Time of Use Electricity Billing: How Puget Sound Energy Reduced Peak Power Demands (Case Study)
When power prices are volatile or supplies are short, reducing peak loads becomes a top priority for utilities. Billing customers for energy based on the time of day has proven to be a viable means for reducing peak loads. This case study examines one of the first field trials of time-of-use tariffs and automated meter reading technologies, how they worked, the results, and why the program ended abruptly.
February 14, 2006
In most discussions of time-based billing for electricity, Puget Sound Energy's experience is used as a reference case. The Washington state utility installed smart meters and tested time-of-use pricing in 2001-2003 and learned some important lessons. The program ended, but utilities in other states have applied PSE's lessons to their customers' benefit.
Utilities caught in the middle
Puget Sound Energy generates its base load with a combination of hydroelectric, natural gas, and coal power plants. The demand for power is not constant; there are certain hours of each day when demand "peaks" at levels considerably higher than the remainder of the day. To meet peak power demands, PSE buys additional energy through wholesale contracts and on the spot market.
Flat-rate electric tariffs shield most customers from fluctuations in energy costs, especially those caused by buying energy supplies on short notice. Utilities, however, are not insulated from these fluctuations. When the market rate for electricity rises above the approved retail rate, utilities are caught in the middle, which can be financially disastrous.
Searching for answers
It was the energy crisis of 2000 and PSE faced unprecedented increases in wholesale energy costs. Prices on the spot market were setting record highs, while droughts in the Northwest threatened to trim hydropower supplies.
"We were in the midst of the perfect storm," says Todd Starnes, PSE's manager of business development. "The wholesale markets were going crazy, we had a drought, there were trading scandals and regulatory uncertainty -- all of these things were happening simultaneously."
During the morning and evening peaks, when customers' power demands exceeded the resources available, PSE had to buy more than expected on the spot market at prices several times higher than ever before. Unlike an unregulated business, utilities can't simply pass price increases along to customers without regulatory approval.
Energy demand fluctuates throughout the day, with morning and evening periods of high usage. To meet demand in excess of normal, PSE bought power at rates inflated by the energy crisis. Before PEM, consumers paid a flat rate for power, regardless of its actual cost or when it was consumed.
Utilities were searching for ways to deal with the crisis. California utilities were raising rates to avert a financial crisis, while using rolling blackouts to deal with peak supply shortages. PSE preferred a proactive approach that gives customers a financial incentive to change their behavior voluntarily, avoids across-the-board rate increases -- and keeps the lights on.
Shifting loads out of peak demand periods
PSE executives knew that shifting enough demand from peak morning and evening periods into the mid-day and nighttime hours would reduce peak power demands and alleviate the problem. With only a slight shift in consumer behavior, PSE could buy much less of its energy at record-high spot-market prices.
To motivate consumers to change, PSE would need to set lower electric rates for off-peak energy use, and higher rates for peak consumption. That required the approval of the Washington Utility and Transportation Commission (WUTC), the state agency in charge of regulating private, investor-owned utilities such as PSE. The commission's purpose is to ensure the utility provides safe and reliable service to customers at reasonable rates, while allowing PSE the opportunity to earn a fair profit.
The time-of-use electric tariff approved for PSE charged customers more for energy during the peak periods, and less during periods of lower cost and demand. The goal was to encourage customers to shift certain loads by a few hours.
PSE proposed the Personal Energy Management program to the WUTC in early 2001. Program participants could keep their energy bills steady, or even save money, with a few minor changes in their daily routines. They could choose to run certain appliances at night or on weekends, and pay a lower price per kilowatt hour (kWh), rather than place those demands on the utility during periods of peak energy consumption.
The Personal Energy Management (PEM) program was potentially a long-term solution to the supply and cost crisis. In addition, it could help the utility use its power plants more efficiently, postpone building new power plants, and avoid costly expansions of its distribution infrastructure.
The WUTC approved a limited trial of a TOU tariff -- electric rates based on time of use -- starting May 1, 2001.
PSE would apply the new TOU rates by reading each customer's meter four times a day instead of once a month -- a task that would multiply by 120 the work of PSE's meter readers. The resulting costs could negate any savings from the PEM program, but PSE had a solution in mind.
Technology and education
Instead of visually checking meters and manually recording the readings, PSE could use automated meter reading (AMR) technology to gather the data electronically, four times a day, over a fixed wireless network.
AMR is a system of intelligent electric meters, a communications network, and servers to gather the data and deliver it to the utility's billing software. The technology had matured enough that PSE could choose from several vendors and minimize its own technology-related risks.
"AMR and several related technologies that are quickly becoming an industry standard," says Ed Solar of Cellnet, the company that provided AMR technology and services to PSE. "Once you deploy a network, billing is just one aspect of what it can do. A utility can integrate load control devices and smart thermostats. They can connect and disconnect service remotely, and protect against theft. The possibilities for improving service and efficiency are endless."
