California is embarking on a disruptive strategy to grow consumer adoption of smart and clean electricity technologies. Starting in 2019 the state’s three investor owned utilities, serving 80 percent 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 kilowatt-hour 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 his or her 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 work 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 his or her 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 supposed 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 received 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 p.m. to 7 p.m. on the hottest summer days when residential consumers cool their homes for comfort, health protection and the ability to enjoy a good night's 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 technologies like rooftop solar, onsite batteries and smart building systems are commercially available and will allow consumers to harvest lower bills through TOU pricing. But the key question is: How much price-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 electricity bills, increased electricity reliability, increased comfort, dramatic local job growth and reduced emissions.
Image credit: Flickr/Traci Lawson