Last week, we discussed updates to electric utilities’ cost structures that will greatly benefit utilities in the future with widespread renewable energy production. In this article, we take a closer look at why changes to today’s cost structures are needed.
The energy production/energy consumption conundrum can be defined as the puzzle of providing energy when it is needed at a reasonable cost. This is a challenge for electric utilities.
In April, far more energy is available than is needed; excess energy flooding the grid leads to low hourly energy prices, less profit for energy producers and reduced profit for electric utilities with rates that are based on KWH sales. In August, during a heat wave, consumers demand more energy than is available, leading to an energy shortfall, high energy prices, higher profits for energy producers, and lower profits for electric utilities with rates that are based on KWH sales.
This outdated electric energy pricing system leads to variable profits for energy producers and electric utilities, and fluctuating electric bills for consumers. To resolve the conundrum, Prescient recommends that utilities move to levelized billing, in which electric utilities charge a consistent rate for both infrastructure and energy.
Let’s take a closer look at how the energy production/energy consumption conundrum plays out for utilities today, and how it can be resolved.
Pitfalls of Today’s Hourly Pricing Structure
On any given day, the consumption and the cost of electric energy is predictable. Figure 1 shows the marginal cost of electric energy in California at 9:50 AM on April 17, 2023. Check out today’s costs on the California ISO website. Similar displays are available for New York, Texas, and many other states.
Figure 1 shows the marginal cost of electric energy in California on a typical April day.
In figure 1, the pitfalls of traditional KWH pricing are obvious. During April, when energy consumption is low and production is high, the cost of electric energy is extremely variable, with costs in the negatives in central California, less than $5 per MWH in southern California, and up to $120 per MWH in Silicon Valley.
When electric energy costs are negative, electric energy producers lose money but electric utilities with rates that are based on KWH sales increase profits. Consumers see a reduction in their electric bill because they use less energy, not because production costs are lower.
During July, the marginal cost of electric energy will most likely hover around $150 per MWH across most of California. This is because demand for electric energy is very high, while energy production capacity remains the same or even decreases. Consumers see much higher electric bills in the summer because they use more energy.
A Closer Look at Energy Consumption and Production
Energy costs are driven by the amount of energy that consumers want to purchase. Right now, energy production facilities are being paid to deliver energy on a real-time basis, as we discussed in last week’s article. This is not a viable method for electric utilities to provide reliable energy from renewable sources.
The following series of graphs display energy consumption and production in terms of monthly usage and hourly usage. These are important for understanding and addressing the energy production/energy consumption conundrum, especially as more homes go all-electric, electric vehicle usage increases, and renewable energy sources expand.
The first graph, Typical Energy Consumption, All-Electric Residence, shows that the amount of energy consumed in an all-electric residence varies seasonally. Various electric appliances contribute to energy usage in each season.
The second graph, Residential Weekday Energy Use, All-Electric Residence, illustrates how energy consumption varies monthly in the same all-electric residence, on weekdays. This graph emphasizes the fact that the energy consumption varies both seasonally and hourly. Note, when rooftop solar panels are installed, data displayed on the second graph would change drastically, as the residence becomes an energy production facility.
The third graph, Weekday Hourly Energy Production, displays energy production during a weekday in January from several types of energy sources: wind, solar, thermal, and stored energy. Energy production also varies seasonally and hourly.
Understanding hourly production remains important, even when moving to levelized billing, because energy production will still need to meet energy consumption on an hourly basis.
Energy Production Must Match Consumer Demand
The amount of energy that renewables produce can be estimated on a yearly basis, and accurately forecast a few days in advance. Solar panels and wind turbines are likely to become the preferred production facilities within the next decade; when that happens, energy storage facilities and thermal production facilities, including green hydrogen and ethanol, will be needed as backup to match energy production with customer load.
At times, energy production will match customer load; for example, on a windy spring day, plenty of energy will be available to meet consumer demand. However, as renewables expand, energy shortfalls may occur daily, especially overnight.
This is where energy storage and thermal production facilities come into play. These facilities will be reserved for use when energy demand exceeds supply. Therefore, they must be available for use almost instantaneously to provide power as soon as a shortfall occurs. Similarly, they will need to be powered down quickly once the shortfall has been addressed.
Levelized Rates
With today’s hourly cost structures, customer’s electric bills vary widely throughout the year, which can lead to difficulty for fixed income residents, and a poor opinion of the utility providing energy.
Rather than charging for energy on an hourly basis, electric utilities should charge levelized rates each month, such as $20 per KW to support infrastructure costs, and $0.05 per KWH for energy. This will benefit all parties: consumers, electric utilities, and energy production facilities.
Of the $20 charged per KW, energy production facilities could be paid $10 per KW of production capacity and $0.05 per KWH of energy delivered. Energy transmission companies could be paid $2.50 per KW of transmission capacity, and energy distribution companies could be paid $2.50 per KW of distribution capacity.
Payments for production capacity would ideally be based on 24-hour load cycles. For an energy production facility to receive $10 per KW of production capacity, the energy production facility must be able to produce a set amount of energy during a 24-hour period.
Renewable facilities, especially solar and wind, may not be able to guarantee a set amount of energy production. To mitigate this, these production facilities can decide to either accept lower payments for intermittent energy or construct energy storage facilities that provide supplemental energy when production is down.
Levelized Billing Benefits All
Charging a levelized rate for electric energy will benefit electric energy producers, electric utilities, and consumers. During low energy consumption months, levelized rates will cover more than the amount of energy used. During high energy consumption months, levelized rates cover the cost of energy production.
When costs are structured on an infrastructure basis rather than solely on a KWH basis, costs will even out throughout the year. Electric utilities will see the same yearly profit. Energy providers can commit to providing a predetermined amount of energy every day of the year. Consumers can plan on paying nearly the same amount for energy every month.
Want to learn more about implementing levelized billing at your electric utility? Contact us to schedule a meeting or presentation. Or check out our next generation billing and rate structure blog collection.