Why Rate Design in New England Needs a Refresh

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Looking ahead to 2030 and then beyond to 2050, the majority of New England states have set ambitious clean energy goals. The growing adoption of new technology empowers energy customers to play a direct role in making these goals happen and to make their own energy choices in ways not available 10 years ago. But one piece of this puzzle is still largely missing: The design of electricity rates by utilities serving the region simply has not kept up with customers’ changing needs.

We set out to examine this mismatch between modern needs and outdated rate design recently in a four-part series of policy briefs. What we found shows that there is substantial room for improvement in residential pricing. The New England large utilities’ rates do not work to realize customers’ current-day needs, nor do they accurately reflect the time-varying aspect of grid costs, from electricity supply to transmission and distribution to regional capacity and charges.

We’re revisiting RAP’s series to highlight the opportunity at hand for utilities and regulators: Updating rate designs can empower consumers control over their energy choices, including low- and moderate-income ratepayers. Modern rates must be affordable rates for all ratepayers, and in turn these rates can help states meet their policy goals for clean energy and affordability. A few leading examples of promising rate design already on offer suggest that this challenge can be met.

A Rate Design Disconnect

The first brief, New England’s Rate Design Disconnect: Analyzing the Region’s Wide Variation in Electricity Bills, tackles one of the most puzzling aspects of rate design by New England utilities: Rates are all over the place, varying among the different states to a degree that is greater than that seen within any other U.S. region. Moreover, when we tried to figure out why that is the case, there was no substantial good reason. This hints at a lack of good information flowing between and among regulators and utilities. That lack of information suggests an opportunity for New England states to set benchmarks and collect data on utility costs and performance for use in better standardizing cost data, analysis and rates.

The Affordability Challenge

The benchmarking process alluded to above could particularly benefit low- and moderate-income customers, who face a significant energy burden, and our second brief, Making Basic Service More Affordable: Electricity Rates for Low- and Moderate-Income Ratepayers, focuses on rate designs for low- and moderate-income customers and how they can be improved. We review and compare tariff discounts from utilities in four New England states, and highlight the example of New Hampshire’s Electric Assistance Program, whose sliding-scale design targets greater relief to those ratepayers who need it most. New Hampshire also provides LMI rate uniformity in design and cost allocations across all the state’s utilities.

Designs that Work for Customers: Time-Varying Rates Give Options

The last two briefs in our series, published in 2020, focused on the modern imperative for rates around the region to shift more to time-varying options and models, in which energy and its delivery is valued in part according to when it is used.

Time-varying rates (TVRs) work well for particularly modern needs such as electric vehicle charging and home storage batteries. This is the focus of our third brief, Rate Designs That Work for a Modern, Customer-Oriented Grid. The brief examines the examples of a few utilities, such as Green Mountain Power (GMP) in Vermont and Liberty Utilities in New Hampshire, that are putting specific EV or battery storage rates in place. Since we published this brief, GMP has begun offering a time-of-use rate for EV charging that features a peak period of 1 p.m. to 9 p.m. on weekdays. (That may be slightly longer than ideal for shaping customer behavior, an idea we explored in the last brief in our series.) GMP separately offers EV customers a chance to avoid “peak event” pricing by having the utility give advance notice that it wishes to switch off their chargers during such an event. Customers can opt out of any given critical peak event notification but will then pay a critical peak rate of 68 cents per kWh to charge during that time; that rate is high enough to be a definite price signal to avoid critical peaks, and that’s the tradeoff for discounted off-peak rates.

A number of the existing time-varying rate designs offered by New England utilities have little uptake from consumers. In the final brief, Time-Varying Rates in New England: Opportunities for Reform, we look at a set of these and concluded that in general, these rates have overly long peak periods and that the differences between peak and off-peak pricing are not large enough to drive customer behavior (i.e., shifting usage to when it is cheaper for the grid to serve it). New rates in New Hampshire are a promising example of a design that fixes these problems, with a peak period of no longer than five hours and a critical-peak-to-off-peak price ratio of more than 3:1. And recently released data from beyond the region, in Maryland —more on that in a moment — shows robust results for well-designed time-varying rates.

