rates and only if it shifts at "least part of the program's risk to shareholders and targets flattening peak demand to benefit all customers," he added.
The limited real-world evidence of the promise of a fixed subscription rate plus DSM offerings has led to concerns about advocates' claims.
Any new rate design, including subscription rates, must be carefully studied to be sure it is in the public interest, Regulatory Assistance Project Associate Mark LeBel told Utility Dive.
A subscription rate "could be reasonable where somebody, presumably whoever manages the customer's load, would clearly be on the hook for higher costs," LeBel said. But "all-you-can-eat programs with one flat fee for any amount of electricity use are clearly unreasonable because it is important to have incentives to manage usage."
Over-consumption could lead to a utility "under-recovering" expenses and "passing that onto customers," he added. "That is a cost shift."
But a well-designed, voluntary subscription plan would allow the electricity provider to use DSM and automation to address over-consumption, Huber wrote in his 2018 paper. And any plan would be a "regulator-approved pricing agreement" designed to prevent cost shifts.
The concept, as described by Huber and the recent Brattle/EIP paper, continues to be carefully studied, Helen Lo, co-author of a 2019 paper on subscription rates and a member of the Sacramento Municipal Utility District distributed energy strategy team, told Utility Dive. "But work is needed to unpack the implicit assumptions about business process protocols and technologies."
Fixed bills are not effective because "retail electricity is microeconomics at its best and if you remove price from the demand and supply curve, the market doesn't work."
co-CEO and co-Founder, Infinite Energy
A subscription-based model that includes DSM in a meaningful way can help optimize system costs but "would be a paradigm shift and requires evolution, not revolution," Lo said. "There are many important questions that go beyond the Brattle paper, and now is the time to do the methodical groundwork necessary."
The concept must consider "reliability, future transmission and distribution infrastructure requirements, and the entire palette of system needs," she said. And subscription rate designs will also require "forward thinking" because programs and offerings will change as energy supply "moves from 45% to 50% of the total system cost toward zero marginal cost," she added.
"Customers don't buy electrons, they buy the value the electrons have for their businesses or homes, and cost is not independent of value," she said. With a nearly zero marginal cost energy supply, "instead of the electricity provider sending a price signal, the customer's choice of program and program cost is the signal."
Not all electricity providers see subscription rates in the future.
Brattle's proposal seems "stuck in a world of monopoly retail electric providers," GridPolicy CEO and former Federal Energy Regulatory Commission Chair Jon Wellinghoff emailed Utility Dive. "The modern world of energy services will be more aligned with the Texas retail electricity model."
Fixed bills are not effective because "retail electricity is microeconomics at its best and if you remove price from the demand and supply curve, the market doesn't work," Rich Blaser, co-CEO and co-Founder of Texas retail electricity provider Infinite Energy, told Utility Dive. "If the price is always the same, there is no incentive to conserve."
Infinite Energy's tiered rate offers lower prices for lower usage, Blaser said. "I'm not a fan of FixedBill+, but I'm a fan of consumer choice. But even with demand response and energy efficiency, the supplier is taking the risk. We give our customers as much information as possible and a lower rate if they use less electricity."
But supporters of FixedBill+ see that differently.
With utilities moving slowly and retail providers skeptical of subscriptions, there is an opening in the market and "nature abhors a vacuum," EIP Senior Director of Research and paper co-author Andy Lubershane told Utility Dive. "A growing segment of customers want this, and some entities will find ways to deliver it."
Utilities and regulators "are reluctant to try new rate designs until they are sure of the returns they require," EIP's Lubershane said. And competitive retailers "need to balance the cost of providing a high-quality service with customer behavior risks."
But the paper's hypothetical case "shows it is possible to offer FixedBill+ with low risk to the customer or the energy provider," he added. EIP client Arcadia's billing platform "is a good example," he said.
"The [Brattle] paper’s quantitative analysis shows there is money to be made in this space and third parties are well positioned to seize the opportunity."
Senior Director for Policy and Regulatory Affairs, Arcadia
Arcadia, an independent electricity provider, initiated pilots of FixedBill+-like offerings in early 2020 in Pepco and Salt River Project territories involving "several hundred customers," the company's Senior Director for Policy and Regulatory Affairs Richard Caperton told Utility Dive. "The paper's quantitative analysis shows there is money to be made in this space and third parties are well positioned to seize the opportunity."
Arcadia offers a fixed rate in return for customer participation in automated EE and DR programs. Aside from handling billing, the utilities are not involved. Results are expected later this year. Among surveyed customers in the pilot territories, 60% wanted bill predictability and only 40% wanted clean energy or bill savings, which suggests subscription rates like those proposed by Brattle and Huber can find takers, Caperton reported.
There are risks in FixedBill+-type subscription offerings, Lubershane said. "But they are already accepted in other sectors, and pilots that include EE and DR technologies and measures can show how the energy sector will respond. The winners will be those who do it in a way that has negligible impact on consumers while getting the most benefit for the provider and the system."