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Has Xcel Minnesota designed the ideal residential time-of-use rate?

December 22, 2017 /
Utility Dive

By Herman K. Trabish

The pilot program, to determine if price signals can get customers to shift energy usage away from peak times, has garnered wide acclaim. The main concern? it doesn’t start soon enough.

Some say pilot projects are a way to avoid the risk of real innovation, but a proposed Xcel Energy pilot to test time-of-use (TOU) rates is charging at innovation and winning praise as it goes.

Xcel’s objectives are to find out how to effectively engage customers and if price signals can get customers to shift energy usage away from the peak, Aakash Chandarana, Xcel VP of Rates and Regulatory Affairs, told Utility Dive. Utility surveys consistently find customers “don’t really care,” he said. “This pilot will allow Xcel to test what our customers truly want.”

The program is expected to drive greater use of renewables and reduce peak demand. Initial reactions are positive from a range of stakeholders.

The pilot will require expenditures that must be paid for by customers, which rarely gets an unequivocal endorsement from ratepayer advocates. But Minnesota Citizens Utility Board (CUB) Executive Director Annie Levinson-Falk said she is happy to see Xcel moving ahead with the pilot because it will likely deliver customer savings.

In addition, utility rate design pilots are usually not structured well enough to satisfy experts. Yet Rocky Mountain Institute (RMI) rate design authority Dan Cross-Call emailed that Xcel’s “is promising and applies many good design elements.”  The pilot “follows many best practices” and will likely support a “future rollout of widespread opt-out TOU rates,” RMI pilot project authority Mike Henchen added.

The two-year, 17,500-customer plan to use three price tiers and drive more off-peak use of Minnesota wind has stood up to serious stakeholder scrutiny. The worst thing said about it so far? It doesn’t start soon enough.

Utilities across the country thinking about TOU rates may need to take a close look it.

Rate design for the 21st century

Chandarana told Utility Dive the objective was to meet stakeholder and customer demands “for the next wave of rate design.”

Stakeholders made it clear in Minnesota Public Utilities Commission (MPUC) proceedings that customers want more insight into their energy use, more bill savings and more renewables-generated electricity, he said. “Meeting those demands will take our rate design into the 21st-century.”

Xcel, Great Plains Institute and the Minnesota Center for Energy and the Environment convened a stakeholder group in May to work through the pilot’s details. Six intensive workshops were attended by the conveners, the Minnesota Department of Commerce, the Minnesota Office of Attorney General, CUB, Fresh Energy, Stoel Rives attorneys, the Suburban Rate Authority and Energy CENTS Coalition.

Xcel’s market research revealed that “substantial effort” in customer education will be “critical” because of a “considerable lack of knowledge” about energy and, especially, about variable pricing.

The research also found that customers who live in multi-family housing will require special consideration and that customers’ responses to new information from advanced metering infrastructure (AMI) is “largely unknown.” The customer data derived from the AMI information should be used in “small steps,” the research added.

The pilot will be big enough to have “statistically significant results” about how “a broad range of personal incomes, housing types and energy usage patterns” react, Xcel promised the stakeholder group.

Credit: From the Huber power point presentation on the MN Xcel TOU pilot (used with permission)

Plan details

TOU rates will be assigned to a 10,000-customer group in two areas. They will be given the necessary tools and education to manage their usage so that it matches the price signals in the new rates. An equally diverse 7,500-customer control group, also in two areas, will remain on Xcel’s current rates. Unless they opt out, participants will remain on TOU rates for two years.

“We wanted to test what would happen with an opt-out structure,” Chandarana said. “That is why we provide bill protections.” If participants’ bills increase more than 10% in the first year, they will get bill credits to make up the difference. Low income participants will be protected both years.

An opt-out approach is the least costly way to enroll participants but will only work if the utility communicates the savings opportunities, Chandarana said. “Seeing how they react will help Xcel plan its next offerings.”

Stakeholders strongly approved of the opt-out design, especially after the high cost of finding participants for Xcel Colorado’s now unfolding opt-in TOU rate pilot became clear. Xcel Minnesota “hopes to devote more resources to facilitating customer education and satisfaction with engaging tools and targeted messages,” its MPUC filing reported.

The widely-endorsed Minnesota rate was largely designed by Strategen Consulting Sr. Director Lon Huber. Based on stakeholder group feedback, his intent was a rate “scalable into a high renewable energy future,” he told Utility Dive. To do that, he created a precise methodology that identifies “when renewable energy is abundant on the system.”

The rate’s “first-of-its-kind analytical approach” incorporates current and forecasted renewables penetrations, he said. It derives “a load duration curve” and assigns system cost “to basically every hour of the year.”

The methodology links “the recovery of system costs to the time periods during which system assets are being utilized,” Xcel’s filing reported. A filing appendix includes the detailed data Huber drew on from Xcel’s current operations and from its most recent integrated resource plan (IRP).

“The IRP data makes sure that we’re tuning the rate to where the system is likely to go,” Huber said. “The modeling includes the current Midwestern wind resource, but it also includes an anticipated 700 MW of utility-scale and distributed solar that Xcel plans to add by 2024.”

The on-peak period of 3pm to 8pm will be priced at $0.258/kWh in the summer and $0.226/kWh in the winter. The off-peak periods will be 6am to 3pm and 8pm to 11:59pm and will be priced at $0.121/kWh in the summer and $0.106/kWh in the winter. The super off-peak period will be midnight to 6am and its year-round price will be $0.057/kWh.