What does all this mean for regulators and utility rate designers in New England?

  • First, discounts for low- and moderate-income customers can be provided on a sliding scale and can be consistent across utilities, following New Hampshire’s model.
  • Second, time-varying pricing is the most tested and leading rate design model to meet modern needs of customers and the grid.
  • Third, utilities and regulators can design time-varying rates that send customers a clear signal to shift their usage to lower-priced and lesser polluting hours.
  • Fourth, time-varying rates empower customers to take more control of their energy consumption and make use of affordable technology (smart thermostats, smart appliances and EV chargers) that can more easily time when they use energy. This helps customers reduce their bills while also reducing grid costs and pollution.
  • Finally, recent data on time-varying rate pilots from Maryland — a state with a restructured electricity market like most of New England — offer encouraging evidence that good rate design can pay off for consumers and the power system alike. The results from pilots by Baltimore Gas & Electric, Pepco, and Delmarva Power & Light found that time-varying rates reduced peak-time usage across all customers enrolled in the pilots by 10-15%, and low- and moderate-income customers were able to save 5-10% on their bills, with other customers saving even more.

Antiquated rate structures are one of the reasons that New England’s energy burden is relatively high compared to the U.S. average. And there are growing questions about whether the management of the region’s power market is designed to meet the needs of the future. To enable the grid flexibility New England will need to decarbonize, customers will need to be empowered to target their energy usage to times that are cheapest for them — and optimal for the operation of the grid. Modernized rate design is an essential ingredient of this modern grid recipe.

A Trans-Atlantic Take on Building Efficiency: Lessons from Germany and New England

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Despite being an ocean apart, Germany and New England are similar in many respects. More than 75% of energy used for residential heat in both places relies on natural gas or heating oil. And both have adopted ambitious energy and climate goals — Germany committing to cutting carbon emissions from buildings by two-thirds below 1990 levels by 2030, and the New England states largely adopting targets calling for reductions in the range of 70-80% below 1990 levels by 2050. Both are also global leaders in energy efficiency, evident in their similar transition away from fossil fuel heating.

In our recent paper, Decarbonizing heat in buildings – A comparison of policies in Germany and New England, RAP explores the similar approaches adopted in these jurisdictions to retrofit existing building stock with low-carbon heating technologies and upgrade building energy performance.

We start out by recognizing the importance of policy support for decarbonizing building heating — first, because most of the buildings in New England and Germany that will be occupied in 2050 have already been built; and second, because this activity, by its nature, will be disruptive for building occupants, subject to high transaction costs and relatively expensive.

Policy Approaches

Both Germany and the New England states have deployed a variety of policy approaches to drive decarbonization of space heating. Described in detail in the paper, they include:

