Updated: May 4
In recent years some energy providers, including those in Texas, have begun offering market-based billing options. Market-based billing provides customers with the cheapest available electric energy at any given time, and is particularly risky because the price paid by consumers changes when the cost of energy production changes. In contrast, with traditional kilowatt hour billing, the utility provides power at a fixed cost that includes an allowance for occasional higher-cost energy.
In market-based billing, as long as supply and demand are balanced, the cost of electric energy is reasonable. But when demand far exceeds supply, prices become extremely high. When customers choose market-based billing, they risk paying for dramatic price increases when the cost of energy production increases.
We saw the negative effects of this billing method during the winter storm in Texas. The market-based pricing model is what led to bills in the tens of thousands for some of the consumers who continued to have electricity during the storm. Energy companies were faced with an increased cost for electricity production, which they passed on to consumers in the form of electric bills.
This massive price hike in Texas is a clear indication that billing practices must be updated to prevent unexpected and outrageous price hikes like this from impacting utilities and consumers in the future.
When electric utility companies update their monthly billing practices to be based on either maximum electric power demand without consumption charges or on maximum electric power demand with consumption charges, then consumers will pay a fair bill and utilities will have a sustainable income. This update would allow utilities to maintain reliable infrastructure while delivering power to consumers.
Let’s look a little more closely at what happened in Texas, and explore demand-based billing options.
Why Some Texans Faced Outrageous Energy Bills
The cost of electricity is not straightforward like the cost of food at a grocery store. When grocery shopping, prices are listed for consumers to evaluate before making their purchase. Consumers can compare prices between several brands of the same product, or chose to not purchase a product because of its price.
On the other hand, electric bills show the amount of power used each month and the price of that power after it has been used. Consumers only know the true cost of energy once they have consumed it, and so they are on the hook for the bill regardless of the cost. Why isn’t electric power purchased like other commodities?
In Texas, natural gas prices increased as demand increased due to the cold weather. As natural gas is used to produce much of Texas’s electricity, and demand for electricity increased due to the winter storm, the price of electric power suddenly increased as well. Homeowners and other consumers that had market-based billing were left with outrageous energy bills.
Energy providers and host utilities need to continuously communicate so that host utilities can always select the lowest priced electric power. Homeowners, however, are not aware of price swings. Both power flow and communications are illustrated in Figure 1. Even though utilities are always trying to get the lowest price, during the Texas energy crisis the lowest price was extremely high.
Not Just Texas
If you don’t live in Texas, you may think this isn’t applicable to you. But updating billing practices is important to everyone because of the increase of distributed renewable energy sources, such as rooftop solar panels. Currently, people with rooftop solar pay a considerably lower price for electricity. As more people adopt solar, this will create a major problem for electric companies in terms of financial stability. When updating billing practices, new technology should also be incorporated into current practices to regulate consumer usage. We’ll discuss the new technology later in this post.
Energy providers and host utilities must anticipate severe weather and other future crises when updating billing practices, in addition to considering solar panels and other distributed energy sources.
When distributed renewables are considered, KWH billing is not a sustainable revenue stream for host utilities. Instead, each host utility should base monthly bills either on maximum electric power demand in KW without consumption charges, or on maximum electric power demand and consumption charges in KWH.
For example, in a demand-based model without consumption charges, a utility could charge $10 per KW for a customer’s maximum electric power demand. No charge would be applied for KWH usage. In a demand-based model that includes consumption charges, a utility could charge $6 per KW plus a usage fee of $0.04 per KWH. Both models should provide electric utilities with sustainable income to maintain infrastructure across the grid while delivering reasonably priced electricity to consumers.
Consumers Must Be Kept Informed
Consumers must be given a communication link so that they can be made aware of price changes before they go into effect, as well as alternatives when price swings occur. Figure 2 illustrates how future electric power consumption and communication should be implemented.
Install Load Sequencing Panels in Every Residence
Today, every home is equipped with a circuit breaker panel, and many homes are equipped with smart meters. In the near future, every home must be equipped with an electric service panel that includes a load sequencing panels as well as circuit breakers. As a note, load sequencing panels are a technology that is in the process of being created at Prescient.
Load sequencing panels will receive input from the host utility, who will share the cost of power in real time. Residents can set their maximum price point for consumption in the load sequencing panels, which will then regulate energy use and cost to prevent the resident from paying more than their set maximum price point.
Once this new technology becomes commonplace, homeowners will be able to optimize their energy demand and control their costs. They can set a limit to their electricity demand, for example 10 KW. They can also minimize usage when the cost of electric power exceeds the amount that they are willing to pay, for example, $0.20 per KWH. Homeowners will determine the priority of each load in their residence based on their lifestyle, and then will use their load sequencing panels to implement their priorities. Load sequencing panels will reduce electric power demand to the value selected by the homeowner and reduce consumption when energy costs are high.
The host utility will communicate with load sequencing panels to reduce electric power consumption as the price of electricity approaches each homeowner's maximum price point. Host utilities will use load sequencing panels to alert homeowners when they are about to hit their maximum usage or price point, so that they can reduce energy use or raise their maximum price point.
Benefits of Demand-based Billing
When implemented together, demand-based billing and load sequencing panels will benefit electric utilities, homeowners and residents, and the planet as a whole. Consumers can set the amount they are willing to spend on electricity monthly, and would not see price spikes in their electric bill.
Load sequencing panels will reduce electric power demand and consumption; therefore, the need for utility investment in infrastructure will be reduced and less energy will be wasted.
Don’t Gamble with Basic Needs
The goal of electric utilities and energy providers should be to always provide reliable power at a reasonable cost to consumers. Consumers should not have to risk outrageous electric bills like those seen by Texans in February. By updating to demand-based billing and installing load sequencing panels, this goal can be achieved.
If you’d like to learn more about Prescient’s recommendations for updated billing practices or our load sequencing panels, contact us. We’d love to discuss the opportunities and advantages at greater lengths with interested parties.