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The Future of Rates

Back in November, the Colorado Public Utilities Commission (PUC) approved a proposal by Xcel Energy to pilot two new residential electric rates that may very well become widespread in the near future. With the pilot program just beginning its rollout (Xcel aims to enroll up to 20,000 customers in 2017), we thought it would be a good time to explain just what these new rates might mean for consumers throughout the state.

Before we dig in, it’s important to understand how current electric rates work. The vast majority of residences in Colorado find themselves on flat rates, although time-of-use and demand rates have been offered in some utility service territories. A flat rate is one in which the consumer pays a fixed cost for every kilowatt-hour consumed (i.e. 11 cents). Xcel customers are charged a flat rate except for during summer when tiered rates go into effect. Tiered rates involve charging one rate for the first block of kWh used and other, usually higher rates for kWh used above previous blocks.

While tiered rates can be used to encourage conservation, they don’t really reflect the true cost of electricity to a utility. Utilities pay more for kWh needed at peak times of a given day, and some utilities have a consistently higher peak demand in a certain season (think summer for utilities that serve irrigators and winter that serve ski areas). Time-of-use (TOU) rates have been designed and are part of Xcel’s pilot in order to charge customers this true cost of energy. Under Xcel’s pilot, customers would be charged the least for kWh used in off-peak periods (late night to early morning), more for kWh used in “shoulder” periods, and the most for kWh used during peak periods (afternoon and early evening). Seasonal adjustments to these TOU rates would also be included.

But TOU rates are just one way of encouraging users to spread out their demand for electricity. Keep in mind that utilities may have to build new sources of generation and infrastructure if demand for electricity exceeds what they are able to generate at any point in time. In Xcel’s second pilot TOU rate, a demand-based charge would be added to reflect the kilowatts of power needed by a given customer over a predetermined time period in a month (commonly 15 minutes).

So what will the impact of these new rates be? While the answer will present itself as the pilot programs are rolled out, there is reason to believe that both TOU rates will result in increased efficiency as well as a flattened ‘demand curve’ for electricity. More keen attention may be paid to when you use electricity, and appliances with “delay” settings may become more popular. Keeping utility costs in check means rates to the end user (YOU) should also be lower. These rates are a way of giving more control to consumers.

On the renewable side, since solar tends to produce electricity during peak periods (especially in summer), that industry might be set to gain from the non-demand TOU rate. Demand charges coupled with lower costs per kWh, on the other hand, could serve to dampen the industry as solar without storage cannot reliably impact one’s demand if measured in 15-minute increments.

The pilot rates will be offered on a voluntary basis and will be evaluated for their value to Xcel’s entire customer base in front of the PUC in 2020. It is reasonable to expect that other utilities – some of which have already offered TOU and residential demand-based rates – will be watching this pilot closely.

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