Should electricity be priced like an all-you-can-eat buffet? Probably not

When you install a solar panel or save energy, your electric utility still has to maintain the same power plants, poles, transformers and wires as before, even though it’s selling you less electricity. Most utilities charge for those fixed infrastructure costs based on your electricity consumption (measured in kilowatt-hours).

This was not an issue for utilities when sales were growing fast: customers used more and paid more. But now that sales growth is declining from customer decisions to save energy and install solar, utilities may have trouble covering their costs of installing and maintaining the necessary infrastructure to get electricity to your home or business.

This has led some to predict that, in the future, customers will be billed for electricity with a big, fixed monthly charge. Similar to a buffet restaurant (like Ryan’s, or my favorite, Moonlight Barbeque), no matter how much electricity you use, you would pay your utility the same monthly charge, think around $60 per month. (Would kids eat free?)

Avoid the buffet

Buffet-style pricing for electric utility services would be bad for several reasons.

First, utility costs that are fixed in the short-term can vary in the long-term. If you and your neighbors use less, your electric utility could be able to build a smaller power plant, delay a substation upgrade, or eliminate a piece of infrastructure entirely. Consolidated Edison – New York City’s electric utility – has been able to avoid almost a quarter of a billion dollars in capital expenditures (which would have raised customer rates and bills) by targeting energy efficiency projects in areas where the grid is stressed. The ability of demand and energy use reductions to avoid or delay infrastructure investment has important consequences for rate design: it may make sense for utilities to recover costs that are fixed in the short term in charges that vary with consumption. 

Second, shifting bills toward fixed, monthly charges will – all else being equal – lower the price tag for the next unit of consumption, sending an “all-you-can-eat” price signal to customers encouraging higher electricity use. Recognizing the market barriers and failures that create the “efficiency gap” (the difference between actual electricity use and what use would be if customers made cost-effective energy efficiency investments), NRDC doesn’t advocate willy-nilly increases in the price of electricity to reduce consumption. Even if we raise prices substantially, market barriers and market failures would still hold efficiency back. But certainly shifting charges so that customers see lower costs for each additional unit of consumption is poor policy.

Third, shifting bills toward fixed, monthly charges would penalize customers who are already use little energy (whether out of choice or necessity), and customers who have already invested in onsite generation resources like solar. Increasing fixed charges would make further investment in energy efficiency or distributed generation less attractive: if you have to pay a certain amount for electricity no matter what, you will be less interested in reducing consumption. Targeting solar customers or the already-efficient for higher fixed charges ignores the benefits that these customers deliver to the grid.

Fourth and last, we have a well-tested solution that provides utilities the revenue assurance they need to invest in the future electricity system, and provides a platform for rate designs that encourage wise use of natural resources: decoupling. First proposed for Pacific Gas and Electric in 1981, decoupling mechanisms adjust rates over time to ensure that utilities collect their authorized fixed infrastructure costs of providing service, no less and no more. If a utility collects more than the regulating agency authorized, money is returned to customers. If a utility collects less, rates increase a bit (and I do mean a bit: most adjustments have been within 3% of base rates, a fraction of the other “adjustment factors” on customer electricity bills). Decoupling is now in place in electric and gas utilities in 22 states. The mechanisms allow utilities to collect costs – avoiding the “death spiral” – and still have a rate structure that encourages conservation and investments in distributed generation.

Rates in the future

So what does the rate structure of the future look like? NRDC’s ideal – reflected in our recent joint statement with the Edison Electric Institute – includes the following elements:

• A demand-based (kilowatt) or usage-based (kilowatt hour) energy charge that collects most costs, reflecting the principle that “the more you use, the more you pay” (this charge could vary based on the time of day that consumption occurs);
• A rate for solar customers that recognizes their use of the grid and the services they provide the electricity system; and
• Atop it all, decoupling, to ensure that a utility has no disincentive to help customers save energy or install distributed generation.

We won’t get to this future this year, and some elements (like a specific rate for solar customers) are probably premature given the nascent solar market in large parts of the country (where net metering will suffice for now). But big fixed charges aren’t the answer. We don’t want to turn electric utilities into all-you-can-eat buffets.