Photo by Flickr user Nacmiasmobil

Complex rate plans discourage adoption by commercial energy users, even when they would come out ahead

When we talk to customers about rate analysis, here’s how the first conversation generally goes:

Gridium: We recommend resetting the Capacity Reservation Level on your E-19 buildings to the following levels.
Customer: Where was the explanation of that in the tariff?
Gridium: Page 16.
Customer: Page 16? How many pages is this rate?
Gridium: It’s not that bad, only 18.
Customer: Tom, how many rates am I on?
Gridium: Currently I show you on 22 different rates.
Customer: …Groan…

Facility managers have dozens of things lobbed at them every day — occupant complaints, mechanical problems, staff issues, budget woes. Who possibly has the time to read and digest the amount of complex information that goes into today’s rates?

That’s part of what Gridium is here to solve. I don’t know a single facility manager who relishes a rate update. Or an energy manager who salivates at the opportunity to untangle the line items in her most recent bill. We hope to bring to bear simple tools that help building professionals get definitive answers to complex rate questions — and save money by making better rate decisions.

Rates have become so complex and impenetrable that beneficial rate plans get lost in the noise

How did things get to this point? Contrary to popular belief, complex rates aren’t an evil scheme perpetrated by the utility or the regulator. In regulated markets, rates are the product of a circuitous process that bears the fingerprints of multiple stakeholders with diverse agendas. The end result is 18-page tariffs. Often these complex rate structures are crafted very carefully to deliver certain benefits or outcomes, such as better peak management. Unfortunately, their very complexity undermines their effectiveness, simply because good information in the rate is too difficult to convey.

The landmark research in economics on information asymmetry showed very clearly that bad information distorts market outcomes. The classical example is used cars; because the buyer doesn’t trust the seller (who knows more about the car than the buyer does), used car prices drop for everyone, even those with nice trusty Honda Accords for sale.

The same is true in energy. Rates have become so complex and impenetrable that beneficial rate plans get lost in the noise. Take for example, PG&E’s Peak Day Pricing program. It is well structured, and for 95% of customers, it’s a winnner. These customers will pay less under Peak Day Pricing while simultaneously (hopefully) engaging in behavior that will foster a more reliable and environmentally sustainable energy supply. Yet we routinely meet customers who don’t understand how PDP works and opt out, leaving money and grid stability on the table.

If the industry wants dynamic pricing to work, we’ve all got work on simple ways to help show that these tariffs are indeed trusty Honda Accords that deliver hard dollars savings and reliable service to commercial customers.

About Tom Arnold

Tom Arnold is co-founder and CEO of Gridium. Prior to Gridium, Tom Arnold was the Vice President of Energy Efficiency at EnerNOC, and cofounder at TerraPass. Tom has an MBA from the Wharton School of Business at the University of Pennsylvania and a BA in Economics from Dartmouth College. When he isn't thinking about the future of buildings, he enjoys riding his bike and chasing after his two daughters.

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