3 Reasons Customer Programs Should Support Complex Rate Design

In 2019, NorthWestern Energy (NYSE: NWE) lobbied the State of Montana’s Public Service Commission to approve a proposed new three-part ratethat was ultimately rejected. Their new rate design would have consisted of an increased monthly service charge, an energy charge, and a demand charge of $8.63/kW that would only apply to new solar Net Metering (NEM) customers.

While that plan was rejected by local regulators, it would have meant that new NEM customers would be forced to pay additional demand charges that would further increase their solar payback period, as opposed to the granular bill structures that customers already received. The reject structure for both NEM and non-NEM customers is shown below.

montana-rates-1

While the new rate proved controversial, Northwestern Energy is part of a growing trend. In January 2018, Massachusetts regulators agreed to approve Eversource’s three-part rate design that included a mandatory demand charge for residential customers who owned distributed energy resources. In September 2018, Kansas regulators approved a new demand fee ($9 per kilowatt in summer and $3 per kilowatt at other times of the year) that only applied to solar customers of the state’s largest electric utility, Westar Energy. Xcel Energy in Colorado and ConEdison in New York are also piloting demand charges, joining several utilities across the country that have begun to adopt these charges as part of their tariff modernization activities.

New, more complex rates increase the onus on the average utility customer to understand the rate while adjusting daily behavior to minimize their monthly utility bill. Utilities must address this head-on by complementing new rates with more robust customer offerings – like real-time demand-side management, customer-led automation, and constant rate improvement/iteration – to be successful. To learn more, read on.

Real-Time Demand Side Management

The residential demand charge that NorthWestern Energy proposed was a “non-coincident” peak demand charge. This type of demand charge implies that the residential customer will pay the demand charge whenever it happens – it doesn’t have to coincide with when the grid is experiencing stress.

In order to adjust their energy use to decrease these demand charges, residential customers would need to constantly monitor their home energy use. It would be ineffective and unfeasible for many customers to manage every single appliance in their home during every hour of the day. However, real-time demand-side management can play an instrumental role in saving money for both customers and utilities while ensuring grid reliability and energy efficiency. Because real-time demand-side management has the ability to analyze and regulate distributed energy resources (DERs) such as solar PV, electric vehicles, energy storage, and smart home devices, it can provide demand response programs and optimize the grid by appropriately adjusting voltage, frequency, and parameters.

Investments Guided By Customer Needs

New residential demand charges would not only have increased the electricity bill for NEM customers but would have also made it harder for customers to understand where their costs were coming from. For these types of

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changes, utilities adopting residential demand charges must take a more customer-centric approach to maintain customer satisfaction and loyalty.

A report from Accenture Strategy titled “Customer-Centricity: Must-Have or a Waste of Energy?” states that eight out of 10 consumers say saving money on their electric bill is very important and that six out of 10 consumers value comfort and the convenience of automation.

The report advises letting customer desires guide investments. Utilities should automate where possible for customer ease by utilizing various digital technologies such as the Internet-of-things (IoT) and artificial intelligence (AI). To do this, utilities can build on the basis of efficiently providing basic services while “disrupting and revolutionizing for growth with an ecosystem of like-minded partners through incubating start-ups that offer new products/services not constrained by the core business.”

These services should include a homeowners app that allows customers to easily monitor their energy use, real-time smart device arbitrage that allows utilities can optimize devices not just on signals like the price but also the behavior of the customer, and/or efficient energy storage and management solutions.

Iterative Rate Design

A McKinsey & Co. insight article titled “Solving the rate puzzle: the future of electricity rate design” shared that as the need for reformed rate design grows, utilities will benefit from “using early action, cooperation with regulators, and a customer-centric approach to help transform utilities’ one-rate-for-all model into a rate structure that helps retain customers, create revenue that contributes to the upkeep of the grid and makes customer behavior and utilities’ operations more sustainable.”

These residential demand charges are caught up in this discussion regarding rate structures. Opposing arguments state that increased costs stemming from these demand charges will significantly decrease the number of newly installed residential solar panels while others argue that the purpose of introducing three-part rates is not to “hurt” the rooftop solar industry, but rather to remove distortions in the price signal and provide customers with an incentive to manage their electricity consumption in an efficient manner. Supporters of the charges believe that residential demand charges can remove an unintended subsidy that is currently being provided to NEM customers by non-NEM customers under the existing flat rates.

Rate Design Customer Programs Conclusion

There is no “perfect” rate design that works for all utilities all the time, and situations and expert opinions often vary as they are varying in this NorthWestern Energy net metering rate case. Because of this discrepancy, there is a need for iterative rate designs to ensure the continuous establishment of appropriate and sustainable rate structures.

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About The Author
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Amanda Zhang is a Yale student studying Sustainable Finance & Development and former intern at Virtual Peaker. She has worked as a research analyst at Point 72, a research assistant and writer for the Yale Center for Business and Environment (CBEY), and Project Manager and Analyst at the Yale Undergraduate Consulting Group. Amanda has a host of honors and awards and has had her work published in a variety of publications.

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