Homeowners could save up to 40 percent on their electricity bills and utilities could slash billions of costs every year in grid upgrades if demand-flexible rate plans were widely available, according to a new study from Rocky Mountain Institute. 

The study looks at demand flexibility -- the ability to shift energy usage across the day based on price signals. Adopting a conservative approach, RMI looked only at residential air conditioning, domestic hot water heaters, clothes dryer timers and timed electric-vehicle charging.

A new market for third parties

RMI found that the savings could be substantial if third parties stepped in to offer guaranteed bill savings by pairing available technology with dynamic utility rates. The rates included structures like real-time pricing, demand charges and avoided-cost compensation for exported PV.

In many ways, this is analogous to third-party battery storage companies that are selling their technology to commercial clients to cut down on or eliminate peak-demand charges and also potentially make money in ancillary service markets. But the utility can benefit from having distributed storage, and some states and utilities are looking at better aligning rates to take advantage of those resources and compensating the customers, or the third-party companies, that own them.

For the residential sector, the study defines demand flexibility as a consumer-centric offering that lowers and manages an energy bill. It is more than just traditional demand response. Just as battery storage offerings are sold to commercial customers as a way for them to control bills and increase resiliency, demand flexibility would be offered to residential customers so they wouldn’t even notice when their grid-connected assets, like smart water heaters, are offering grid services and flattening load. 

Although there is vast potential in the residential market for shifting and shaping energy loads, it’s a bit more complicated compared to just selling storage to large commercial customers. First, a utility has to offer the sort of rates that are attractive for third parties to build offerings around. The combination of bill management and enabling technology cannot sacrifice comfort, yet still has to earn enough money for the third parties to turn a profit. 

Even with the complexities, the potential business is huge, RMI found. More than 65 million Americans already have access to some form of time-of-use rates, according to the study, although take-up has been slow. In Commonwealth Edison’s territory alone, the average customer could save $140 per year compared to the volumetric rate, according to the study. The report identified the investment opportunity as more than $900 million for vendors that could help customers unlock those savings.

Smart thermostats are already being widely adopted, and Wi-Fi-connected water heaters are becoming more common. “When we look at this, we feel the full benefits of these trends aren’t being realized,” said James Mandel, principal at RMI.

Changes already afoot

The new opportunities RMI envisions for residential customers are not just theoretical. A few utilities are starting to tap residential loads to help smooth peaks and balance the grid. Con Edison, for example, is looking for residential load to help defer a $1 billion substation. In Hawaii, Hawaiian Electric is testing distributed energy assets such as hot water heaters as grid assets to balance solar PV.

The potential for demand flexibility, however, can work against utilities in certain situations if rate structures are not designed correctly. Following up on its previously published load defection report, RMI found that if net metering is reduced or eliminated, demand flexibility could hasten load defection for those who have adopted rooftop solar.

Another recent study that took an even closer look at modern rate design was published by the Regulatory Assistance Project (RAP). The paper suggested that customers should pay for grid services in the proportion they use it and relative to the time they use it.

“When we go to the grocery store, we pay for a worldwide food grid in the cost of each item at the register,” said Jim Lazar, senior advisor at RAP. There is no reason, the paper argues, that those costs cannot be baked into the prices of electricity products rather than separated out as standby and fixed charges.

The RAP study also called for time-varying rates. “It is hard to envision an electric system future without greater use of time-differentiated pricing,” the authors stated. It also suggested bidirectional pricing, in which customers with solar would pay the retail cost of the electricity they consume but be compensated for any energy they sell back at the full value of the energy delivered to the grid.

In general, the study found that value-of-solar tariffs came close to approximating what solar PV customers should be paying, while straight fixed/variable rates that sharply increase monthly fees were overcharging customers for their customer-specific distribution costs.

“High fixed charges have the most adverse impacts on consumers, the environment, the economy and society,” the RAP study found. “Good rate design addresses the legitimate concerns of all major interests, provides a framework for stable regulation of utilities, and enables the growth of renewable energy.”

There are utilities and regulators that are already considering much more holistic rate designs. “These are no longer side projects sitting within a siloed product development group," said Steve Propper, director of GTM Research's grid edge practice and author of the report Alternate Utility Revenue Streams: Expanding Utility Business Models at the Grid Edge. "We're seeing utilities beginning to have strategic conversations about products and service offerings and incorporating them into their long-term operational planning.”

Although some utilities are moving forward, studies agree that this is largely uncharted territory. “The path to the future will require courage,” said Wilson Gonzalez, co-author of the RAP paper and president of Tree House Energy, a consulting firm. The time to muster that courage is sooner rather than later, even for utilities that are not inundated with rooftop solar.

“One of the most exciting things was just how big the opportunity was with very simple changes,” said Mandel. “It seems like a huge opportunity for customers and the grid.”