  • Building codes: European Union Member States must establish national building codes set by the EU’s Energy Performance of Buildings Directive. Builders in the New England states likewise must meet building energy performance specified by the International Energy Conservation Code for residential buildings. Germany and one of the New England states, Maine, have also adopted time-of-sale energy performance disclosure standards for buildings. Furthermore, a number of New England states have adopted voluntary net-zero energy building standards.
  • Appliance standards: Heating systems in Germany are subject to EU regulation under the Ecodesign Directive, which sets minimum performance standards for boilers and heat pumps. The U.S. Department of Energy and the Environmental Protection Agency periodically update appliance standards for furnaces and water heaters, enabling purchasers in the New England states and elsewhere to capture significant energy savings. The U.S. Department of Energy’s standards require appliances to meet certain efficiency levels, while the Environmental Protection Agency’s voluntary Energy Star program encourages even greater efficiency.
  • Weatherization programs: Every major study of pathways for heat decarbonization demonstrates the need for substantial improvements in building shell integrity. Germany’s most prominent and long-standing building energy efficiency finance efforts are administered by the public bank Kreditanstalt für Wiederaufbau, which provides low-interest loans and grants for energy-efficient refurbishment and construction, including projects designed to integrate with the latest building codes. The New England states are supported by the federal Weatherization Assistance Program (WAP), which enables low-income families to reduce their energy bills by making their homes more energy-efficient. A number of New England states have developed programs to augment or reinforce low-income WAP funding and expand building refurbishment efforts.
  • Low-carbon and renewable heating programs: International experience shows that replacing fossil fuel-based heating with low-carbon alternatives can also stimulate demand for both heat pumps. Germany’s Market Incentive Program is the central funding mechanism for expanding the use of renewable energy in the building sector, and for including technologies like heat pumps. New England states have also promoted electrification by providing incentives for heat pumps with other energy efficiency measures.
  • Energy efficiency resource standards: Energy efficiency resource standards (EERS), or “energy efficiency obligations” as they are known in Europe, set savings targets that retail distributors of electricity or natural gas must meet, and have contributed to significant carbon emissions reductions in the New England states. An EERS typically requires an annual percentage reduction or cumulative reduction of energy over a given time period, whether measured in kilowatt hours for electricity or therms for natural gas. Greater adoption of electrification, however, which increases electricity use while decreasing carbon emissions, may require these metrics for EERS to be revised.
  • Carbon revenue recycling: Secure funding of building decarbonization programs is one key to ensuring their effectiveness. Germany and nearly all of the New England states allocate over half of the carbon allowance auction revenues from their cap-and-trade programs to cost-effectively support end-use energy efficiency and decarbonization goals. Germany’s revenues come from the European Union’s Emissions Trading System, while New England participates in the Regional Greenhouse Gas Initiative. Both places have found that this investment yields multiple dividends: securing additional emissions reductions, lowering economic and societal decarbonization costs, providing a wide range of non-energy benefits (including improvements in health, comfort, air quality, public housing and welfare costs, job creation and economic growth), and supporting the political processes associated with tightening the emissions cap.

Lessons learned

One key insight in Decarbonizing Heat in Buildings is that retrofitting buildings for energy and carbon reductions is challenging because it depends on affirmative decisions made by millions of individuals, most of whom actually live in the buildings that require improvement. Many market barriers must be overcome, so well-designed, customer-focused programs are needed. Even the best programs have to address information needs, trust issues, financing, and quality assurance issues.

The use of carbon revenues to fund building efficiency programs makes sense, and experience in both regions is positive, supporting, for example, pivotal low-interest loan programs for driving deep retrofits in Germany. The explicit link to building codes is a forward-looking approach to policy integration. Energy efficiency resource standards in Europe and New England are also a key policy instrument. With revision, they can readily encourage electrification and will continue to be one of the most effective and economically efficient ways of funding end-use energy efficiency.

Both regions recognize the importance of policy continuity and innovation to support the market for low-carbon heating. Both end-use customers (building owners) and efficiency and heating contractors need stable programs and funding in order to identify, plan, market, and deliver renovations. Germany and New England have long-standing policies and long-term targets for decarbonization in place, but policy innovation is required to reap the benefits of efficiency programs as technologies and markets continue to evolve. The improving capabilities of heat pumps is a prime example, but by no means the only one. Not surprisingly, Germany and New England have both modified their policies over time to account for technological improvements.

Finally, Decarbonizing Heat in Buildings draws several conclusions regarding electrification. First, electrification requires a holistic approach to designing building codes and appliance standards. Electrification also requires programmatic assistance to retrofit heating appliances. Experience in both Germany and New England shows that, without this support, uptake rates remain low. These lessons will be valuable not only for policymakers in New England and Germany, but also for those working on policy design and implementation elsewhere.

A version of this article was originally published by Northeast Energy Efficiency Partnerships.