California is embarking on a disruptive strategy for growing consumer adoption of smart/clean electricity technologies. Starting in 2019 the state’s three investor owned utilities, serving 80% of the state’s electricity customers, will launch Time Of Use (TOU) pricing for residential consumers. The utilities are now signing up volunteer residential customers to refine price designs based on actual customer reactions.
The question confronting California’s strategy is whether high prices charged to residential consumers during peak periods is a “bridge too far?” Will residential customers respond by buying smart and cleaner technologies to access lower prices? Or will they vote in revolt?
Will TOU pricing help or hurt residential consumers
Air conditioning is the ultimate challenge for gaining consumer acceptance of TOU pricing. Imagine the third day of a heat wave. You or your business receives a signal from the utility that the price for electricity will jump from 30 cents per kWh to $3 per kWh! That is the type of tension TOU pricing will create.
A rate department reported to me during my electric utility career. We implemented a form of TOU pricing called Real Time Pricing (RTP). In this type of price design consumers are provided a difference price every hour. The consumer characteristics we identified for a win/win result were:
- Price elastic consumers. Price elasticity in economics measures how consumers respond to price changes. A price elastic consumer will change their consumption when prices change. A price inelastic consumer will not. We sought to offer RTP to consumers who would change their consumption based on prices.
- Real time attention. RTP and TOU pricing works when consumers (or their smart buildings/appliances) are monitoring and acting on price changes. We sought consumers who were sophisticated enough to monitor and act on price volatility.
- Ability to change. A person on life support is an extreme example of the wrong type of consumer for TOU pricing. No amount of price signals, or attention to price signals, will impact their consumption of electricity. The ability to take action is key to TOU effectiveness.
Based on these criteria we did not implement RTP for residential consumers. This decision was heavily influenced by focus groups with residential consumers. A summary of their feedback included:
- Air conditioning was a flash point issue. Consumers can visualize shifting the operation of their washing machine from periods when electricity prices are high to time periods when they are low. But by day three of a heat wave most consumers view air conditioning to be a “must have” to protect their health and welfare. Charging more during these time periods appeared to produce more anger than load shifts.
- Residential consumers do not want to be focused on hourly electricity prices. They want to watch TV not utility prices. Focus group participants expressed strong frustration and apprehension over having to pay attention to electricity price changes to avoid higher bills.
- A common theme was “what am I suppose to do?” When prompted with suggestions like turn your thermostat higher the response was a frustration that they were already doing so. When prompted with suggestions to buy a higher efficiency air conditioner the response was typically a feeling of being coerced into choosing between paying more for a new air conditioner or paying a higher bill.
Conversely, we did receive very positive engagement from industrial and commercial consumers. These consumers had the ability, and procurement sophistication, to respond to hourly price signals. The result was a win/win. Consumers saved money and felt positive about doing so. The utility saved money from operating its generation more efficiently. The environment won because this more efficient operation also reduced emissions.
Will California TOU prices create a consumer revolt or a technology revolution
California’s launch of TOU for residential consumers is a real gamble. The need for doing so is obvious. Residential consumers set the state’s peak electricity demand and their peak demand is tied to their air conditioning use. The state consistently peaks around 5 to 7 pm on the hottest summer days when residential consumers cool their homes for comfort, health protection and the ability to enjoy a good night sleep.
The question is will, or can, California residential consumers respond to peak prices by reducing their demand during the very time period they place such a high value on air conditioning? The answer is yes if TOU sparks residential consumer purchases of smart appliances, solar power and batteries. TOU can be the financial incentive that drives mass market adoption of Zero Net Energy buildings. The answer is no if consumers simply revolt and this revolt translates into voter action.
I applaud California for taking this risk. I am signing up to be in the TOU test program. But professionally, this looks like a bumpy ride. The great news is that there are technologies like rooftop solar, onsite batteries and smart building systems that are commercially available and that will allow consumers to harvest lower bills through TOU pricing. But the key question is how much electric bill pain will be required to motivate consumers to buy and use these technologies? I hope consumers and the state can work through this turbulence. The result will be lower electric bills, increased electricity reliability, increased comfort, dramatic local job growth and reduced emissions.
About the author
Bill Roth is the author of The Boomer Generation Diet, now on sale at Amazon! Here’s what Jen Boynton, Editor in Chief of Triple Pundit says about the book: ”Written in Bill Roth’s lovable, relatable tone. The Boomer Generation Diet is a must-read for any Boomer who is looking to jumpstart their health and have fun at the same time. I hope my parents read it!” Follow Bill on Twitter and Facebook.