This is part seven of a series on climate change and the electric power industry.
Currently, electric utilities bill customers using an outdated rate structure that will not continue to provide sustainable revenue. The challenges utilities face due to human-caused climate change, including recovery efforts from more severe and frequent storms and the need to embrace significantly more renewable energy sources, will require utilities to acquire additional revenue.
In this post, we’ll look at the current rate structure and the historic cost of electricity. We’ll also examine the potential for a sustainable revenue stream that utilities could achieve by updating their rate structure.
A new rate structure would allow a set amount of funds to be funneled directly into an escrow-style account, which utilities would retain until infrastructure needs to be repaired or proactively updated. Escrowed funds could be specifically designated for use towards utilities’ climate change mitigation strategies.
With an updated rate structure, electric utilities could take a more intentional approach to confronting the challenges of climate change. Read on to find out more.
Electric Utilities’ Current Rate Structure
The current rate structure assumes that consumers will purchase electric energy on an ongoing basis. Consumers are charged for the electricity they use in kilowatt hours (KWH) each month. Utilities provide and maintain infrastructure to serve homes or businesses, regardless of the amount of power used each month.
Due to this billing structure, utilities’ revenue fluctuates with changing power demand related to the change of seasons; however, the cost of maintaining the infrastructure always remains the same.
This system of billing was useful a century ago, but is now outdated. Electric utilities must have a sustainable revenue throughout the year to continually enhance grid infrastructure to withstand the effects of climate change.
Utilities tend to operate under the assumption that consumers will not be willing to pay a little more for robust substations and power lines. This line of thinking needs to be reconsidered. Consumers must pay slightly more for grid enhancements, or continue to suffer the hidden costs of an outdated grid: storm-damaged component failure, frequent blackouts, and a continued contribution to climate change through burning fossil fuels for energy.
Historic Electric Prices
Historically, residential consumers have been charged a few cents per kilowatt hour of electricity use, with prices rising yearly. Comparisons can be made using an average consumption of 500 KWH per month from the 1960s to present.
Between 1960 and 2020, the average cost of electricity for residential customers rose by 500%, as shown in table 1. As a point of comparison, in 1960, the average cost of a gallon of gasoline was 31₵. In 2020, the average cost of a gallon of gasoline was $2.67. This was an increase of more than 850%.
Prescient Updates to Utilities’ Rate Structure
Updated rate structures should include a set infrastructure fee and consumption charges in KWH. Infrastructure charges should be funneled into an escrow account specifically designated for use towards utilities’ climate change mitigation strategies, including updating infrastructure to prepare for renewables and weatherizing grid components that are susceptible to recurring damage. Funds could also be used to replace components that have reached end of life.
Infrastructure costs should be a fixed amount based on maximum 15 minute usage in kilowatts during the previous twelve months. If, for example, the set cost is $10 per KW and the maximum fifteen minute usage is 3 KW, then the monthly infrastructure charge would be $30. If the maximum fifteen minute usage is 10 KW, the monthly infrastructure charge would be $100. This fee is based on the maximum 15 minute usage because components are sized to meet the maximum consumption of energy, to avoid being overloaded during periods of maximum use.
Consumption costs should be a fixed amount of around 4₵ per KWH multiplied by maximum thirty day usage during the previous twelve months. If, for example, the maximum thirty day usage is 1000 KWH, the monthly consumption charge would be $40. If the maximum thirty day usage is 2000 KWH, the monthly consumption charge would be $80.
This means that in each billing cycle throughout the year, electricity consumers will pay the same amount. However, individual households and businesses will pay an amount that is unique to their specific energy usage. With this structure in place, utilities will have consistent revenue throughout the year, with funds available to put in escrow.
Save For a Better Future with Escrow
Escrow accounts are one innovation that utilities can use in the face of climate change. With money saved, utilities would be able spend a little more to enhance the system every year, rather than simply replacing damaged components with the same components. The hidden costs associated with lack of upgrades would diminish.
Moreover, an updated rate structure would direct electric utilities' funds more intentionally to reduce their contribution to climate change in the form of burning fossil fuels, and to enhance utilities’ climate change mitigation strategies.
In our next post, we’ll take a closer look at how escrow accounts can improve utilities’ method of implementing grid enhancements.
To learn more about Prescient’s recommended grid updates to enhance renewable energy transfer capability, check out our renewable energy blog collection. You can also find more information about the necessity of demand-based billing as distributed renewables expand throughout the grid.