High operating costs pose a substantial barrier to electrification in high-cost regions. Whole house time-of-use rates can lower operating costs but usually not enough to accelerate adoption of heat pumps and EVs. While rebates and income tax credits provide substantial financial incentives that lower the capital and installation cost of as heat pumps for HVAC and electric vehicles (EVs), they don’t lower their operating costs.
We need a new rate design paradigm that satisfies three conditions: Makes electrification affordable, recovers the utility’s revenue requirement, and does not unleash a public outcry
Under the existing paradigm, rate design should not be technology-specific. Under the new paradigm, marginal cost pricing would only be applied at the margin for incremental consumption associated with the installation of heat pumps and EV chargers.
This approach is not without precedent. Today, a few utilities allow EVs to be charged a rate that is specific to that vehicle if they install a separate meter. Other utilities are examining the use of telematics to bill EV customers for charging their vehicles at home.
As for heat pumps, Artificial Intelligence (AI) may be able to infer the incremental load associated with electrification to which marginal cost pricing would be applied.
A case study
Consider the case of Pacific Gas & Electric Company, which serves more than 5 million customers in northern California. The average residential rate currently stands at 42 cents/kWh. Using the E-1 tiered rate as a point of reference, the price of electricity has doubled over the past seven years, far exceeding the rate of inflation. In the seven years prior to 2017, it had only grown by 23%. As a point of reference, in 2008 the rate stood at 16.4 cents/kWh. More increases are expected to occur at year end, with the average rate possibly reaching 50 cents/kWh.
One of the popular rates being used by its EV customers is EV2-A. The rate features three pricing periods. During the summer, the off-peak rate is 31 cents/kWh. If EV load is priced at the marginal cost of electricity, the price may drop to 10 cents/kWh.
A typical household whose EV load is 3,000 kWh a year would see their annual EV driving costs drop substantially from $930 to $300. This would substantially enhance the appeal of EVs to drivers who are in the market for a new car, and probably accelerate the EV adoption rate.
In the areas that lie east or south of San Francisco, or in the Central Valley, summers are hot and winters are cold. A heat pump for heating, ventilating and air conditioning (HVAC) may consume 3,500 kWh a year. If the year-round peak period price averages 55 cents/kWh, the mid-peak averages 49 cents/kWh and the off-peak price averages 31 cents/kWh, then a weighted average price of 45 cents/kWh may be used to get a ballpark estimate of the annual operating cost of a heat pump.
With the existing rate, that would amount to roughly $1,575. If a marginal price of 15 cents/kWh is used, the cost would drop to $525, making it a substantially more attractive investment for customers, and probably accelerating the adoption rate. In both cases, operating costs fall by two-thirds, as brought out in the figure below.
In some areas, electrification might run into distribution capacity constraints, requiring capacity expansion. In such cases, estimates of marginal capacity costs would be added to marginal energy costs. In addition, electrification-focused marginal cost pricing should feature time variation in energy rates to avoid creating new peaks and to facilitate load flexibility.
Society as a whole will benefit through the reduction of carbon emissions that will accompany electrification. Climate change will be mitigated. Customers who electrify will see lower bills compared to what they would be paying with gas furnaces and ICE vehicles. There will be no losers. No one will see higher bills.
Image: Twitter
Dr. Faruqui is an Economist-at-Large who has been working on energy issues since the summer of 1976, when he interned at the California Energy Commission. From 1978 to June 1979, he was a full-time analyst at the CEC. Subsequently, he worked at the Electric Power Research Institute for 11 years and then at several consulting firms, most notably Barakat & Chamblerlin, Charles River Associates, and The Brattle Group.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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