What you need to know about utility revenue decoupling
March 24, 2016
With more renewable energy coming online, its impact on the grid is being felt and utilities find themselves in a potential death spiral. Solar costs have come down and so more energy consumers are generating their own power. When renewable resources are unavailable these consumers turn to the grid for their energy needs. However, for utilities, making up for unavailable renewable energy is unsustainable because it doesn't reflect the true cost of stand-by power. Expensive power plants must be paid for and maintained regardless of how often consumers connect to the grid. In addition, the amount of energy the companies sell is directly tied to their profit margin. This means there is little incentive for utilities to support renewable resources.
As a result, utilities largely impacted by solar installations may be looking to raise the rates for solar energy customers and diminish the value of net metering. In reaction to the rate hikes, solar installations decrease. In Nevada, for example, where a fixed fee is proposed to triple over 12 years, rooftop solar applications are dwindling down to a trickle.
What is utility decoupling?
Under the current rate system, utility companies are seemingly bound to be against any sustainable energy initiatives, because of the effect it has on their revenue. Utility decoupling changes this process by switching utility plant's profit margins to the number of customers serviced, rather than the total amount of power sold, according to the Solar Energy Industries Association.
Utility decoupling changes this process by switching utility plant's profit margins to the number of customers serviced, rather than the total amount of power sold, according to the Solar Energy Industries Association.
"The current system basically rewards utilities for increasing their sales of power, which from an environmental perspective discourages efficiency and encourages pollution," Dick Munson, director of the Environmental Defense Fund's Midwest Clean Energy program, told Energy Biz.
On the other hand, when utility rates are decoupled, fixed infrastructure costs are met and frequent, automated rate adjustments address the variability of energy consumption. Regular reviews recalibrate energy prices to make sure that these companies stay in the black, but don't make a fortune at the consumer's expense.
What does this mean for energy customers?
Renewable resources have started to have pushback from utility companies by way of higher rates because revenue takes a hit when customers switch to solar energy and consume less energy off the grid. Getting past this dilemma by decoupling profits from energy consumption allows states more success when passing clean energy initiatives and energy efficiency policies which ultimately saves money for consumers. Take California, for example, which decoupled utilities in 1981, according to Energy Biz. The result has been a case study for the rest of the states in the U.S.
"Since 1973, on a per-capita basis, energy bills in California have averaged $100 per year less than U.S. bills," the California Energy Commission concluded in a study, Energy Biz reported. In another consequence of utility coupling, California has also invested in more solar energy programs than any other state.
Under decoupling, utility companies no longer have an incentive to sell more energy. Instead they are more likely to promote energy efficiency, renewable energy programs and energy storage as revenue streams. By providing reliable service, they can draw in more customers, which will in turn increase their profit margins.
Utility customers will experience a few noticeable changes once regulations kick in and decouple profits from sales from utility decoupling. The most obvious being small rate adjustments up to 3% of the retail rate. According to the Alliance to Save Energy, 37% of ratepayers received modest refunds. These adjustments can be frequent so system flexibility is important. Technologies such as thermal energy storage provide this needed flexibility, allowing customers to use energy when it is most effective. This flexibility is particularly effective for large businesses, government facilities and schools that use a lot of power.
The broader effect of decoupling is that customers will have more incentives to install solar panels. More energy efficiency and energy storage initiatives will be available. California for example offers an array of programs from the Bright Schools program to the Peak Load Shift program, which in the long run cuts down utility bills even further.
The majority of consumers that don't fall under the umbrella of utility decoupling will most likely see demand charges spike as renewables resources rise. In Arizona, a whopping $50 demand charge reduced solar applications by over 90%. As a result, meeting company sustainability goals such as zero energy buildings, in a cost effective manner, will be heavily affected by choices in technology purchases. Investment in renewable energy will require that energy consumers reduce their energy demand through technologies that provide an energy arbitrage between day and nighttime power such as energy storage or pay skyrocketing rates for electricity. Utilities aware of the benefits storage has to balance out variable generation are actively pursuing investments in distributed energy storage.