Six months prior to launch, PSE and CellNet installed the technology behind PEM:
- Itron smart meters were installed on 900,000 homes and businesses, transmitting energy usage data 30 times per hour
- CellNet established connections between the meters and its data center over a secure broadband data network
- PSE enhanced its customer billing software to integrate the CellNet data stream and bill customers based on four time slices per day, instead of one per month
- CellNet produced a Web site where PSE customers could see their energy consumption patterns
In addition to the investment in technology, PSE invested in marketing for PEM. Public outreach efforts informed customers about the program and suggested ways to shift loads from peak to off-peak hours. For many families, it would be as simple as running the dishwasher in the late-evening economy period, and doing the laundry on the weekend when standard flat rates applied.
"We did a very thorough job of promotion," says PSE's Starnes. "When we announced that we were coming out with this program, we did a lot of pre-promotion for several months before we instituted the price change. We also started printing a graph on customers' bills that showed when they were using the most energy." "We were in the midst of the perfect storm. The wholesale markets were going crazy, we had a drought, there were trading scandals and regulatory uncertainty..." --Todd Starnes, PSE's manager of business development
PEM Launched in Stages
During an initial test phase PSE switched on the system, but did not yet apply the TOU rates. It simply gathered baseline information that would later help the utility analyze whether customers responded to the TOU price incentives by shifting some of their demand from peak to off-peak hours.
"We were in the midst of the perfect storm. The wholesale markets were going crazy, we had a drought, there were trading scandals and regulatory uncertainty..." --Todd Starnes, PSE's manager of business development
PEM was launched in April of 2001 with a test group of 300,000 customers. A control group of 100,000 more customers would participate, but remain on a flat-rate tariff without the price incentives. A third group would have their consumption measured in the same way, but continue to receive only monthly summaries of their consumption at a flat rate, as before AMR.
PSE customers participated in PEM for about two years, during which time PSE learned some valuable lessons. Those lessons would later benefit utilities who decided to deploy smart meters and apply TOU rates in other regions.
Customers respond with new behaviors
"I think the major lessons are that it works, customers understand it, and they are in fact willing to step up and make a change in their behavior if they're given the right information," observes Starnes.
PSE customers participating in the TOU trial responded by shifting about 4% of their loads out of peak and into economy hours. This equated to about a 25,000 kWh peak reduction for PSE, and significant savings on last-minute wholesale energy purchases.
Voluntary shifting and the conservation effect
There were a few surprises for PSE from their PEM experience. One was that some customers in the control group also shifted their loads, even though they didn't have the incentive of a lower price.
This may be reflective of customers' desire to do the right thing, the effect of having the information and being educated about energy costs, short-term curiosity, or confusion about whether the TOU rates applied to them.
The second surprise was a net decrease in energy consumption among PEM participants. Says Starnes:
"One area that was a nice surprise for us was the conservation effect. We weren't asking people to use less energy, we were strictly asking them to move their loads. Instead, they actually used less energy. We got a measurable conservation effect of one to two percent, which is significant when you multiply it by the thousands of kilowatt-hours involved."
Why the program was discontinued
PSE and the WUTC ended the PEM program in August of 2003, ahead of schedule. There were several factors in the decision, first among them being the end of the current energy crisis. Market power prices returned to near-normal levels, easing the financial pressure on PSE for meeting demand during peak hours.
Some observers feel that there was not enough of a differential between peak and off-peak electric rates to result in meaningful savings on participants' energy bills. Shifting 200 kWh in a month saved less than $2 for most customers. The savings were reduced by a $1 per month charge added late in the program to help PSE to recover part of the meter-reading cost. Without measurable savings on customers' bills, observers felt the shift in behavior would be short-lived.
A larger price differential was not tested in Washington, but California utilities offer higher price differences in their TOU tariffs. Those utilities experience three to four times as much energy shift among their customers -- about 15 percent.
As PEM entered its second year, most PSE customers' bills had actually increased by an average of $0.80 per month under the program. With a larger rate differential the WUTC was concerned that bills might increase even more. After much discussion, the program was ended.
Eventually, after the PEM program was over, WUTC approved PSE rate increases exceeding $0.80 per month for the average home, but customers no longer had an alternative to the flat-rate tariff.
Other utilities benefit from PSE lessons
Since the PEM program ended in 2003, numerous other utilities have adopted AMR and applied TOU tariffs. CellNet is just one of the vendors in the category, and it has 10 million smart meters on its AMR network.
The meters belong to 20 different utilities. The number is expected to grow by 3 million meters in 2006. CellNet also serves other markets with progressive reforms, from Ontario to Asia.
How PSE still uses AMR
Today, even without TOU rates, PSE still gathers valuable data from the 900,000 smart meters in its AMR system. The utility uses that data to help it control costs and improve customer service.
One such use is in the PSE call center, where customer service representatives help customers understand the source of sudden increases in their energy usage.
Another advantage of AMR data is that outages can be detected and isolated in minutes over the network, rather than waiting for calls to come in.
The greatest value from AMR may have yet to be realized: Having made the technology investment, and having learned from experience how effective TOU rates can be, PSE is well prepared.
Starnes says: "Over the long term, as energy prices change and our energy infrastructure comes under increasing pressure, it will be important for us to have programs like time of use, and the technology to institute it, sitting on the shelf for a crisis situation."