Equitable electricity rates and our energy transition

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Rate structures like time-of-use (TOU) rates encourage customers—like Sage and baby Juniper above, who participated in Xcel’s TOU pilot program—to reduce their energy bills and emissions impacts by using power when renewable energy is plentiful.

It is clear that slowing the effects of climate change requires a combination of solutions. We need to keep scaling up clean energy technologies like wind, solar, and battery storage, while at the same time improving old equipment to make it cleaner and more efficient. And while these tactics may be the obvious tools for clean energy and climate progress, another important piece of the puzzle comes from our electricity rates. 

Depending on how rates are designed, they can either encourage customers to power their lives with clean energy, or can do the opposite. But how do we work toward rate design that is equitable, responsive, and future-focused? 

That’s a big part of why Fresh Energy’s 30-year history in climate and clean energy advocacy has focused on building relationships with utilities, utility customers, the Minnesota Public Utilities Commission or PUC, other stakeholders, and community and consumer advocates, and beyond. These relationships and partnerships allow us to effectively work together to advocate for policies that drive Minnesota toward a truly just and equitable clean energy economy—for everyone who calls Minnesota home.  

So, what exactly is the connection between electricity rates and our clean energy future? In this blog, we tackle some of the biggest questions about equitable rate design.  

What are electricity rates, and who does rate design impact?  

Rates are simply the prices a utility charges its customers for the services (e.g., reliable electricity) the utility provides. And these rates play a very important role in public adoption of clean energy technologies.

Rates and any special programs or pilots send price signals to customers. The way electricity is priced can encourage customers to change their habits to use less electricity overall, use it at less expensive times of day, or even use it when there is more renewable energy generation in the electricity mix—for example, wind power is often plentiful at night but sometimes that energy goes unused.

Typically, low-income or under-resourced customers tend to use less electricity and therefore contribute less to the overall costs of our electric grid—the vast network of transmission lines, substations, and more that ferries electricity from where it is generated to the end user. That makes under-resourced customers a priority among advocates, as they must not shoulder the brunt of electricity costs and must be provided the ability to control their electricity use to lower their bills, if desired.

There is a long history of consumer advocates working to ensure rates do not add disproportionate costs to under-resourced customers. In Minnesota, the Attorney General’s Office, the Energy CENTS Coalition, Citizens Utility Board of Minnesota (CUB Minnesota), and others focus on this area in greater detail, and their advocacy also includes general customer protection outside of that specifically undertaken for under-resourced customers and communities.

Why does rate design need to be equitable?  

Electricity is a basic necessity of modern life – it is required for maintaining a healthy living space and completing essential daily tasks. Our electric utilities are obligated by law to provide safe, reliable electricity service and within their service area, are a monopoly provider. This is efficient, because it means we don’t have multiple sets of poles, wires, substations, etc., erected throughout our neighborhoods, but it does mean that customers have less control over the prices they pay for electricity, as well as other utilities.

This is at the core of why the state regulates utilities. Regulators at the Minnesota Public Utilities Commission and the Minnesota Department of Commerce are responsible for implementing state laws around what utilities can and cannot do and the Commission is responsible for establishing just and reasonable rates. Regulators want to make sure our utilities are acting in the public interest and that customers are paying fair rates that reflect the costs of their electricity usage.

Fresh Energy frequently engages in regulatory proceedings like rate cases that determine how much a utility is allowed to charge and how those costs are shared among customers. Check out this blog for more on rate cases and what exactly they entail. Both the infrastructure investments that utility companies make today as well as regulators’ decisions about what goes into electricity rates have significant impacts for decades to come.

No two electricity bills look exactly the same, but many share very similar line items. And it’s these line items that are critically important when considering the way electricity rates impact customers, particularly those who are under-resourced. For example, a monthly electricity bill might have a standing, fixed fee. That fixed fee can have a disproportionate impact on under-resourced customers and households of color who, as we stated earlier, typically use less electricity and who are more likely to be at risk of losing service. When a fixed fee comprises a larger portion of your electricity bill, you have less opportunity to reduce your bill through conservation efforts or energy efficiency. This is why Fresh Energy has long advocated for smaller fixed fees to help encourage energy conservation and renewable energy adoption.

Fixed fees are one example of the way that rate design choices can impact the clean energy transition and shape the experience of community members paying monthly electricity bills. Regulators, utilities, and other key stakeholders have to be aligned in prioritizing energy equity when making rates that advance a modern clean energy system that will benefit future customers, while protecting customers today.

How can we design rates to be more equitable?  

As we mentioned above, one of the foundations of equitable rates is to ensure customers’ bills reflect the utility’s costs to serve them. Multifamily dwellers, for example, cost much less to serve than single-family dwellers, because a significant portion of the distribution infrastructure is shared among other units in a multi-family setting. Analysts and accountants at the utilities, the Minnesota Department of Commerce, the Attorney General’s Office, and other consumer advocates work hard to ensure that the allocation of costs between customer groups is as fair and reasonable as possible.

Once costs have been allocated, it is key to ensure that customers are able to take steps to reduce their bills through conservation if they so desire. This means fixed charges should not be any higher than necessary, so customers have maximum flexibility over their bill. Then, we need to design rates and programs that help customers achieve those conservation goals.