Peak demand reduction

“Customers get a huge discount from the peak rate for using wind when it is blowing the hardest, in the off-peak and super off-peak hours,” Huber said. “That will meet stakeholders’ demand for a rate that drives renewables use.”

To get peak demand reduction, “the on-peak price lets customers know when the system is most overloaded and signals them to reduce their use,” Huber added.

“The price ratios were informed by best practices across the U.S.,” he said. As shown in TOU studies detailed in another appendix of Xcel’s filing, a less than 2:1 peak-to-off-peak price ratio produces only a 6% average reduction in peak demand. A 4:1 peak-to-off-peak price ratio produces an average 15% reduction in peak demand.

The 5-hour peak window is intended to accommodate customers. Longer-duration peak windows “give customers fewer opportunities to respond to the TOU price signal,” the filing reported. But shorter periods also limit customer response and create “a ‘snap back’ in demand for the hours right after the last peak hour.”

The utility will also be able to learn how different customer segments and classes respond to “information, tools, messages, and price signals,” the filing reported. Segments will include seniors, different household incomes and EV owners.

The filing added that Xcel expects the pilot to help it deploy 400 MW of new demand response (DR) by 2023 to meet a separate regulatory obligation. The wide peak-to-off-peak price difference is expected to give DR providers more incentive to participate.

Finally, the unprecedented amount of granular customer data will provide invaluable insights into customer behavior and allow Xcel to ready a system-wide TOU rate implementation, the filing reported.

Chandarana said a lot of “elbow grease” went into designing a pilot. “We want to learn from this pilot what changes we need to make because our customers are going to get more sophisticated and our system is going to change,” he said.

Credit: From the Huber power point presentation on the MN Xcel TOU pilot (used with permission)

Stakeholders are unanimous

Regulatory Assistance Project (RAP) Senior Advisor Jim Lazar said most utilities have TOU rates, but few have opt-out TOU rates and they vary in effectiveness. “This one is quite good. The on-peak period is longer than I would prefer but it is otherwise well-designed. The $0.06/kWh super off-peak rate is very attractive for EV charging, but not so low as to move people to electric heating,” he said.

RMI’s Cross-Call said the rates send “a fair price signal that customers can respond to while limiting the risk of burdensome or punitive customer bills.” Its “meaningful peak-to-off-peak price ratio” has been shown to “significantly reduce” peak demand, he said.

RMI’s Henchen said the pilot’s price ratios and time periods follow “best practices” by building on other utilities’ experiences. Importantly, Henchen added, the pilot’s design was the result of “a collaborative stakeholder engagement process.”

CUB’s Levinson-Falk said the collaborative stakeholder process helped her understand “where the utility is coming from” and she believes it helped the utility understand “where CUB and other stakeholders are coming from.”

Crucially, the process helped her understand why Xcel’s present meters will be inadequate for the proposed three-tier rate. “They brought an engineer in to explain the limited functionality.” A ratepayer advocate needs to know any expenditure is necessary and will benefit ratepayers, she said.

CUB endorses Xcel’s plan to use an opt-out design and bill protections, Levinson-Falk said. And a flattened load curve and moving from high-cost, high-emissions peak demand generation to lower-cost, higher-renewables off-peak generation is good for all customers, she added.

“We are also excited about having access to the AMI data, both related to the TOU pilot and to general usage,” she said. “It became clear in the stakeholder process that Xcel does not have that kind of data. But when it does, stakeholders should have access to it for modeling new rate design options.”

2020 Launch

A CUB concern is that the plan does not launch until 2020. That means “the earliest we can expect a full rollout of TOU rates from Xcel would be 2022 or 2023,” she said. “That is pretty long to wait for rates that are already in use in other places.”

Xcel’s Chandarana said obtaining commission and corporate approvals of expenditures necessary for the AMI rollout and other grid modernization infrastructure will be an 18-month process. The MPUC is likely to approve the pilot by Q3 2018 and cost recovery by Q3 2019. The pilot could “go live by Q4 2019, he said. “We wish we could go faster, but these are the limitations built into the multi-year rate plan.”

Will Nissen, director for energy performance at renewables advocate Fresh Energy, also got a better understanding of Xcel’s intentions and needs from the collaborative stakeholder process. “It was entirely unofficial, which allowed conversations that are probably not possible now that the proposal is filed.”

Fresh Energy endorses the pilot’s key features and its goals of reducing peak demand and expanding renewables use. Its revenue neutral design is also important because that makes the focus of the pilot what Xcel can learn, and not what it can earn, Nissen said.

Net metered owners of distributed generation are not eligible for the pilot, and they do not need to be, Nissen said. “But the question of how they can be included in TOU rates needs to be addressed before the end of the pilot.”

He agreed with RAP’s Lazar that the peak window might be more effective if it was an hour or two shorter. “But it is much better than the current 12-hour peak period.”

Mike Bull, director of policy at Minnesota Center for Energy and the Environment and a former Xcel executive, also endorsed the pilot’s design and goals. It is the first project of the “learning by doing” phase of Minnesota’s e21 Initiative to bring state energy policy into the 21st century, he said.

He agreed with Lazar that the pilot will join a small number of other opt-out TOU rate offerings and may be one of the best-designed among them. “There is general agreement among stakeholders that this rate design should become the default residential rate structure if proven out by the pilot.”

Author: Ben Bratrud

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