Distribution shapes the future of energy economics

How a one-line formula for rate making, zero-sum economics, and a utility's efforts to adapt to the duck curve reveal the true impact of distribution costs.

Gridium’s rate engine technology is crucial for building operations because it allows engineers and managers to clearly translate an energy pattern into a cost to make better decisions. Most of the time, these analyses are short term–should I start early to avoid a peak today? How much did advancing start time actually save me? Should I enroll in price response? For these questions all you need is the current rates and a system like Gridium.

Others are concerned with longer term questions. If I install a battery storage system, are my savings likely to increase every year? Or decrease? Should I fund a HVAC retrofit or a install LED lights? If I sign that lease with WeWork, how much will my bill go up? Should my campus go to transmission level voltage?

To answer these questions, some reading of the tea leaves in rates is crucial. And while the electricity system in the US is massively diverse, many trends start in states like California, where renewable policies, deferred maintenance, and low gas prices are providing a glimpse of the future.

Consider PG&E and its recent rate case. California follows “cost of service rate making” where rates are calculated with a simple formula: ( cost of service / sales ) = rates. Below is the key table of the spending increases desired. This will inevitably get haircut, especially given outrage about wildfire culpability, but the spending requests are what to focus on. These spending requests are graciously called “revenue requirements”, part of the poetic language of monopoly utility regulation.

Table from PG&E’s Test Year 2020 General Rate Case application.

Notice that the total request here is for $1.4B and 81% of it is related to distribution. Electric distribution alone is requested to rise a massive 23.3%! This is not a new trend. Below is the table of recent rate cases and the proportion of increases by distribution versus generation.

Data from initial applications from PG&E General Rate Cases 2011, 2014, 2017, and 2020.

How will these increases affect bills in the long term? By looking closely at the current tariffs, we can see where these expense increases are likely to fall among PG&E’s fifteen different rate elements.

Currently on the most popular commercial rate, distribution charges are largely tariffed in demand charges while generation charges are largely allocated by consumption charges. A massive 83% of demand charges are distribution related; six months of the year there is no generation component of demand at all. Among those charges, service voltage matters — transmission level customers pay only 36% of the distribution expenses of secondary voltage customers. Put more simply, current expenses are largely “poles and wires” related and a function of the maximum demand and infrastructure required to deliver that demand.

If accepted, these rate increases will continue that trend. It’s quite probable that, in the near term, summer demand rates will crest $50/kW/mo, the highest in the US. For perspective, when we started Gridium in 2011, they were just $24/kW/mo.

Of course these changes are exacerbated by changes in the denominator of the rate formula as well. As more load disappears into the arms of solar and energy efficiency, the same costs must be spread over a shrinking rate base. California’s economy marches on at 5% growth, but electricity sales are down almost 3% per year.

So what does this all mean for you? With apologies to technology trade rags, the table below sums up these changes for popular project types.

A final note. As we discussed in 2012, efficient building operations is a zero-sum game. If you’re reading this and planing a strategy around it, delight yourself in the fact that your competitors pay for your savings.

References

1. PG&E’s General Rate Case website
2. Archive of GRC documents