In Minnesota, most energy efficiency programs are offered through our bedrock Conservation Improvement Program (CIP), which is funded by utilities via customers and regulated by the Department of Commerce. CIP, as well as federal programs like the Weatherization Assistance Program (which Fresh Energy recently engaged in) and some utility-specific programs, have helped Minnesota make strides toward greater energy equity by supporting access to energy efficiency measures for under-resourced households.

How can we design rates to speed decarbonization?

The critical role that rate design plays in decarbonization can be summed up as load flexibility. As we shift to getting more of our power from wind and solar, there are more times throughout the day (as well as times of year) when electricity supply does not match electricity demand. Today when this occurs, power plants ramp up or down to match demand. Wind and solar are less able to ramp up or down than traditional fossil power plants. This is why batteries are so important—they are able to store electricity for later use. But, we probably can’t and shouldn’t rely entirely on batteries to solve this—there are other solutions that can be more effective and efficient. Enter, load flexibility!

The basic idea is to encourage electricity usage patterns (“load”) to correspond to periods of wind and solar production, periods of lower-cost electricity, and to become more responsive to grid conditions. The primary tools we use for this are “time-of-use” (TOU) or “time-of-day” (TOD) rates, and demand response programs. TOU and TOD rates have been around for a long time for commercial and industrial customers but are becoming more common for residents as well, and are becoming more precise overall.

How do they work? TOU or TOD rates encourage customers to use less electricity during the peak times of the day and/or peak seasons—when energy use is highest across a utility’s territory and drives the highest grid costs. Peaks are when we need the most electricity generation, transmission, and distribution—so if peak demand increases, the utility needs more power generation and needs to build more grid infrastructure.

It’s quite common for utilities to build and operate “peaking” or “peaker” fossil gas power plants to supply power to meet peak demand just a few times per year. These fossil gas peaking plants are frequently some of the least efficient and dirtiest power plants in the grid, often running less than 10 percent of the year but having outsized environmental impacts on nearby communities. For now, we do need some peaking power plants to be available until we can replace them with zero-carbon alternatives. But the goal is that with load flexibility and other tools, we can use peakers as little as possible.

Typically, peak energy use occurs during the afternoon or early evenings in the summertime—such as around dinner time each night when many families are turning on lights, making dinner, or catching up on laundry. Through TOU rates, customers who reduce usage during peak times pay less. Customers can do this by, for example, plugging in their electric vehicle for charging overnight versus immediately after arriving home from work, or by using a “delay start” function on the clothes and dishwasher.

Demand response programs perform a similar but distinct function—the utility pays customers to commit to temporarily reducing electricity usage if a need arises, such as unusually high peak demand or a grid emergency. Demand response programs target less-frequent peaks and require only temporary reductions, while TOU rates encourage more consistent behavior changes. Overall, TOU rates and demand response programs have several benefits. They help customers use cleaner, less expensive power, which reduces their bills. And in the longer-term, they reduce the need for peaking power plants and ensure we use grid infrastructure efficiently, which keeps future electricity costs – and emissions – lower. As the clean energy transition continues, we need to expand TOU rates, demand response, and other types of load flexibility, which work together to maximize renewable energy and ensure safe, reliable, affordable electricity service.

The bottom line is that decarbonization and energy equity goals must go hand-in-hand, and greater action must be taken to ensure that under-resourced customers and communities are not left behind when it comes to adopting clean energy technologies that will advance our collective transition to a clean energy economy.

How is Fresh Energy plugged into rate design?

Fresh Energy, alongside many of our clean energy and consumer advocate partners, regularly engages in regulatory proceedings to advocate for policies and rates that are more equitable and more closely aligned with Minnesota’s clean energy landscape and climate goals. While there are many elements to rate design, here are a few of the Fresh Energy team’s top rate design priorities:

Innovative rate structures. As we discussed above, rate structures like Time-of-Use (TOU) rates encourage customers to reduce their energy bills and emissions impacts by using power when renewable energy is plentiful. TOU rates can also incentivize the electrification of appliances, improve flexibility, and reduce long-term system costs.

Keep fixed charges low. A fixed charge is the portion of an electric bill that is constant month-to-month and does not change based on how much electricity a customer uses. Increasing fixed charges disproportionately harms under-resourced customers and disincentivizes energy conservation by giving customers less control over their bill. Instead, a greater portion of utility costs should be recovered through volumetric rates (e.g., based on the quantity of electricity a customer uses).

Evaluate and iterate. Fresh Energy works with partners, customers, and utilities to closely evaluate existing rate offerings and design ways to make them better while advancing public interest and Fresh Energy’s policy goals to improve load flexibility, achieve equity and affordability especially for under-resourced customers, and encourage energy conservation and strategic electrification.

Stay tuned for updates on equitable rate design, a key facet of the work underway on Fresh Energy’s Clean Electricity team.

As we continue speeding Minnesota and the Midwest’s transition to a clean energy economy, our team of experts will remain actively engaged with utilities, public agencies, cities, and Minnesotans themselves to ensure that our communities enjoy good health, a vibrant economy, and thriving neighborhoods for generations to come. Make sure you’re signed up for our Action Network to receive updates about opportunities to plug in and ensure your utility’s rates are designed equitably!