Rate Design is the No. 1 Energy Efficiency Tool

Sun Jul 01 16:24:38 EDT 2007
By Dr. Hethie Parmesano

In the US, headlines in the national media have been documenting the new focus on energy efficiency. Global climate change concerns, efforts to remove barriers to development of renewable energy sources, concerns about meeting growing demand for electricity, and efforts to make new electricity markets more competitive all point to an enhanced role for energy efficient measures in the electricity sector. However, notes NERA Special Consultant Dr. Hethie Parmesano in this article from The Electricity Journal, the fundamental role of economically efficient electricity pricing in eliciting energy efficiency activities by users is often underemphasized or lost. Dr. Parmesano argues that, if the goal is to maximize the cost-effectiveness of other efficiency efforts, efficient rate design is an essential starting point because, at a relatively low cost and without raising issues of cross-subsidy, it can achieve significant efficiency gains.

Electric rates that reflect marginal costs and include the maximum amount of time differentiation consistent with metering can go a long way toward promoting efficient energy decisions by consumers, Dr. Parmesano notes. This means keeping marginal cost studies up to date (including reflecting market conditions), using class marginal cost revenue calculations in setting class revenue requirements, creating rate structures that mirror marginal cost relationships, and carefully designing rate adjustment mechanisms to preserve efficient price signals.