Updated: May 11
This is part three of a series on the fourth generation (4Ge) electric power system.
Monthly electric bills are not much different than the monthly cost of gasoline. Both are dependent on usage: consumers are charged for the amount of electric energy they use, just like drivers are charged for the amount of gas they use. Similarly, both have variable prices, and consumers know that they will pay a different price at the pump or on their electric bill each month.
One key difference is that gasoline prices are clearly presented to the consumer before they fill up their tank. On the other hand, the cost of electric energy in kilowatt hours is often not readily available for consumers. Consumers use electricity regardless of the cost, then pay the bill, often complaining along the way. This method of billing is unfair to consumers, and will not be sustainable for utilities in the fourth generation electric power system.
Instead, electric utilities must create a billing method that is more like that of subscription services: monthly, flat rate charges for both electric energy usage and infrastructure maintenance.
By effectively communicating both the benefits they provide, including readily available electric energy, and the cost of maintaining electric power system infrastructure, electric utilities will be able to present consumers with a simple, transparent bill that covers both costs. This will benefit both utilities and consumers. Let’s take a closer look at how that can work.
Current Billing Practices Lack Transparency
For more than twenty five years, I have been developing and presenting technical training to electric utility executives, as well as their staff, suppliers, and regulators. I like to start my courses by asking questions that everyone should be able to answer, such as: “How much was your last electric bill?” “What is your cost per KWH?” “How many watts does your hair dryer produce?”
In response to questions about last month’s bill, I hear answers ranging from, “I’m not sure, I’m enrolled in an automatic payment plan,” to “I haven’t checked in quite a while, but I can check right now,” or even, “my partner is responsible for the electric bill.”
When I ask questions about the energy required to operate certain appliances, the answers I get range from a blank stare to “you must be really interested in electricity to know the answer,” implying that lack of interest in electricity correlates with lack of understanding of the billing process.
In general, this turns out to be true. Few people who work in the electric power industry, and even fewer in the general population, are aware of their monthly electric energy costs until after they have consumed the energy. It wouldn’t be acceptable for subscription services to bill in this manner, so why is this billing system acceptable for utilities?
Flat Rate Billing Structure
The flat rate billing structure of subscription services is the business model that electric utilities need to emulate. Utilities will need to implement two flat rate billing charges: one charge for infrastructure, and another for energy usage.
The infrastructure charge would be based on the same calculation for all consumers, but would differ in cost for each individual household or business. Consumers would pay the same rate each month, regardless of their usage. To calculate a fair infrastructure charge, utilities can take a low cost, for example $10 per KW, multiplied by the amount of KWs consumed during the peak fifteen minute period in the preceding year.
The energy charge would also be a flat rate that is disclosed ahead of time, rather than a variable rate, like energy bills of today. A fair example would be $5 per KW for consumers with rooftop solar panels, and $15 per KW for consumers without rooftop solar.
With this flat rate billing structure in place, consumers will know exactly how much they will be charged for their energy usage. They may still have to do a bit of research to find out how many watts each appliances uses; however, once they have that knowledge, they can curb the cost of their electric bill by using appliances more intentionally.
Impacts on Electric Utilities’ Revenue
With this method in place, energy producers would receive two payments each month: one payment for their infrastructure costs and one for their energy costs. Electric utilities, the transmission and distribution companies, would receive a monthly payment for the infrastructure they build and maintain.
What happens if a customer increases their KWH usage by 100% when this new billing strategy is implemented? Electric utilities may be concerned that this will lead to a significant decline in revenue.
To address this, utilities should analyze both peak usage (KW) and consumption (KWH) to determine if there is a negative cost impact, meaning the utility needs to check if they are losing revenue based on the substantial increase in KWH usage. When this is the case, utilities can use an updated peak fifteen minute period to calculate a new flat rate for the consumer in question. If this is a major concern, utilities may consider recalculating the flat rate for consumers every six months, rather than yearly.
Reliable Revenue, Transparent Prices
With an updated rate structure in place, electric utilities will have reliable revenue throughout the year, and consumers will have transparent monthly charges.
Another result of an updated rate structure may be that more electricity consumers implement rooftop solar so that they pay a lower energy charge each month. Adding rooftop solar not only reduces consumer costs, but also reduces greenhouse gas emissions by hundreds of pounds each month.
If you’d like to learn more about Prescient’s recommendations for updated billing practices, contact us. Or check out our other articles on updated rate structure, including: