Catalyst Spring 2017
Final Analysis

Changing How We Pay for Electricity Can Help Boost Clean Energy

By Julie McNamara

Our electricity grid is designed to provide power whenever we need it, with every flick of the switch or adjustment of the thermostat. Most of us are charged a single flat rate for electricity regardless of when we turn on our lights, crank up our air conditioning, or do our laundry. As a result, we use electricity whenever we want because we have no reason not to.

The problem with this setup? It’s incredibly costly and inefficient. Because the grid needs to be equipped to handle peak periods of enormous electricity use, we build and maintain many extra power plants as backup—even though we need them just a handful of times per year.

And as we race toward a clean energy future supplied by greater amounts of renewable electricity, flat rates cause another problem. Wind and solar power production is variable, so we need ways to fill the gaps when the wind dies down or clouds cover the sun. But flat rates don’t encourage consumers to adjust their electricity usage based on when our renewable resources are abundant and when they’re not. That means we wind up relying on fossil-fueled generators to compensate for the variation in wind and solar power, even though that often means higher costs, more pollution, and added global warming emissions.

A Better Way

Instead of charging a flat rate for electricity, utilities can use time-varying rates—rates that move higher and lower to discourage and encourage use at different times. By taking advantage of what economists call “price signals,” time-varying rates shift prices in a way that signals consumers to alter when and how they use electricity. As a result, these rates can help unleash the power of flexible demand, allowing us to take a vitally important step forward on the path to a clean energy future.

There are three main forms of time-varying rates: time-of-use rates, critical peak pricing, and real-time pricing. These rates vary in granularity from patterns of peak and off-peak periods that repeat each day to five-minute intervals that closely track the dynamic real-time prices of energy markets.

Adopting any of them can help electric utilities seamlessly integrate more renewable energy onto the grid. Consumers can save money with time-varying rates by making simple adjustments to their routines, such as pressing “delay start” on a dishwasher. Plus, the recent mass deployment of smart meters—electricity meters capable of tracking the timing of electricity use, not just the total amount—is spurring the development of many new opportunities for consumers to adjust their electricity use, and respond to price signals that can help incentivize the growth of renewable energy.

Learn more about the environmental and economic benefits of time-varying rates and flexible demand.

Julie McNamara is an energy analyst in the UCS Climate and Energy Program. Read more from Julie on our blog, The Equation.