In February 2021 and, more recently, in May of 2022, Texas experienced severe electric energy shortfalls. Just last week, temperatures across Texas soared, causing six power generation facilities to trip offline. As a result, Texans were urged to curb their demand for electric energy by turning their thermostats up to reduce air conditioner usage, as well as by limiting the use of major appliances.
Increased electric load due to the heat caused the power generating facilities to trip offline; however, this was not the only issue that led to Texas’ energy shortfalls. Our analysis finds that the shortfall was also due to least-cost pricing, in which electric utilities prefer to purchase energy from the lowest cost energy producers, rather than from the most sustainable energy producers. Though this technique is appealing when the cost of energy is low, it can backfire when demand increases, as was the case in February 2021 when some Texans saw sky-high power bills.
Flat rate billing should be implemented by utilities to mitigate the challenges presented by least-cost pricing and other outdated billing methods. This issue is not isolated in Texas; in fact, as the climate changes, more areas will see record heat waves and other extreme weather events, causing demand for electric power to increase. In addition, electric energy demand will increase as consumers purchase electric vehicles and electrification of homes expands.
Flat rate billing not only provides a transparent billing structure for consumers and sustainable revenue for electric utilities; it also supports renewable energy production facilities in both upfront and maintenance costs. Let’s take a closer look at how this is possible.
Energy Producers Benefit from Flat Rate Billing
The intent of flat rate billing is to move from least-cost billing to sustainable billing. It will require setting rates that are fair for consumers, while still being high enough for energy producers to cover their costs when the amount of energy they produce is low. With flat rate billing, energy producers will generate profit when the amount of energy they produce is high.
Flat rate billing will be designed to provide a sustainable revenue to every energy producer that is needed during peak load periods. Energy producers will be paid for providing standby energy during low load periods, as well as for providing energy to consumers during peak load periods.
During peak load conditions, 20% of energy producers will be paid to have their facilities ready for energy production on a moment’s notice in case other energy producers trip offline. During light load conditions, 70% of energy producers will be paid to have their facilities ready for energy production on a moment’s notice.
Billing structures should be developed that pay energy producers around $3 per kilowatt for standby energy and $5 per kilowatt for delivered energy. With this arrangement, energy producers will be reimbursed for facilities they provide, regardless of the load level on the power grid.
With flat rate billing, electric utilities will receive payments from consumers that will be used to pay energy suppliers. When this change goes into effect, energy producers and their shareholders will need to base their expectations on yearly revenue, rather than monthly or quarterly revenue.
An Advantage for Electric Utilities Too
Flat rate billing will provide a sustainable monthly revenue source to every electric utility that provides infrastructure. Electric utilities should charge a set base rate of, for example, $8 per kilowatt for peak demand in the preceding year. This monthly fee should be high enough to cover the cost of infrastructure, operations, maintenance, and losses, while providing sustainable profits.
Electric utilities will receive payments for both energy production and infrastructure through the flat rate billing structure, as outlined in our article Transparent Billing Benefits Electric Utilities and Consumers. Utilities will forward energy production payments to energy producers.
Flat Rate Billing Supports Renewables
To prevent the worst impacts of climate change, fossil fuel-based energy production facilities must be phased out. Between now and 2035, the largest cost factor at such facilities is fuel. The cost of continuing to rely on fossil fuels is even greater when considering the environmental impact in addition to the economic.
Instead, renewable energy sources such as solar and wind must be implemented at a rapidly increasing rate over the next 15 years. For renewable-based energy production facilities, the largest initial cost factor is building infrastructure. For example, wind generators require wind turbines, support structures, electric lines, and more, all of which contribute to a high upfront cost.
To mitigate these costs, renewable energy providers will have a target revenue of $50 per megawatt for new facilities. They will also have a guaranteed revenue of $20 per megawatt after they synchronize their facility to the electric power grid. This should help offset the startup costs and provide plenty of revenue to support increased renewable energy.
Flat Rate Billing Benefits All
As the climate continues to change, electric utilities face a choice: dig in their heels with current practices, or face the challenge head on with changes across the board. These changes include an update to current billing practices. Flat rate billing structures will benefit electric utilities, electric energy consumers, and electric energy producers, so why not make the change today?
To learn more about Prescient’s recommended updates to electric utilities’ billing practices, check out our Billing and Rate Structure blog series. Contact us to learn how to best apply these practices within your utility.