This is part four of a series on the fourth generation (4Ge) electric power system.
As we’ve discussed in our previous article Updated Electric Energy Pricing, the traditional method of KWH billing will not provide sustainable revenue for electric utilities in 2035 and beyond. To address the shortcomings of this outdated billing practice, Prescient has developed models for alternative billing structures for residential customers.
Updated billing practices are especially important as the transition to clean renewable electric energy continues and electrification of homes, vehicles, and businesses expands. In this article, we explore two new methods of billing: demand-based and flat rate billing. Electric utilities can choose the method that works best for them.
Monetary figures included in this article are based on Prescient’s own calculations, using a three bedroom, three bathroom house as the standard. Our calculations can be adjusted to fit a variety of home types; contact us to learn more or to apply the numbers to your average customer’s residence.
Outdated Billing: Customers Pay More, Utilities See Less
Residential customers will spend a larger percentage of their income on electric energy in 2035 than they do today. This will be due to several factors, including:
Increased electrification of households: transitioning away from gas-powered heat and appliances in favor of those powered by electricity.
Increased electrification of vehicles.
Increased rates for electricity.
For a three bedroom, three bathroom house in Oregon, residential customers with all electric appliances and heat should anticipate an average electric bill of $300 per month; similar residential customers with rooftop solar panels should anticipate an average bill of about $100 per month. These estimates do not include electric vehicle charging costs.
The estimates for energy usage are based on Oregon’s climate and typical household heating and cooling. Residential customers in Oregon typically use heat in the late fall, winter, and early spring; and use air conditioning in the summer. To determine the cost of energy usage, we estimate that traditional KWH billing charges will be $0.15 per KWH.
Though average bills will be around $300, with traditional KWH billing residential customers pay for their usage, often paying more in the winter and summer. As the cost of electric energy increases, customers may anticipate a monthly bill of $500 in January, $150 in April, and $400 in August.
Within this system, residential customers’ monthly electric bills are directly tied to their energy consumption: more energy consumed means a higher electric bill. There is little incentive to reduce energy usage because cost savings throughout the year are minimal.
With this billing method in place, electric utilities may find it challenging to build and support a system that can supply peak loads during the short time where electricity demand is at its highest. Peak load is typically only about one week in August and one week in January. Utilities face higher overhead to create a system that can meet demand during those two brief periods, while rarely seeing the revenue needed to sustain such projects.
A Better Billing Option: Demand-Based Billing
With demand-based billing, residential customers are charged an infrastructure fee and a KWH fee based on their energy usage. This method of billing is like the traditional billing method, but differs in that both peak demand and energy consumption are considered.
Prescient’s estimates for demand-based billing are based on a cost of $0.075 per KWH and an hourly demand charge of $7.50 per KW. With demand-based billing, the same residential customers should expect to receive a monthly bill of $400 in January, $200 in April, and $300 in August.
This billing structure will offer more incentive for residential customers to reduce their electric energy demand because demand-based billing will reduce residential customers’ yearly electric bills when those customers reduce their peak energy usage.
Every KW that is shaved off residential customers’ peak energy use will result in a cost savings of $90 per year. If they reduce their peak energy use by 4 KW, then they will reduce their electric bills by $360 per year. This will also reduce the amount of infrastructure that electric utilities need to build.
Flat Rate Billing: An Ideal Billing Method
An even better method of billing for electric utilities is flat rate billing. Like a subscription service fee, the flat rate billing method charges residential customers the same amount for electric energy every billing period.
Prescient’s estimates for flat rate billing are based on an hourly demand charge of $15 per KW. Customers are charged for the average of their electric energy usage over a set period, such as the last year. Every year, the flat rate is recalculated based on the previous year’s energy usage. With flat rate billing, the same residential customers should expect to receive a monthly bill of $300.
By reducing their peak energy usage, residential customers can reduce their yearly electric bills. This is an advantage for electric utilities as well: reducing their hourly demand also reduces the amount of infrastructure that needs to be built. For every KW shaved off residential customers’ peak energy use, they will see a cost savings of $180 per year. If a residential customer reduces their peak energy use by 4 KW, they will reduce their electric bills by $720 per year.
Leaders Demand Innovation
As we charge along the path to carbon free electric energy, leaders in the electric energy sector need to demand cutting edge innovations. Samuel Insull, the father of KWH billing, was an innovator; his vision has persisted for more than 100 years. Now is the time to implement new innovations, starting with demand-based or flat rate billing structures.
At Prescient, we are leading the journey to the next set of innovations for the electric utility industry. Please take a minute to forward this blog to the leaders in your company who are leading the charge to carbon free energy, and encourage them to contact us. We are ready to share our ideas and listen to yours.