As U.S. policymakers consider how to tackle the challenge of greenhouse-gas constraints, the U.K.’s approach to the problem offers instructive examples.
Inclining for the Climate
GHG reduction via residential electricity ratemaking.
to the U.S. average.
Using the above simplifying assumptions, the percentage change in total sales is 1.7 percent, 10 or 5.9 TWh of energy savings. Assuming CO 2 emissions intensity of 0.67 metric tons per MWh, 11 this amounts to 3.96 million metric tons of CO 2 savings, about one percent of what would be required to reduce the electric sector’s total CO 2 emissions to the 1990 level. 12 This number would be roughly doubled if the calculation were expanded to encompass utilities not in our review and those with inclining rates in other seasons.
While a one to two percent CO 2 reduction might seem negligible, it’s significant when one considers the ease of implementing the rate redesign. Further, where marginal cost is high, upper-tier rates might be increased beyond the modest levels considered in this study, spurring even greater reductions. California’s large IOUs for example, have upper tiers that are multiples of lower tiers, nearly 30 cents/kWh in the case of PG&E.
Finally, the calculation does not account for long-term customer price response that entails energy-efficient purchase decisions, nor does it attempt to measure the enhanced value to existing DSM programs.
Time-varying pricing encompasses time-of-use (TOU) rates, real-time pricing (RTP), and critical-peak pricing (CPP). 13 Peak-shaving benefits notwithstanding, there is little GHG reduction potential for alternative rate designs based on time-varying pricing.
To achieve meaningful GHG reduction, a rate redesign must induce a reduction in a customer’s overall kWh consumption. Time-varying rates, in contrast, mainly result in load shifting. To understand this point, consider the case of optional time-varying pricing. A customer likely joins a time-varying rate option, whether TOU, RTP or CPP, if he or she can achieve bill savings with relative ease. The bill savings can be obtained by shifting consumption from the high-price peak hours to low-price off-peak hours. 14 While the participating customer may achieve the desired reduction in the per-kWh charge, there is little or no conservation incentive.
Making the time-varying rate designs mandatory doesn’t alter their inability to induce significant conservation. For example, a revenue-neutral two-period TOU rate design necessarily has a peak rate above, and an off-peak rate below, an existing flat rate. While the peak rate reduces peak kWh consumption, the off-peak rate increases off-peak kWh consumption. Thus, the total kWh effect of the TOU design is small. The same line of reasoning applies to an RTP that has hourly rates above and below the existing flat rate. It also applies to a CPP that has high rates during critical peak hours but low rates in non-critical-peak hours.
Inclining block rates offer a low-cost and timely opportunity to achieve electricity conservation and efficiency improvements, and resulting GHG-emissions reductions. Residential inclining block rates are easy to implement and to understand. Unlike time-varying and dynamic pricing rates, they don’t require new billing and metering infrastructure. Moreover, inclining block rates can spur residential customers to make long-term consumption decisions that incorporate investments in energy efficiency. Efforts to reduce national GHG emissions should include this easy-to-implement and low-cost measure.