Designing Electric Rates for Efficient Electrification and Distributed Energy Growth
Across the country, traditional utility rate designs are being reexamined to serve a more modern, cleaner, and distributed energy system. Electric rates that were developed for a simpler, less dynamic energy system are being adapted to meet the challenges and opportunities of the 21st century. As regulators and utilities consider new residential options, they can decide what signals they want to send. Well-designed rates can encourage energy efficiency and demand flexibility across the system, and also enable the full range of advanced energy technologies, such as heat pumps, distributed energy resources (DERs), and other smart devices to work together to reduce costs for both customers and the grid.
Several key factors are driving the surge of focus on rate design. First, energy affordability remains a top concern for households, businesses, and policymakers alike. Innovative rate design can not only empower individual customers to manage their energy in exchange for monthly utility bill savings but can also reduce long-term electric system costs passed on to all customers. Second, electrification through adoption of clean energy technologies, such as heat pumps and electric vehicles (EVs), is prompting important questions about how utilities should recover costs and accurately reflect the cost of serving different types of electric demand. And lastly, the electric grid is becoming smarter and more flexible – and more taxed. Advanced metering infrastructure (AMI), smart panels, and other grid-edge technologies can enable more sophisticated rates that better reflect when and how electricity is used, and how distributed technologies are used to manage the distribution system.
Every rate design involves tradeoffs. When redesigning offerings, regulators and utilities should set clear objectives and strike a balance between simplicity and the dynamic rates needed for a more sophisticated grid. After all, rates do more than simply recover utility costs, they can motivate energy consumption behavioral changes and be a means to achieve desired policy outcomes, such as increased clean technology adoption, energy conservation and affordability, and long-term electric system cost containment.
At Advanced Energy United, we engage in rate design proceedings across the country. Through collaboration with industry partners, advocates, utilities, and other stakeholders, we work to advance rates that can lower operating costs for clean technologies while sending price signals that support long-term electric system cost containment through energy efficiency and customer-sited resources. We broadly refer to these rates as electrification-enabling rates. While specific rate structures vary by utility and state, we believe effective rate design includes the following principles:
1. Time-of-use (TOU) pricing should be incorporated in rates where possible.
TOU rates price electricity higher when customer demand on the system is higher. By doing so, TOU rates encourage customers to shift energy usage to off-peak times. This can reduce system costs driven by peak demand, improve grid utilization, and lower customer bills. TOU rates need to be accompanied by effective customer education.
2. Rates should be technology-neutral to reduce administrative complexity and costs.
Rate options should be easy for customers to participate in and as low-cost to administer as possible. Higher administrative burdens, such as offering too many rate options, or separately metering specific end-uses for certain rates, can increase costs and create barriers to adoption.
3. Rate offerings should support the full suite of advanced energy solutions.
As homes and businesses electrify, rate designs should balance support for technologies that may increase overall kWh usage – such as heat pumps, EVs, and other electric appliances – while also supporting technologies that reduce or manage kWh usage, including DERs and energy conservation measures. Rather than favoring one technology over another, well-designed rates enable a more flexible, reliable, and affordable electric system where electrification, DERs, and efficiency work in synchrony.
4. Fixed charges should be kept low and should accurately reflect costs that are truly fixed on the system.
High fixed charges, offset by reduced volumetric (or per kWh) charges cut into the benefit for distributed generation customers and energy efficiency by reducing the benefits that a customer can achieve via conservation, self-generation, or energy export. Perhaps most importantly, rates that lower volumetric charges do not reflect the true benefit to the grid of reducing energy consumption. In addition, high fixed charges disproportionately impact low-income customers who have been shown to use less energy. Overall, only costs that can be traced to a specific customer (e.g., a meter or service drop) should be assigned as a fixed cost.
5. Rates need to be evaluated with a long-term perspective.
The electric system’s conditions driving current rates may change significantly within the next five to ten years. For example, as more homes and businesses electrify space heating and other end-uses, some regions may switch from a summer-peaking grid to dual- or winter-peaking. While the effectiveness of current rates should be routinely evaluated, frequently updating rates can lead to customer confusion, fatigue, and disengagement, ultimately reducing the effectiveness of certain price signals. As rates are reformed, regulators and utilities should balance today’s system needs with the electric grid of the future to ensure rates remain effective over time.
6. Utilities should leverage AMI and other smart devices when designing rate structures, including in the customer enrollment process.
AMI enables the ability to offer more sophisticated rate designs, such as TOU rates. It can also provide valuable data to help utilities identify the most beneficial rate options for customers. Utilities should use AMI to identify customers for a rate, simplify enrollment, and improve customer education. Essentially, AMI should be used to make participation in new rate offerings as accessible, easy, and beneficial as possible.
7. Opt-out rates should be offered where possible to drive higher participation.
Whenever feasible, utilities should consider default or opt-out rate enrollment approaches, which lead to higher participation in rates than opt-in programs. Opt-out rates should also be accompanied by education and resources from the utility to the customer.
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While not a comprehensive list, these principles are some of the most relevant to the evolving conversation around rate design. Several of these considerations were recently adopted in a Massachusetts Department of Public Utilities (DPU) order in its investigation on seasonal heat pump rates. In the order, the DPU agreed with United’s argument that major rate design change should be implemented when AMI is fully deployed in the state (given that AMI enables more sophisticated and effective rate designs, such as TOU rates). In the case, United cited its 2025 study that found TOU rates paired with enhanced energy efficiency efforts can significantly reduce residential energy bills for electrified homes while mitigating rate increases for everyone in the long run.
There are many states currently considering new residential rate offerings given evolving technologies and economic realities. The California Public Utilities Commission (CPUC) recently opened a rulemaking on advanced electric rate design. While the CPUC has yet to establish the full scope of the rulemaking, one of the proceeding’s goals is to have rates send price signals that support efficient use of grid infrastructure. Additionally, Michigan utility Consumers Energy also proposed an electric heating rate in its most recent rate case filing. There are a number of other states across the country considering rate reforms to accommodate new clean and an evolving electric grid, such as Maryland, Illinois, and more.
At a time when energy costs continue to rise across the country, and states seek strategies to manage electricity demand – rate designs that promote electrification alongside energy efficiency, DERs, and demand flexibility can both lower household energy bills and help contain long-term electric system costs. As regulators and utilities consider the tradeoffs between rate offerings, a forward-thinking, holistic approach to electrification-enabling rates can help states meet clean energy and affordability goals.